Outside Innovation: How Your Customers Will Co-Design Your Company's Future

Citation preview

E D I S T OU

N O I T A V INNO HOW YOUR CUSTOMERS

WILL CO-DESIGN YOUR COMPANY’S FUTURE

PATRICIA B. SEYBOLD

To my Visionaries and Pioneers—our lead customers

Contents INTRODUCTION: The Outside Innovation Imperative CHAPTER ONE How to Harness Customer Innovation Co-Design Business Models, Business Processes, and Solutions with Customers to Help Them Accomplish Their Goals Give Customers Important Roles to Play in Shaping Your Business Natural Behaviors You Can Tap to Unleash Customer Innovation CHAPTER TWO LEGO® MINDSTORMS® NXT Powered by Customers’ Inventiveness

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National Instruments A Thirty-Year History of Enabling Customer Innovation

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Let Customers’ Inventiveness Drive Your Business Best Practices in Customer-Led Innovation

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CHAPTER THREE Help Customers Reach Their Goals Capturing Customers’ Context and Desired Outcomes Staples Customers Help Bring a Customer Experience Promise to Life Bathing Your Organization in Real-Time Customer Context Using Online Communities to Understand Customers’ Passions, Issues, and Needs (Hallmark, Kraft, RC2, Schwab, Unilever) Koko® Fitness Discovering Baby Boomers’ Health and Fitness Issues Zopa Creating a New Financial Services Exchange: Peer-to-Peer Lending and Borrowing for “Freeformers” CHAPTER FOUR Let Customers Strut Their Stuff Profiting from Customer-Created Intellectual Property Tripod Built a Multimillion-Dollar Business from Customers’ Creations Early “Publisher” Shifted to User-Created Content American Institute of Physics A 200-Year Tradition of Publishing Customers’ Content

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Harnessing Customers’ Contributions as Guides, Problem Solvers, and Reviewers Customers Will Contribute Much of Your Content, If You Make It Easy for Them to Do So (Snap-on, Cisco, Amazon, IgoUgo) The Blogosphere Customer-Created Content Run Wild Flickr Attracts Both Amateur and Professional Photographers from Around the World Organize and Tag My Photos, Appreciate and Study Yours

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Why “Mash Ups” Matter Customers Mix and Match Web-Enabled Services from Different Companies to Support Their Scenarios

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BBC’s Backstage Working Interactively with Lead Users to Support Customer Innovation

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How Does Customer-Created Content Apply to My Business? CHAPTER FIVE Promote and Leverage Open Source Development Attracting and Sustaining Collaborative Communities of Peer Producers A Personal Introduction to Open Source Software Open Source Is, Above All, Customer-Led Development Communities

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Mozilla Firefox Supporting Innovation and Choice by Moving Software to Open Source

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Asterisk and Digium Shaking Up the Telecom Industry by Harnessing Customers’ Creativity

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What Business Models Work in an Open Source World? Cohesive Financial Technologies: How a Software Start-Up Thinks Through Its Options

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Open Source Biotechnology Enabling Peer-Production Communities to Share and Build upon Each Others’ Intellectual Property

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Wikipedia Applying Open Source Principles to the Development of a Community-Created Encyclopedia: How Much Structure Is Enough?

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CHAPTER SIX Enabling Customer Co-Design Using Customer Co-Design Tools and Innovation Toolkits

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Customized, Built-to-Order Products Solutions That Are Configured by Me and Built for Me

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GE ColorXpress® Services Helping Customers Design Differentiated Products

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SEI Wealth Network® Engaging Clients in Designing Their Own Life and Wealth Plans

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Customer Scenario® Mapping—A Tool to Enable Customer Innovation Co-Designing Your Business with Your Customers National Semiconductor Empowering Design Engineers to Reach Their Desired Outcomes with a Comprehensive Toolkit CHAPTER SEVEN Let Customers Co-Design and Promote Your Products

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Threadless Selling Customers’ Designs to Other Customers

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Muji Engaging Customers to Help with Product Design

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Karmaloop Making a Business Out of Catering to Lead Customers

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The Ultimate Customer-Created Experiences: Virtual Worlds The Implications of Online Gaming: Your Customers, Kids, and Employees Expect to Co-Design Your Business Making Outside Innovation the “Path of Least Resistance” in Your Organization A Blueprint for Harnessing Customer-Led Innovation

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NOTES

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ACKNOWLEDGMENTS

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INDEX

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ABOUT THE AUTHOR COVER COPYRIGHT ABOUT THE PUBLISHER

N O I T C U D O R INT The Outside Innovation Imperative

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he “Customer Revolution”1 that we described in 2001 is now in full swing. Customers have taken control. Their rampant comparison shopping is eroding your margins. Their renegade behavior is challenging your business models and endangering your intellectual property. Their demanding expectations for customized products, wonderful experiences, and high service levels are draining your resources. Customers’ insistence on open access is exposing your industry’s policies and challenging your inflexible business processes. This customer-led outside innovation movement is inevitable. It’s scary. It’s exciting. And it’s dangerous to your business if you’re not prepared. What can you do to channel this customer energy into a positive direction—one that will power your business rather than sink it? Here’s the answer: Engage your customers in more ways to help you redesign your business, your products, your processes, and your business models.

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You’ve already begun to open the floodgates by giving your customers the ability to do business with you electronically. You’ve felt the excitement of working shoulder-to-shoulder with specific customers to help them solve problems or design new products. You may have already empowered customers to solve each others’ problems. Your executives are immersed in customer meetings. You’re sprinkling your organization with customer survey data and customer loyalty scores. But that’s drip irrigation. Now it’s time to turn the spigots on full: Invite customers to play more roles in driving your business direction.

Harness Customer-Led Innovation In this book, we’ll describe a “new” approach to the process of business innovation. In particular, we’ll describe innovation approaches that intentionally involve outside parties, most notably customers and potential customers, in the process of creating new value. You’ll see how customers designed Lego’s highest revenuegenerating product, MINDSTORMS®. You’ll discover how customers codesigned an open source telephone system that sells for one-tenth the cost of competitive offerings. You’ll learn how Staples redesigned the retail rebate process in response to customer demand. You’ll learn how GE Plastics empowers designers by providing them with direct access to its most proprietary knowledgebase. You’ll discover how Hallmark, Kraft, and Unilever have harnessed customers’ insights and creativity to drive their business decisions. You’ll also discover how the next-generation of multiplayer games—games that would normally cost $100 million to develop— are now being co-created by the gamers themselves. You’ll see how publishers and broadcasters are not only giving away their intellectual property, but encouraging customers to create derivative works. You’ll also discover how customers are reinventing the money lending business at Zopa, how they’ve become the salesforce at Karmaloop, and the product designers at Muji. Will your company miss the next—and by far most sweeping—tide of outside innovation? Unlike a tidal wave, which flattens everything in

Introduction

its path, the customer innovation surge is more like water pouring over a dam. It keeps coming. It generates tremendous energy. It powers new services and provides new growth opportunities. It opens new markets and spawns new products. It transforms industries. It changes business models. But if you aren’t ready, you won’t catch the outside innovation wave, and you may be waiting a long time to find another one. Don’t let that happen!

The Innovation Game Is Changing I like John Seely Brown’s definition of innovation best: “Innovation is invention implemented and taken to market.”2 You create or invent a new product or a new way of doing things. You commercialize it. Customers value it. Your firm benefits through increased sales and/or usage, improved brand reputation, and better results delivered.

The Process of Outside Innovation When business people say “we need to master repeatable innovation,” they’re referring to the innovation process. The process of innovation is the procedure that businesses use to create something new. Outside innovation is an innovation process. You engage directly with lead users and passionate customers to harness and commercialize their ideas, and to co-design solutions that will better meet their needs. Many companies already do this. What’s new is the exponential growth in the ratio of outside innovation to inside innovation in many industries. In the software industry, for example, outside innovation—in the form of open source development—now accounts for more than 50 percent of all R&D.

The Results of Outside Innovation When business people say “We need a predictable stream of innovations that will keep us ahead of our competition,” they’re using the word innovation to describe the results of an innovation process: innovative products. But don’t limit your thinking to products. Think

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about true innovation: industry redefinition, business model innovation, value chain innovation, and redefinition of customers’ problems to provide end-to-end solutions. EBay created a new industry by enabling sellers to find buyers. Apple redefined the business model for the music industry. Dell made build-to-order standard operating procedure. Those are all industry-changing innovations.

How Does Outside Innovation Differ from “Traditional” Innovation? There’s an underlying assumption that drives traditional innovation: “our experts are smarter than our customers.” While it is certainly true that your company probably has deep subject matter expertise in a certain domain—automobile design, financial derivatives structuring, new drug discovery—it’s also true that your customers are subject matter experts in their own right. In particular, your customers know more about their context, their desired outcomes, their needs, and their constraints than you can ever hope to learn. Traditional “inside out” approaches to innovation assume that our subject matter experts invent and design innovative new products to meet needs customers may not have even realized they have. Then our marketing and advertising departments make prospective customers aware of those needs, wrap a brand experience around our innovative products, package and price those offerings (with some market research along the way), and bring them to market. The “outside in” approach is to flip the innovation process around and assume that customers have outcomes they want to achieve, they have deep knowledge about their own circumstances and contexts, and they are not happy with the way they have to do things today. They will innovate—with or without your help—to create better ways to do things or to design products and services that meet their specific needs. If you want to harness the power of customers’ organic creativity, you need to support their creative processes with tools, with resources, and with imagination.

Introduction

HOW OUTSIDE INNOVATION DIFFERS FROM “TRADITIONAL” INNOVATION

Traditional Innovation (Internally-Driven Innovation)

1. Internal scientists, engineers, or subject matter experts lead R&D efforts.

2. Internal research and experimentation drives innovation.

3. Customer requirements are collected and prioritized by product marketing.

4. New product ideas are generated in the labs and tested in stealth mode with existing or prospective customers.

5. Business processes and business models are designed by internal teams and approved by management.

6. Chief technologists and business development officers scan the environment for buy vs. build opportunities to complement or extend existing product lines and markets.

7. A small percentage of internal innovations are actually commercialized.

Outside Innovation (Customer-Driven Innovation)

1. Lead customers and lead users drive 50 percent of your R&D agenda.

2. The structural tension between lead users’ current reality and their desired outcomes and experiences drives innovation.

3. Customers design new business models; extend, customize, and modify products; and share their ideas and creations with one another.

4. New business models, processes, and solutions are co-designed with customers and tested with a broader customer community in an open process.

5. Customers are actively engaged in co-designing business processes and business models with crossfunctional stakeholders and top execs.

6. Customers scan the environment for complementary solutions and do the initial integration themselves.

7. Customers actively promote new products and services to one another and help build a vibrant ecosystem.

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Debunking the Myths About Customer Innovation There are two myths about customer innovation. The first is that customers can’t envision what they don’t know about. The second is that most companies already do a good job of working directly with customers in new product and process design. Both are bunk! First, many customers can be innovators; they can envision what they’d like to be able to do and help you co-design ways to help them achieve your mutual goals. It’s also true that there will always be scientific and technical breakthroughs that come from the laboratory (or serendipity) that your customers can’t foresee. Yet we’ll show that there are an equal number of business innovations and business process breakthroughs that have emerged from customers’ desires to do things differently. You can only tap this customer creativity if you’re working shoulder to shoulder with customers, helping them transform their ways of doing things and deeply understanding their context and their motivations. That brings us to the second point: many businesspeople think that their company does a good job of “listening” to customers and gathering their requirements, of getting customers involved in new product design, and in making prioritization trade-offs. Most organizations have a small number of people who work closely with customers, cocreating and innovating—particularly when they are engaged in the custom design of purpose-built products for a particular customer. Very few organizations make customer co-design a core competency— the starting point for all new business initiatives. Yet this doesn’t make sense. Why would you redesign your internal business processes without starting by redesigning or transforming your customers’ business processes first? You want to align your organization around the way your customers ideally want to get things done—not the way either of you does things today. Can You Harness Customer Innovation for Competitive Advantage? The ability to innovate is what keeps your organization at the top of its field. The faster and better you can innovate, the more likely you are to remain in the lead and be able to set the new rules of the game

Introduction

that others will have to follow. But the innovation game itself is changing dramatically. You no longer win by having the smartest engineers and scientists; you win by having the smartest customers. • You win by finding the lead users in your industry and commercializing their inventions. • You win by engaging with your most visionary customers to codesign new products and new processes. • You win by enabling customers to troubleshoot each others’ problems, hack your solutions, and modify and extend your products to meet their needs. • You win by engaging customers in brainstorming new products, providing new marketing and distribution ideas, and promoting your brand to their peers. • You win by providing toolkits to your customers to design very specific solutions for themselves—customized solutions that leverage your firm’s deep domain expertise. • You win by encouraging customers to generate new knowledge and contribute their intellectual property. • You win by inviting customers to vie with one another in designing new products for you to sell. • You win by opening up your intellectual property and inviting customers to design and share their creations. • You win by encouraging customers to build on top of one another’s creations. What is outside innovation? It’s when customers lead the design of your business processes, products, services, and business models. It’s when customers roll up their sleeves to co-design their products and your business. It’s when customers attract other customers to build a vital customer-centric ecosystem around your products and services. The good news is that customer-led innovation is one of the most

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predictably successful innovation processes. The bad news is that many managers and executives don’t yet believe in it. Today, that’s their loss. Ultimately, it may be their downfall.

WHO IS A “CUSTOMER”? Just a word about terminology: I define a “customer” as the person who consumes or uses a product or service. The customer is not necessarily the person who pays for the product or service. Payment may be made in any number of ways, including donation, advertising, sponsorship, pay-per-use, licensing, and/or by someone else in the organization or household (e.g., purchasing department, mom, or dad), or by someone outside of the organization/household (e.g., insurer, government agency, charity, or other organization). I use the term “lead user” or “lead customer” to describe an end user or end customer (again, the ultimate consumer) who is passionately interested in achieving an outcome and who will usually figure out how to accomplish that outcome on their own, with or without encouragement or assistance.

The Winning Formula for Unleashing Customer Innovation In order to foster outside innovation, there are three key ingredients you need to have: 1. Customers/users who are passionate about something they’re trying to accomplish or something they want. 2. A deep understanding and appreciation by those customers/users of their current reality: their context, their situation, their constraints, how things are currently done. 3. A clear vision by those customers/users of their ideal outcome: what it would be, how it would feel, how they would feel having achieved it, and all of their conditions of satisfaction that would need to be met.

Introduction

We’ve spent the last twenty-five years identifying, interviewing, selecting, and grouping customers together to participate in our Customer Scenario® Mapping sessions. Over the years, we’ve learned how to identify the people who will contribute the most to a customer co-design session. These are the same kinds of people you should be recruiting when you set out to harness customer-led innovation.

Lead Customers. We use the term “lead customers” to describe that small percentage of your current customers who are truly innovative. As you’ll see as you examine the characteristics listed below, these may not be your most vocal customers, your most profitable customers, or your largest customers. They may not even be representative of the majority of your customers. But they are the customers who care deeply about the way in which your products or services could help them achieve something they care about. For example, office supplies retailer Staples discovered a group of lead customers who were expert in managing and redeeming coupon promotions. These customers had devised elaborate systems that enabled them to keep track of all the promotions that Staples offered for different types of products, expiring on different dates, so they would be able to take advantage of these promotions when they replenished their standard office supplies orders. By working closely with these “lead customers,” Staples co-designed an innovative new coupon management process for its small-business customers. Lead Users. Eric von Hippel uses the term “lead users”3 to describe an expanded group of both customers and non-customers who are passionate about getting certain things accomplished. They may not know or care about the products and services you offer. But they do care about their project or need. Lead users have already explored innovative ways to get things done. They’re usually willing to share their approaches with others. For example, Charles Schwab recruited a group of active stock traders (both Schwab and non-Schwab traders) and discovered that many of these people had devised elaborate reporting systems they

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used to track and improve the success of their trading strategies. These successful traders were perfectly willing to share their secrets with Schwab and with other customers. They wanted Schwab to improve the tools Schwab offered—to make it easier for them and for others like them to achieve their goals. If Schwab had limited its recruitment to Schwab-only customers, chances are it would have missed this user-led innovation, as well as many others. We will be using the phrase “lead customers” throughout to include non-customers, such as von Hippel’s “lead users.”

What Are the Characteristics of Lead Customers/Lead Users? Here’s what lead customers and lead users have in common: 1. Their self-image is deeply connected to the problem domain at hand. 2. They are passionate (positively or negatively) about the outcomes they want and frustrated about the issues that get in the way of achieving those outcomes. 3. They are influential in their organizations and/or in their circle of family and friends. 4. They have thought deeply about their problem space/domain of expertise. 5. They are insightful about their own context and they can easily articulate their conditions of satisfaction (what works for them; what won’t work). 6. They are imaginative and visionary. 7. They are pragmatic and realistic about the need for viable business models and win/win solutions. 8. If they are true “lead users,” they have already invented their own solution and often are happy to share their solution with other insightful users.

Introduction

How Do You Involve Lead Customers and Users in Innovation? Once you’ve got your three key ingredients in place—passionate, knowledgeable users with clear vision and a grounded understanding of reality—the next step is to engage with them. This is where it gets dicey. As you inject lead customers into your business development, product development, and business process transformation activities, your organization’s immune system will trigger and your customers’ insights and ideas may be rejected. That doesn’t mean you should stop. Nor do I recommend that you isolate these outside innovation activities off in a lab or skunkworks somewhere. Instead, you want to surround your people with deep customer knowledge. You want to bathe them in stories of customer inventiveness. You want your staff to become endlessly curious about what their customers care about and are doing. This transition will take time and effort. We’re talking about major cultural change. The good news for those of you in organizations which have already embarked on the outside innovation journey is that because cultural transformation takes time (at least two to three years), any of your current competitors who haven’t already started won’t be able to catch up. The bad news, for those of you in organizations that have been resisting this sea change, is that it will take you three years to get back in the game. Better get started now!

The Secret of Success. There is a “best practices” way to approach outside innovation. The secret is to engage with your lead customers in as many ways as possible. Your goal is to get as many of your people involved with as many lead customers as possible. Your purchasing department should be working with your customers’ purchasing departments to transform your mutual procurement and contracting processes. Your marketing organization and your product planners should be interacting with lead customers all the time, in real time. (As you’ll see, a number of companies are using the power of the Internet to create lead customer communities you can consult with 24 × 7.) Your customer support, retail, and field service people should be bringing lead customers in to co-design their ideal scenarios with the people in your operations groups so they can better understand

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customers’ desired outcomes and metrics. Outside innovation means just that—redesign your business from the outside in, with the help of your most visionary customers.

Tell Stories about Customers’ Inventiveness. The acid test is the number of stories your employees tell each other about neat things customers have done to improve their lives and their jobs using your products and services. Instill a customer story-telling culture in your organization. Celebrate customers’ success and applaud their inventiveness. Measure Results. Measure your customers’ results, not just your results. Can you measure how you have transformed your customers’ business or life? Have they achieved their outcomes faster, more easily? Are they able to do things they couldn’t do before? Their bottom line is your bottom line. If you make it easy for customers to achieve their outcomes in ways that meet or exceed their vision, you’ll gain their loyalty and their walletshare. Customers who are empowered to do the things they care about will attract more like-minded customers. How do You become an Outside Innovation Organization? Once you’ve read this book and are ready to take the next steps, come download my free Customer Innovation Guide at www.outsideinnovation.com. This guide provides a self-assessment tool to help you identify where you are on the customer innovation continuum and will help you to identify next steps and a roadmap for moving forward.

E N O R E T P A CH How to Harness Customer Innovation Co-Design Business Models, Business Processes, and Solutions with Customers to Help Them Accomplish Their Goals

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ow do you figure out what customers really want, need, and will pay for? This is the foundational question for any business. It’s also a question to which many business theorists and practitioners have devoted a lot of thought (and ink). We were delighted to discover that Clayton Christensen, the author of two well-regarded business books—The Innovator’s Dilemma and The Innovator’s Solution—has discovered and documented a basic business truth that we’ve been practicing for almost twenty years: You design solutions to help customers accomplish their desired outcomes. We call these Customer Scenarios®; Clayton refers to them as “the jobs that customers need to get done.” Customers—people and companies—have “jobs” that arise regularly and need to get done. When customers become aware of a job that they need to get done in their lives, they look around for a product or service that they can

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“hire” to get the job done. . . . The functional, emotional, and social dimension of the jobs that customers need to get done constitute the circumstances in which they buy. In other words, the jobs that customers are trying to get done or the outcomes that they are trying to achieve constitute a circumstance-based categorization of “markets.” Companies that target their products at the circumstances in which customers find themselves, rather than at the customers themselves, are those that can launch predictably successful products.1 We believe that what Clay Christensen groups together under the rubric “circumstances” actually includes several distinct concepts: the customers’ context, the “job” they need to do (our Customer Scenario), their desired outcomes, and their constraints (what we refer to as “conditions of satisfaction”2). This concept of “jobs that customers need to do” or Customer Scenarios® is subtly different from traditional customer segmentation and needs analysis. But that subtlety is important. It’s not enough to identify a group of customers who have certain things in common for whom you are going to develop a solution; you also need to know what scenarios these customers actually care about accomplishing. What outcomes are they trying to achieve?

A customer scenario identifies how a customer ideally wants to achieve a desired outcome.

How to Harness Customer Innovation

What’s the Relationship Between Customer Scenarios® and Innovation? Innovation occurs naturally as a result of the structural or creative tension between what you ideally want and what you currently have. The secret to mastering the creative process is to understand and to leverage the structural tension that powers it. Once you’ve created the correct structures, creativity will take the “path of least resistance,” according to Robert Fritz, who authored a seminal book by that title.3 “People think innovation is about brainstorming; it’s not. It’s a very focused activity,”4 Fritz explained. “People studying innovation should start by understanding the creative process.” Innovation is a form of creation. Like any creative endeavor, innovation emerges from the structural tension between current reality— the way things are—and a vision—what we’d like to achieve.5 The keys to unleashing customer innovation are to: 1. Find lead users who are already closing the gap between how they do things today and what they’d ideally like to be able to do and commercialize their innovations. 2. Engage with your most creative, yet grounded, customers—your lead customers—to work with them to co-design how they’d like to achieve their ideal outcomes. 3. Empower your lead customers with co-design tools and innovation toolkits so they can design their own solutions, innovating as they go (a favorite approach of both von Hippel’s and mine). In all three approaches, the discrepancy between what customers can do today and what they ideally want to be able to do is the structural tension that spawns innovation. How We Use Customer Scenarios® in This Book In the case studies in this book, we’ll identify the key Customer Scenarios® that companies have addressed though customer co-design and customer-led innovation. The firms you’ll be reading about have used a

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Innovation occurs naturally as a result of the structural tension between your ideal scenario and your current situation. Truly creative people know how to generate and maintain that structural tension and use it to spawn innovative ideas and creative breakthroughs.

number of different approaches for harnessing customer innovation. We don’t claim to have worked with each of these firms, nor do we claim that they used our particular methodology in their journeys. We offer this common terminology of Customer Scenarios® and customer outcomes for understanding customer-led innovation as a way to help us all stay focused on “the jobs our customers need to do.” As you’ll see throughout the examples in the book, by understanding your customers’ scenarios—the jobs your customers are trying to do—you can help them create the outcomes they’re seeking. In essence, customers’ scenarios should fuel your business strategy.

Letting Your Customers’ Ideal Scenarios Power Your Business How do you truly design or transform your business from the outside in? Many companies claim to be “customer-centric.” Yet too often

How to Harness Customer Innovation

we find disconnects between the things that customers care about and the way that companies’ resources are allocated and results are measured.

Shedding the Inside-Out Legacy of Business Design In the inside out way of running a business, you usually design a product, wrap a brand around it, figure out how you’re going to produce and distribute it, and along the way, of course, decide to whom you want to sell it and how you’re going to describe and market it. Creating a viable business model is an important part of your business development and commercialization process. What will customers value? How much can we charge? How much profit can we make? Then, as the business grows, you develop new products to sell to customers in the same market, and/or you diversify into new products for new markets. Most business executives or business school graduates probably wouldn’t describe the business definition process as following the approach we’ve just described. (They would claim that they start with a customer need and work from there.) Yet if you look at the ways in which most of today’s businesses are structured and observe the ways these businesses behave, this model—which we describe as the “old

An admittedly oversimplified view of the classic product-centric approach to business model definition. You begin with your invention or product idea, figure out how to produce it, decide how to differentiate it (the brand), determine how to distribute it and identify which markets you can therefore address.

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way” to design a business—is pretty accurate. Resources are allocated to product lines. Distribution channels drive business decisions. Customers are important, but they come last in the resource allocation and prioritization process. And nobody really thinks about customers’ scenarios and outcomes, except for the beleaguered customer experience executive who acts as the proverbial tail trying to wag an unresponsive dog (your organization!).

Adopting a Customer Outcome–Focused Approach to Business Design When you take the outside innovation approach to business, you start by developing a deep understanding of your customers: the particular audience you are serving. At the core of that understanding is an appreciation of what they want and need to accomplish—their ideal scenarios. As you and your customers work together to close the gap between their ideal scenario and their current way of doing things, you’ll be codesigning new products, new business processes, and new business models. That engine of customer-driven innovation powers your business, generating organic growth. The ideal experience that customers want to have during their scenarios becomes your brand experience. That desired brand experience may be different for different customer audience/scenario combinations. So you may have a portfolio of customer audiences (and their ideal scenarios) and a matching brand portfolio of customer experiences. Or you may have an overarching brand experience that is instantiated differently for different customer audience/scenario combinations. For example, BMW offers a unique brand experience for owners of its cars and a different—but also unique—experience for Mini Cooper owners. Staples, the office supplies superstore chain, provides an “easy” brand experience tailored in one way for people who run businesses out of their homes, and in a different way for procurement agents and office administrators in large corporations. Whether your firm takes a single brand or a multibrand approach, the brand

How to Harness Customer Innovation

The outside innovation approach to business design: You begin by identifying a customer audience and their ideal outcome—the customer scenario. The ideal experience the customer wants to have in accomplishing that outcome is the brand experience you want to create. You develop products and services to support the customers’ ideal scenario(s), and determine the appropriate distribution channels based on customers’ needs. Customer-led innovation powers the business model, as you and your customers invent new ways to close the gaps between their ideal scenarios and the way they do things today.

experience should be optimized for each customer audience and scenario combination. The solutions, tools, services, and products that you provide to support your customers’ ideal scenarios play just that—a supporting role. Products should not be the focal point of your company. They aren’t your customers’ focal point. Customers care about the “jobs” they need to get done. They are happy to use tools and to buy and consume services that help them accomplish their scenarios. The solutions that customers need and value will change over time. As long as your product development and solution-packaging

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activities are designed to support and streamline customers’ ideal scenarios, and you co-develop new solutions to continuously improve those scenarios or to address new, more pressing scenarios (now that the original ones have been addressed), you’re probably on the right track. Your distribution channels—how you go to market and distribute your products, whether direct or through agents or retailers— should be determined by your customers’ context. Where are they when they need this product or service? What’s most convenient for them?

Design Your Business from the Outside (Customer Scenario) In For each group of customers you choose to serve, there will be several scenarios that are critical (read valuable) to them at any point in time. A good rule of thumb is to focus on one to three customer-critical scenarios for each target audience. Then move on to the next scenarios for that audience (since you’ve made it easy for them to accomplish their outcomes, they’re ready for the next transformational experience). Or focus on addressing the most crucial scenarios for a different audience. Each audience/scenario combination gives you an innovation platform—an opportunity to build and release the structural tension between the experiences the customers in that segment would ideally like to have in accomplishing their outcomes and the experience your firm currently provides.

Should All Innovation Be Customer-Driven Innovation? Of course not! Much of the innovation that will fuel your business will come from pure R&D, from slogging away at solving hard problems—curing diseases, lowering energy consumption, lengthening shelf life, and so on (note that most of these examples are related to helping customers achieve their outcomes). Other innovations that will delight your customers may be serendipitous. Not all good things in life are designed to serve a purpose. Some things—like delicious

How to Harness Customer Innovation

foods or delightful forms of entertainment or new games or clothing— are the result of delightful surprises, mistakes, or improvisations. The purpose of this book isn’t to dissuade you from engaging in other forms of innovation, but rather to encourage you to think about all the ways in which you can harness your customers’ natural inventiveness to power your growth.

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Give Customers Important Roles to Play in Shaping Your Business Natural Behaviors You Can Tap to Unleash Customer Innovation

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ou’ll find that customers and users play many roles in and around your business. They don’t play these roles to please you. They do because it comes naturally to them. They’re not focused on what they can do for your organization. They’re focused on what they can do for themselves. Your goal should be to empower your most thoughtful customers to play as many of these roles as you can and as are appropriate for them. That way, passionate customers will intersect with people in many different parts of your business. You can measure how well you’re doing in harnessing customer innovation by counting the number of roles customers are playing in helping to co-design your business. You can gauge your progress in cultural transformation by noticing how many of your employees and how many departments are engaging with customers in these various roles.

Give Customers Important Roles

Customer Roles to Engage in Outside Innovation One of the patterns we spotted across the innovative organizations we’ve studied is that the firms that are doing the best job in harnessing customer-led innovation have engaged with different groups of customers in five distinct roles.

Lead Customers. Lead customers are a special breed of innovators. They innovate without being asked. Eric von Hippel, author of Democratizing Innovation,1 calls these people “lead users” because, often, they aren’t paying customers—yet. But whether these people pay for your products, or whether they are even using your products to create something new and amazing, they are thoughtful and passionate about the outcomes they want to achieve. Lead users and lead customers are the people who will design your next-generation products or business model. We’ll use the term “lead customers” to subsume both. But remember that the people you’re seeking to recruit as lead customers may not yet be current customers. Fred Martin, a graduate student at the Massachusetts Institute of Technology’s (MIT) Computer Science and Artificial Intelligence Lab, invented the “programmable brick” that Lego later commercialized. Chris Rogers, an engineering professor at Tufts University, used the Lego intelligent bricks with his students to build robots. Because there was no Macintosh version of the graphical programming language with which these bricks were programmed, Chris modified a popular engineering software environment, National Instruments LabVIEW. Lego came to Chris after he had done this work, and partnered with National Instruments to create a commercial version of the robotics software. Contributors. Contributors innovate within your company’s guidelines and provide value to your company by doing so. For example, if you offer a developer’s toolkit with which new applications can be built, your customers may use the toolkit and never contribute anything in return. True contributors, however, offer these applications to the company to share with others in the customer community. An excellent example of contributors are the thousands of “virtual

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ROLES CUSTOMERS PLAY IN OUTSIDE INNOVATION

Customer Roles

Description Lead customers are a special breed of innovators. Not finding what they need, they invent new solutions themselves, without being asked. Watch them, support them, and commercialize their inventions. Engage them in co-design activities. Give them innovation toolkits that enable them to extend, modify, and/or redesign your products and services. Then watch what they do and profit from it. Contributors are happy to donate their work for the benefit of others. For example, contributors may create software or music or designs, and offer their creations freely to others. They contribute their time as debuggers and testers of new products and concepts. They enjoy seeing their contributions and ideas used. They may reap reciprocal benefits but that’s not a precondition. Encourage and acknowledge contributors. Make sure their contributions are recognized and appreciated. Consultants provide deep subject matter expertise and offer valuable guidance and insights. Invite them to become part of your company. They’ll analyze trade-offs, help you prioritize, and recommend winning approaches. Guides act as advisors to other customers, solving problems, offering insights, and helping create “maps” that will help other customers navigate complicated product lines or explain relationships among complex concepts. Guides classify, filter, organize, and review alternatives. They help others make sense out of confusion. They add value by creating new knowledge. Promoters are enthusiasts about your brand and your products. They are happy to spread the word. They come up with innovative ideas about how to attract and delight other customers. They can help shorten time-to-adoption. They may sell and/or promote your wares.

Give Customers Important Roles

instruments” or VIs—programs that mirror the appearance and functions of a physical scientific instrument—that are routinely submitted by developers to National Instruments Developer Zone, an online repository of notes, samples, and applications to be shared. The scientists and researchers who freely publish and share their ideas in scientific communities are also contributors, as are the photographers and musicians who publish their works online and encourage others to reuse them.

Consultants. Customers love to offer advice (both solicited and unsolicited) to people at all levels in your organization. These are the people whose energy you should be harnessing to supplement your internal teams’ hard work. For example, Hallmark created the Hallmark Idea Exchange (IdEx), an online customer community, in order to capture new ideas. Members of this community have participated since 2001, both brainstorming ideas among themselves and responding to Hallmark’s questions about pricing, merchandising strategies, and product needs. Hallmark has a dedicated employee who acts as the community facilitator and project leader. There are now more than 500 community members who offer that “outside” view into Hallmark’s innovation process. Customer consultants serve on committees and design teams, they validate marketing strategies, and they become advisory board members, all the time working with your employees on new ideas. Guides. Guides act as advisors to other customers, solving problems, offering insights, and, often most importantly, helping create “maps” that will help customers navigate complicated product lines or explain relationships among complex concepts. When Staples set about reorganizing its online product navigation categories, it looked to its customers. The company invited more than 5,000 customers to participate in an exercise to create product categories and organize products into the appropriate categories. The American Institute of Physics engages top physicists to classify scientific research as new disciplines emerge in this rapidly changing field. Amazon.com and many other companies rely on customers to contribute product reviews for the hundreds of thousands of products they sell.

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Promoters. Every business has its fans—those customers who refer others to do business with the company and recommend the products. Organizations that actively support these fans gain their enthusiastic referrals as well as their ongoing loyalty. For example, boutique streetwear retailer Karmaloop’s products are promoted by 5,000 avid trendsetters all over the globe. When the Mozilla Firefox browser was getting ready to launch, a community of 65,000 promoters created the marketing programs and engineered the guerilla marketing that produced one of the fastest adoptions of software ever seen.

Expanding the Breadth and Depth of Your Relationships with Customer-Innovators In the case studies that follow, you’ll read about companies that have nurtured customers in one or more of these innovation roles. You’ll see that the more roles the company embraces and the greater the depth and duration of these relationships, the bigger the leaps in innovation and success. Notice, as you’re reading, that companies such as Lego and National Instruments work closely with their customers in all five of these roles. Notice, too, that these companies are in longtime—if not lifetime—relationships with these innovative customers. And notice that they are achieving not only impressive financial results, but they also have gained worldwide respect and recognition as leaders in their respective fields and as examples to other industries. Roles You Play in Customer Innovation We recommend that you formalize and coordinate the ways in which your organization harnesses customers’ involvement in each of these roles. • Top executives, business strategists, line of business leaders, and top R&D executives should work closely with their companies’ lead customers. Lead customers are a great source for breakthrough thinking. Make sure that lead customers (not just your

Give Customers Important Roles

most profitable or vocal customers) are the ones your senior executives hang out with. Bring these lead customers together. Create a community to support them. Being a pioneer can be lonely; they really need the support of a community of peers and you can amplify their contributions to your strategy by engaging with them as a creative business co-design community. • You need a formal program to encourage, acknowledge, and engage customer contributors for each brand or customer segment, for each product line, and for each functional area in which you want to encourage customers to contribute. Contributors typically will amplify your brand with their own creative offerings, supplement your products with their own extensions, improvisations and creative content, and improve your operations by contributing work-arounds or shortcuts. • Customer consultants should be working with employees at all levels within the organization—product line managers, brand managers, marketing managers, operations, finance, and logistics. Smart businesses have quick communications links to customer consultants so they can use them as sounding boards for all kinds of questions and issues as they arise. • Customer guides are the most coveted resource for pre-sales, customer support, product merchandising (helping new customers make buying decisions), personnel involved in content, and knowledge creation and management. • Customer champions are a godsend for your brand management, marketing, and sales organizations.

Observe What Customers Do. You can’t sit back and wait for customers to innovate for you. Even in the case of lead customers, you have to be out there, looking at what customers and potential customers are doing. Try to observe customers in their natural settings. Watch how they do things, what they’re trying to do, and how they improvise or customize in order to accomplish their desired outcomes in the way that works best for them. And make sure this is a formalized

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and continuing project. A haphazard approach will yield haphazard results.

Provide Toolkits and Guidelines for Innovation. If you want to harness customers’ innovative abilities, provide them with built-in opportunities to innovate. Give them ways to mix and match, to extend your products, to customize, to extend the capabilities you’ve provided. For example, provide software tools that make it easy for customers to extend, customize, or modify functionality or services. Encourage them to share their improvisations, customizations, and extensions with others. Look for opportunities to commercialize your customers’ inventions. Invite and Reward Customers for Providing Guidance to Others. The chances are pretty good that your current customers understand the advantages and disadvantages of your products and processes. Invite your expert customers to categorize and classify your information and your products in ways that make sense to other customers or prospects. Solicit their recommendations and suggestions for additional features and for new product ideas. Formalize a mechanism for soliciting customer guidance, assign a high-placed employee to facilitate and foster this community of guides, and reward customers for donating their knowledge and/or pay them for providing guidance to their peers. Take input from problem solvers and guides seriously. Their suggestions should provide your product roadmap for the next twelve months. Create Customer Communities and Observe/Participate in Online Communities Your Customers Care About. Don’t just post a discussion forum on your Web site. Recruit and incent the right group of people to act as consultants in ongoing discussions with each other and with your organization. You need to provide guidelines for participation and to be explicit in your expectations of participation. When observing public discussion about your industry or products, be forthcoming in acknowledging your presence and let the discussions flow

Give Customers Important Roles

unimpeded. Provide clarification, but resist the impulse to defend your stuff. If you hear negatives, learn from them and fix the problems.

Put a Program in Place to Encourage and Support Promoters. Even the most loyal fans sometimes need encouragement to get the word out there. Offer your customers benefits for promoting your products and services—since it’s something they’ll do naturally, anyway. And make it easy for fans to send new customers your way by providing a referral link or packet of info to your champions. Work with customers to find out how they’d like to promote your services— the chances are that they’ll come up with an innovative promotional idea that hasn’t occurred to you. And remember, if the products they’re promoting include their own contributions, they’ll be even more enthusiastic about promoting them.

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O W T R E T P A CH LEGO® MINDSTORMS® NXT Powered by Customers’ Inventiveness

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n late April 2006, thousands of Lego Mindstorms fans flocked to the Olympic stadium in Atlanta, Georgia, to witness the world finals of the FIRST Lego League1 robotics competition. More than 84,000 kids age nine to fourteen, from thirty-five countries, participated in the robotics contests, with more than 30,000 adult volunteers supporting them. Each team’s goal: to program a Lego Mindstorms robot to carry out a complex set of “Ocean Odyssey” missions involving vehicles, objects, and animals, all made out of Lego bricks. The kids’ robots had to take a submarine off of a research vessel, map the ocean floor to find the presence of a shipwreck (flipping up marker flags as it did so); locate a water pumping station and cover it with a protective structure to keep it from being damaged; install a new segment of underwater pipeline; sample different species of fish and separate them by color; release a trapped dolphin; move an artificial reef into the correct location; clean up a cargo shipping accident by replacing the debris back into the cargo container and hauling it away; and, finally, recover archaeological artifacts from an ancient shipwreck. Whew! At the same time as the kids’ competition was held, a large Lego

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convention drew thousands more AFOLs (Adult Fans of Lego) to Atlanta. The annual BrickSouth convention featured booths crammed with customer-created Lego designs. These were joined together by theme into large Lego landscapes, including a moonbase, towns and trains, castles, a Gotham City complete with Batman, and a large collection of Mindstorms robots at work and at play. Lego products provide a great metaphor for customer-led innovation. The company has provided building kits to fuel kids’ (and adults’) inventiveness for more than fifty years. But the most interesting story about Lego’s recent turnaround is the extent to which lead users and customers (school kids, math teachers, college professors, computer hackers, and hard-core hobbyists) have been involved in co-designing the company’s most successful product of all time: Lego Mindstorms. LEGO EXECUTIVE SUMMARY

LEGO Group/International Toy Manufacturer The Lego Group is one of the world’s largest toy manufacturers and the largest in construction toys. It is estimated that the world’s children spend five billion hours a year playing with Lego bricks. Lego is making a comeback after some missteps. Engaging customers as co-designers and consultants has been part of the secret of Lego’s success.

Target Customers Lego targets three different customer segments for its Mindstorms product line: families (children and parents), educators, and hackers/hobbyists

Case Study Focus

1. How to commercialize lead user innovations.

2. How to nurture and leverage online communities for new ideas and to build customer loyalty.

3. How to partner with lead customers and their partners to develop a next-generation product. 4. How to engage lead customers in the design of next-generation products.

Customers’ Issues Kids don’t enjoy passive learning. Parents are concerned their kids won’t be competitive in math and science. Teachers are unwilling to teach things they don’t understand.

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Key Customer Scenarios®

Customers’ Results

Business Results

In 2005, 84,000 kids in 35 countries participated in the leading Lego robotics competition. Mindstorms-based curricula are being used in 30,000 schools with coursework available from elementary school grades through college level. Ten thousand adult Mindstorms enthusiasts volunteered to beta test the next-generation product.

In 2005, the Lego Group went from a loss of a226 million in 2004 on revenues of a847 million to a profit of a94 million on revenues of a945 million. Lego Mindstorms has been the company’s best-selling product for more than eight years. The new version, Mindstorms NXT, is forecast to be a best seller.

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Lead User Innovation Fueled the Original LEGO MINDSTORMS It was Seymour Papert who pioneered the idea of having children build and manipulate robots by programming them at MIT’s Computer Science and Artificial Intelligence Laboratory in the 1970s. Children used Seymour Papert’s Logo programming language to control the behavior of robot turtles. In the mid-1980s, the Lego Education Group began to sponsor this fascinating hands-on research into how kids learned by doing. Seymour Papert’s disciples at MIT’s Media Lab connected a computer running Logo software through the Lego Control Lab Interface (CLI), a device that lets you connect a computer to a number of input and output devices, like motors, lights, and sensors. Kids could build Lego houses with doors they could open and close by remote control, cars that would drive about, and Lego pets they could control from the computer software. But these early robots had one major limitation. They had to be tethered to the computer with cumbersome wires. That limited their range and made them less than ideal for classroom use. It was Fred Martin, now a professor at the University of Massachusetts Lowell, who first came up with the idea of turning a Lego brick into a programmable computer. If you could develop the program on a PC, download it to the memory on a computer contained on a Lego brick, then your robot could work without wires. By 1995 and 1996, Fred recalls, “We had teachers in six different classrooms in Rhode Island, using these programmable bricks. The teachers influenced many key design decisions.”2 That’s when Robert Rasmussen, then head of Lego’s USA Education Group, decided that it was time to commercialize the concept that had been pioneered at MIT’s Media Lab. “We recognized that PCs were beginning to be affordable and were in the home,” Søren Lund, now director of the Mindstorms product line, recalled. “Fred Martin had already developed the first prototype of an intelligent brick.” The Lego team realized it could develop the programmable brick into a commercial product, consisting of the construction materials for building a freestanding robot and a PC software program that kids could

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use to download instructions into a programmable brick to tell the robot what to do.

Identifying the Target Market(s) for LEGO MINDSTORMS

Consumer Market. “We did extensive market research, especially in the U.S.,” Søren Lund remembers. “We looked, in particular, at the home-learning market.” Parents in the United States were concerned about American kids falling behind in science, math, and computer science, and they were anxious to do more at home to improve their kids’ competitive chances in an increasingly global economy. Lego’s market research team felt this was a group of customers that would spend money on something if they believed it would give their kids a better chance to compete. Education Market. Lego’s Education Division had been sponsoring much of the Lego robotics-related research in early childhood education programs at MIT, Tufts, and other universities in the United States. They knew that PCs and Macs were making their way into schools and that early-adopter teachers were excited about the handson learning and level of engagement kids experienced when they worked in teams to build robots and have them perform tasks. Big Differences between the Two Markets. “We knew that the two markets operated very differently,” Søren Lund explained. “In the retail market, you want a big hit. You’re appealing to kids and their parents. Retailers want something new every year. In the school market, you’re selling to teachers and school committees. You need to grow a curriculum. You start slow and build every year. You don’t want to make changes to the platform.”

Two Different Versions of the Original LEGO MINDSTORMS Product: Retail and Educational The original Mindstorms product that Lego brought to market in 1997 consisted of a software application that kids and adults could

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use to program one or more programmable bricks; the programmable brick itself, called the RCX (which included an 8-bit computer); two motors; three sensors; and a kit of Lego bricks, gears, and wheels. Of course, you could add any of the standard Lego components to design your own objects and creatures. The RCX code ran on the most popular PC platform at the time, Microsoft Windows. Lego’s education division realized that it needed a version of the software that would run on the Apple Macintosh, the more popular platform in the education arena. “We wanted to use the same software platform for both the retail and educational versions of the product. But we didn’t have the money to fund the software development for a Mac version,” Søren recalled. Lego’s U.S. Education Group was aware of the educational robotics work that engineering professor Chris Rogers had been doing at Tufts University. Chris Rogers’s team had been showing teachers and kids how to build and control robots through software. Chris had built his own graphical user interface on top of a software program that was widely used by engineers—National Instruments’ LabView. Robert Rasmussen asked Chris if he could develop a simple application in LabView, which runs on both the PC and the Mac, to drive the new Mindstorms robot. “Chris came to our headquarters in Billund to show us what he could do,” Søren remembers. “We were impressed. The education division was able to sponsor the project.” That’s how the company wound up with two different versions of software: one for the retail market and one for the education market. “In hindsight, doing two different versions of the software was probably the biggest mistake we made,” Søren now admits. It made it difficult for students who were using Mindstorms at school to use the same product at home. The two programs were too different. Despite those differences, Mindstorms has been the company’s most successful revenue generator.

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How Kids Were Involved in the Design of LEGO MINDSTORMS Of course, as with all of its products, Lego recruited kids in both the United States and in Europe to play with and test Mindstorms before its release. What was different about the testing for this product was the fact that teachers and students were involved in development and continuous refinement even before Lego decided to commercialize the product. MIT, Tufts, and Carnegie Mellon, among others, all had active hands-on learning programs in which they were combining Lego bricks and computer software to enable kids to experiment with early robotics.

Surprising Success of the Original LEGO MINDSTORMS Product Søren recalls two main problems in preparing for the launch of Mindstorms. “We didn’t know how to describe it. And we didn’t know how many we could sell.” The Lego marketing group had trouble figuring out what category Mindstorms was in. Was it a toy? A software product? Was it for kids? Was it for adults? “We had an open mind about how the product might be used from the very beginning. We knew we were launching a very open-ended platform,” said Søren. Like a traditional Lego product, it was a platform for the imagination. “We felt we were taking the best from the physical world—like Legos, and the best from the software world,” Søren said. “In the end, we decided to create a new category: ‘consumer robotics.’ ” Forecasting sales was really difficult. “In the beginning, we really didn’t have a clue. There was nothing to compare it with. There were people who were already building robots. But they were professional people in research labs” explained Søren. During the six-month window before launch, the team had to decide how many to manufacture. “We tripled our forecasts during that half year,” Søren remembers. But they still guessed wrong. “We sold 80,000 between August and early December. We were completely out of stock by December 5th!” Søren was delighted by the product’s success and, of

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course, chagrined that they were out of stock before the holidays. “This was the best-selling product in the company’s entire history,” Søren exclaimed.

Lead Customer Innovation Pays Off! From its launch in 1998 through the end of 2005, Lego sold one million Lego RCX bricks. These bricks were included in Mindstorms kits which sold at an average retail price of $199 in the United States and a249 in Europe. The bricks were also sold in educational packages designed to be used by groups of students. “The Mindstorms Robotics Invention System has been the best-selling retail product in the company’s history, measured by revenue,” Søren said. Profit margins were slim at first, but have increased over time as Lego became more efficient. The company has been able to hold the same price for eight years. “Mindstorms has remained the most badly-forecasted product in the company,” Søren said ruefully. “We kept expecting it to reach the end of its useful life. Show me any technology platform that is still selling eight years after launch.”

First Big Surprise: Adult Hackers and Hobbyists Flocked to MINDSTORMS Søren Lund recalls wondering a lot about the potential adult market for Mindstorms, before its release. “We had an early-adopter marketing strategy,” Søren recalls. The Lego team assumed that dads, big brothers, and professors would be the early adopters. From there, little brothers and sisters, students, friends, and family would become interested. But when Lego surveyed the buyers after the first six months, it discovered that 70 percent of the purchasers were adults who had purchased the kits for themselves. By tracking discussion forums on the Internet3 the Lego team realized that there was a community of like-minded adults who were exchanging tips and ideas around what you could build with

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Mindstorms. These discussion groups had sprung up quickly in a variety of venues—robotics discussion groups, computer discussion groups, hobbyists, and gamers. Many of these user groups crosslinked to one another, so you could see how the contagion spread from one group of hackers and hobbyists to another. “These guys were fun to watch,” Søren remarked. The customers knew the Lego executives were listening in to their conversations, because when they talked about things they liked and didn’t like, and things they wanted to be able to do with the product, they’d often close with “Are you listening TLG?”—their name for The Lego Group.

Lead Customers Began “Hacking” and Extending MINDSTORMS “Before we launched Mindstorms,” Søren recalls, “we had had many internal discussions about whether or not to open up the software to outside developers. Our legal group was adamant. ‘No,’ they said, ‘you don’t let customers change a Lego platform.’ ” What Søren had in mind was not to open up the platform, but to provide the information that would enable smart people to take advantage of its functionality. “We wanted to provide a software development toolkit that would enable software developers to write their own applications,” he said. “But the software development toolkit wasn’t available when we launched the product.” So the Lego team watched what happened. Sure enough, clever customers quickly figured out how to “hack” the microcode that was programmed onto the RCX brick. Lead customers had opened up the platform for others to extend and write to, even without Lego’s software development kit. According to Paul Wallich, “Mindstormers exchanged information through mailing lists . . . and through LUGNET, Lego Users Group Network. Development during those early days was fast and heady.” For example, in one rapid exchange that lasted two days, two members of this community of innovative hackers designed a version of the brick that was four times as fast as the original.4

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Wired magazine author Brendan Koerner described the way in which the Lego Group’s executives realized that the flurry of hacking was a positive development in his February 2006 article, “Geeks in Toyland”: After a few months of wait-and-see, Lego concluded that limiting creativity was contrary to its mission of encouraging exploration and ingenuity. Besides, the hackers were providing a valuable service. . . . Rather than send out cease and desist letters, Lego decided to let the modders flourish; it even wrote a “right to hack” into the Mindstorms software license. . . . Soon, dozens of Web sites were hosting third-party programs that helped Mindstorms users build robots that Lego had never dreamed of: soda machines, blackjack dealers, even toilet scrubbers.5

Customer Communities Sprang Up Around LEGO MINDSTORMS Lego Offered an Online Discussion Forum for Mindstorms Users Hosting your own online forums seems to be a critical ingredient to success in supporting customer-led innovation. In addition to the online discussions that lead customers were having on their own Internet Usenet user groups and discussion forums, Lego was quick to introduce a discussion forum as part of the Mindstorms Web site. It was the first forum Lego had ever hosted on its corporate Web site. The Lego executives talked about the trade-offs between hosting a discussion forum on the Lego Web site and just monitoring the discussions their customers were having elsewhere. “What if customers say bad things about our products?” the executives wondered. “We knew from prior experience that if one customer bad-mouths your product, another customer will usually defend it,” Søren recalls.

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School Kids Started Participating in Robotics Competitions Inventor Dean Kamen and his organization, FIRST (For Inspiration and Recognition of Science and Technology), founded as a not-forprofit in 1989, were a big catalyst for spreading the enthusiasm around Lego Mindstorms. “FIRST was running a robotics program for college students to promote science in the U.S.,” Søren recalls. “But they were using big metal robots. They wanted to reach younger kids and in order to do that, they needed to go down both in age and in price for the robotics kits.” The link between FIRST and Lego was an obvious one. “FIRST runs the FIRST Robotics competitions in which teams of high school students, sponsored and assisted by local companies and volunteers, design, assemble, and test a robot capable of performing a specified task in competition with other teams. FIRST also runs the FIRST Lego League, for children nine to fourteen years old.”6

Adam building a crab robot at the Tufts Center for Engineering Education.

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“We ran the original FIRST Lego League competitions back in 1998,” Søren recalls. “That first year, we had 1,600 kids participating in two tournaments in the U.S. In 2006, we have 84,000 kids in thirty-five countries, with more than 30,000 adult volunteers supporting them. Today, at least one-third of the participants are girls.”

Teachers Shared Mindstorms Curricula Another vibrant user community included the teachers who began using Mindstorms within their classrooms or in home-schooling projects. They went online to get questions answered. “Should I combine boys and girls on a team? Should I organize Lego bricks by type or by kit? How do I demonstrate the solar system? What activities can third graders do?” Teachers shared designs and lesson plans. The academic community also began providing training and resources to teachers in primary schools, in middle schools, and in high schools. A number of universities and educational institutions have developed curricula and lesson plans that incorporate Mindstorms.

Other Online Member Communities In addition to the communities that have sprung up around Mindstorms, there are many other Lego communities. The Lego Club, which was launched in 1987 and moved online in 1998, now has close to three million members—mostly children between the ages of six and twelve. A kids’ fan club, Lego BrickMaster, sends new kits directly to children’s homes each month, as well as providing an online forum for them to swap tips and show off their best inventions.

LEGO Group Refocuses on Its “Core Construction” Business The Lego group lost money in 2000, 2003, and 2004 as the toy business became more and more competitive. Revenues declined from a1,270 million in 2001 to a899 million in 2004. (Until 2006 Lego

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still manufactured its components in Europe—at higher costs than Chinese manufacturing.) “It’s no secret that as a company, we lost our way a little bit in the early 2000’s,” Søren Lund commented. “We tried to reach out to kids who didn’t want to play with Lego bricks. We forgot about our core users. And we heard from our customers and our retailers. ‘What are you guys doing? Where’s my standard product? I need a fire station that looks like a fire station!’ they were telling us. We needed to refocus on our core values and our core consumers.” The refocusing seems to be working. In 2005, the Lego Group went from a loss of a226 million in 2004 on revenues of a847 million to a profit of a94 million on revenues of a945 million. Making building blocks sexy for kids living in a digital age surrounded by MP3 players, mobile phones, and electronic games is a key challenge for The Lego Group. One important pillar in Lego’s strategy is to surround its physical construction toys with software toolkits and customer communities. The Mindstorms product line is essential for keeping Lego relevant in the digital age.

Planning for the Next Generation of MINDSTORMS The first decision that the Lego design team made when planning the next generation of products was to use a common software platform for both the retail and the educational products. Although the two markets demanded different pricing, packaging, and support material, one thing was crystal clear from customer feedback: customers wanted a single version of the product for use at home and at school. Another early decision was that the software needed to run across platforms—at least on operating systems from Microsoft and Macintosh, and preferably other software platforms, such as Linux. The next decision was whether to try to make the next-generation product backward-compatible with all the Mindstorms sets that were already out in the field. The team decided to develop a true nextgeneration product. The programmable brick and the software that controlled it would be replaced by the new versions.

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The team also decided to make the more flexible Technic construction set the design center for the robotics kit. This would enable the robots to be easier to build, more flexible, and to have a sleeker look. Finally, the team realized that a 32-bit processor was necessary for serious robotics.

Design Principles for Mindstorms NXT “Our first-generation product was relatively easy to learn to use as long as you were working together with other people,” Søren Lund explained. But it was hard for most kids to build a robot completely by themselves. “We wanted the first-time solo experience to be much better, much more intuitive,” said Søren. “If a 10- or a 12-year-old opens the box, they should be able to build something that works within thirty minutes, the team decided. That WOW! factor is really important,” Søren said.

Partnering with National Instruments for the Software Platform “We used to have our own software development group,” Søren Lund explained. “But we recognize that we aren’t a software company. For Mindstorms, we wanted to find a company that could develop the software for us. We did some research. But at the end of the day, it was an easy decision to go with National Instruments. They had been working with our education division, and our two companies’ cultures matched well. Their employees and executives are focused and dedicated to getting kids excited about science and technology.”

Engaging Lead Users and Customers in Co-Designing MINDSTORMS NXT Lego and National Instruments already had a lot of information about how kids, teachers, and adult hobbyists used the first-generation

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Mindstorms product. They knew a lot about what additional functionality people wanted and needed. They had already made significant decisions about the design principles and about the hardware and software platform. They could have designed the product based on what they knew and then begun alpha and beta testing it with lead customers. But they went several steps beyond that.

Held Lead User Co-Design Workshop In August 2004, Lego hosted a two-day workshop at MIT with a number of the lead users whose opinions they valued. All of these lead users were actively working in the classroom with teachers and students, ranging from first grade all the way through university courses. “We wanted to get all of these smart people in a room and really look at everything we should consider before we got too locked in on the design,” Søren Lund recalls. The lead customer brainstorm workshop produced some great tangible results and was a pivotal turning point. Since adult enthusiasts had been such an important customer group, Lund wanted to work really closely with a small group of adult customers (AFOLs) who had a lot of experience working with the first-generation Mindstorms product. He wanted this group to help steer the product development, to help make design trade-offs, and to ensure that the next-generation product would really meet customers’ needs.

Selecting the Right Lead Customers By October 2004, an original list of twenty people was developed, and from this Lego selected its “top five” lead customer candidates. “This process took a while because we wanted to make sure that we had picked the right ones,” Søren Lund recalls. Lego wanted people who had different kinds of expertise to offer. The e-mail invitations were sent out in January 2005. Four of the five responded, signed the non-disclosure agreement, and logged on to the private Web forum to see what was up.

L e g o ® M i n d s t o r m s® N X T

The four lead customers—Ralph Hempel, an embedded systems engineer and co-author of Extreme MINDSTORMS,7 for advanced Mindstorms users; John Barnes, an electronics engineer and software developer with expertise in ultrasonic sensors used by robotics fans; Steve Hassenplug, a software engineer well known in Mindstorms circles for prowess in designing robots; and David Schilling, a homeschool teacher who used Mindstorms to teach math, engineering, and physics—were dubbed the Mindstorms User Panelists (MUPs or “Muppets”).

Engaging with Lead Customers to Consult on the New Product Under Development Lego had made a lot of decisions before it involved the Mindstorms User Panel. It had “locked down” the draft design including the processor selection, much of the hardware design, and selected LabView as the underlying software platform. Although the overall direction for the product had been decided, there still was a lot to figure out. “We had a draft design in place,” Søren Lund said. “We invited the Muppets into the team at a time where there still were a lot of decisions to be made.” Before revealing the specs to the lead customers, Søren asked for their wish list. To his great relief, most of the things they wanted were already included in the spec. As hardware and software prototypes were ready, the Lego team sent them out to the lead customers to play with and comment upon. A great deal of the lead customers’ feedback was solicited online during the fifteen months before the Mindstorms NXT product was announced. “We would send a question about design trade-offs and get a thread of twenty answers back within a couple of hours,” Søren exclaimed. In April 2005, Steve Hassenplug and David Schilling were both attending a Mindstorms tournament at Lego’s headquarters in Billund, Denmark. (They paid their own travel expenses.) The Mindstorms team asked them to stay on for a day and took them into the labs. Wired magazine’s Brendan Koerner describes what happened:

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They stayed an extra day and were ushered into Lego’s research sanctum . . . that’s strictly off-limits to non-employees, beneath a sign reading “we will do for robotics what iPod did for music.” Hassenplug had a serious problem with the studless Legos. Because they’re linked by rods, it’s tricky to make right angles. And that makes it difficult to construct square frames. He asked whether Lego could add a small L-shaped joint so Technic bars could be bolted at right angles. “One of the first things Søren told us was ‘We don’t have the budget to make new pieces,’ ” Hassenplug says. “But then after our talks, they decided it was really a good idea.” Lego’s designers located an L-shaped mold languishing in a pile of unused prototypes and added it to the production line.8 In the fall of 2005, Søren added nine more lead customers to the user panel in order to get input from AFOLs in other parts of the world.

Engaging Beta Testers to Support the Community In January 2006, after the official launch of Mindstorms NXT at the Consumer Electronics Show in Las Vegas, Lego put the word out that it was soliciting 100 additional beta testers. There were two factors in gating the size of the beta community. “We wanted to have a real relationship with these folks,” Søren said. “And, we had a limited number of prototypes available.” In order to make the cut, you had to fill in a lengthy questionnaire documenting your longstanding involvement with, and passion about, Mindstorms. You also had to pitch “what you will do to benefit the community.” “We were looking for people who would write a book, develop sensors, develop other third-party add-ons,” Søren reported. “We got close to 10,000 applicants!”

L e g o ® M i n d s t o r m s® N X T

Empowering the MINDSTORMS Community to Extend the Platform The Lego Group has learned a lot from watching the original Mindstorms community in action. The company has decided not to even attempt to “control” the direction in which customers want to co-opt and extend the Mindstorms NXT platform. “We believe we have a fantastic robotics toolset. We don’t believe it’s the answer to doing

A boy programming his LEGO MINDSTORMS NXT Robot.

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everything people will want to do. If you want to create your own software environment to control the robotics, you are welcome to do so. You won’t be able to hack our software, but you can extend it,” Søren explained. He’s convinced that Mindstorms users will develop alternative programming environments. Not only is Lego publishing the interfaces that will make it easier for programmers to drive the Mindstorms NXT firmware, he is also planning to make the intelligent brick’s firmware open source. “We expect people to take our firmware out and put their own firmware in. This will be the ultimate open platform,” he exclaimed proudly in early 2006. There are more consumer robotics products now competing in the marketplace than there were in 1998, when Mindstorms was first introduced. Lego and National Instruments are counting on customer innovation to continue to keep Mindstorms NXT ahead of the pack.

How LEGO Harnessed Customer Innovation to Define Its Product Direction and Business Strategy This Lego Mindstorms story provides a classic “how to” for harnessing customer innovation. Notice all the different ways in which Lego involved its customers in co-designing its products. Note too, that when an unexpected customer segment emerged, Lego was quick to listen to those customers and to support them. And, when these lead customers began hacking and extending the company’s hardware and software, Lego actually encouraged this behavior! 1. Lego identified (and sponsored) lead users who were inventing new capabilities (intelligent bricks, robotics software for kids) and then commercialized their innovations. 2. Lego commissioned one of these lead users/customers—Dr. Chris Rogers at Tufts University and his students—to develop the robotics software needed for the educational market.

L e g o ® M i n d s t o r m s® N X T

3. Lego continued to work closely with these lead users and their end customers—teachers and students—as they took the commercial product (Lego Mindstorms) into the market. 4. Lego quickly identified an emerging and unexpected audience (adult hobbyists). 5. Lego executives tracked Internet Usenet groups and online discussions to monitor what lead customers cared about. 6. Lego sponsored its own online community and lured the lead customers to join the Lego-sponsored community as well as their own LUGNET community. 7. Lego executives watched lead customers hack its products, and embraced and encouraged their creativity. 8. Lego sponsored competitions for innovative use of its products by customers (kids, teachers, hobbyists) to identify new product possibilities, generate excitement among the community, and create awareness in the market. 9. Lego listened to its lead customer—Professor Chris Rogers— and decided to partner with a like-minded technology provider—National Instruments—for the software needed to drive its next-generation product, eliminating the “not-inventedhere” mindset. 10. Lego recruited lead customers as consultants to co-design its next-generation product. 11. Lego selected beta testers who would both promote and enhance the new products from among its lead customer base. 12. Lego provided customers with an open toolkit to extend the product’s capabilities.

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TAKE-AWAYS FROM LEGO Lego has thrived because of the ongoing customer community that sprang up independently of the company, but which Lego has now embraced. Customers are now collaborating with Lego in its product design. Here are some best practices we noted that may apply to your business: • Watch lead users carefully. Sponsor their research with your products. Be ready to commercialize their great ideas. • Listen carefully to what customers are trying to do with your products and let them know you’re listening. • Identify and appreciate the different customer audiences you have. Gain a deep understanding of what those customers are trying to accomplish—their Customer Scenarios®—and make sure that you are supporting them in achieving their desired outcomes. • Establish and nurture customer communities. • Give users the tools, information, and capabilities to extend your products. • Be willing to relinquish control and follow where customers lead. • Engage lead customers to co-design your products. • Sponsor activities that enable customers to gain recognition and respect from their peers. • Encourage your customers to be your voice in the market.

National Instruments A Thirty-Year History of Enabling Customer Innovation

Lead Customer Makes the LEGO Connection “How did we wind up providing the software for Lego Mindstorms? It’s a great story,” chuckled Ray Almgren, National Instruments’s vice president of marketing and academic relations. “I guess you could say we were in the right place at the right time with the right products and a lot of luck thrown in.” Lead Customer Makes the LEGO Connection Chris Rogers, professor of mechanical engineering at Tufts University, had a passion for improving kids’ math and science skills. He wanted to use Lego Mindstorms so that kids could build robots, come up with the best ways to solve problems, and compete against one another. But, because Macs were huge in classrooms in the U.S., he needed a Macintosh version of the software and Lego wasn’t planning to offer one. Chris did a lot of programming using National Instruments’s flagship software product, LabView. Not only did LabView deliver an easy-to-use, intuitive graphical interface, but it also ran on Macs.

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With LabView, Chris could expand Lego Mindstorms to the Mac platform and engage more teachers and kids in the fun and excitement of robotics. Thus, Robert Rasmussen, then head of Lego’s USA Education Group, asked Chris to develop an application in LabView to program Mindstorms robots.

NATIONAL INSTRUMENTS EXECUTIVE SUMMARY

National Instruments/Scientific Instruments and Software For thirty years, National Instruments has been the leader in virtual instrumentation, a concept that has changed the way engineers and scientists approach measurement and automation. In 2005, the company sold products to more than 25,000 companies in ninety countries. The company’s LabView graphical development product was used as the basis for the software that powers Lego Mindstorms NXT.

Case Study Focus

1. How to provide tools to support customer innovation.

2. How to support lead users and follow their lead

3. How to foster online communities to support customer innovation.

4. How to recruit lead customers as consultants.

Target Customers

Customers’ Issues

Scientists and engineers who create highly specialized measurement and analysis applications. Lego Mindstorms customers—kids, parents, teachers, and adult hobbyists who want to program robots to perform tasks.

LabView customers want a development tool that is easy to use and is versatile enough so that it can be used to develop a wide variety of applications. Mindstorms users want a toolkit that is easy to use but that will grow as they become more proficient.

National Instruments

Key Customer Scenarios®

Customers’ Results

Business Results

LabView customers have used the platform to create virtual instrument programs which are combined to create such diverse solutions as a virtual weather station, a monitoring and testing application for oil rigs, and an application to measure trial runs for bobsled competitions. Even relatively new developers are able to quickly create applications. Mindstorms software users (many of them kids) are able to start simply and then create more and more sophisticated applications for their robots by leveraging the power of the graphical development environment.

In 2006 National Instruments grew revenues to $572 million, an increase of 11% from the previous year, and had a record net income of $62 million, a 27% increase from the previous year, and a 14% operating margin.

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Using National Instruments’s LabVIEW to Create a Graphical Robotics Program for Kids “Here was our first bit of luck,” Ray Almgren reported. “Chris knew LabView ran on the Mac, so he reverse engineered the Mindstorms user interface on top of LabView,” and wrote his own interface to the Lego “smart brick” computer. Chris christened the program “Robolab,” a much catchier name than the “Robotics Invention System” (RIS) that Lego sold through its retail division. When Chris’s team approached National Instruments about licensing the software for use in schools, Chris asked National Instruments if he could base Robolab on an older version of the student edition of LabView to keep the licensing and deployment costs down. “It was kind of a challenge for us, to figure out how to make a $2,000 software program available for them to retail in a $200 product,” Ray recalled, “but our CEO is really passionate about education, and he just said, ‘Make it work.’ ” The Robolab application that Chris Rogers’s team developed has a simple interface with icons you can drag and connect, such as traffic lights for stop and go, a motor for driving the motor, a watch face you can use to time things, switches for turning things on and off, musical notes for sound and other self-evident pictures that kids can string together and control. “But, the full LabView application is still available under the hood,” Ray explained. “When they want to do other things, a lot of the kids just start programming in LabView the same way professional engineers and leading researchers and scientists do.” For National Instruments, the benefits of having Robolab running on top of LabView are great. There’s a whole generation of kids that are now using LabView to design solutions to complex problems, starting at the age of three. This is a wonderful way for National Instruments to capture new customers—they’ll grow up using the software. Since the introduction of the Robolab software for the education market in 1998, there have been many upgrades. Since Robolab is based on the off-the-shelf LabView 7 product, as soon as a customer

National Instruments

or supplier adds support for a new input sensor or output driver, the new functionality is immediately available to Robolab users.

Getting onto the LEGO Group’s Radar Like many Lego Mindstorms watchers, Ray Almgren has been expecting Lego to come out with a new version of Lego Mindstorms every year since it was released. He wanted to be sure that LabView continued to be part of the offering. “By 2002, four years after the Mindstorms/Robolab combination had hit the market, we started wondering what Lego was doing. We didn’t have an ‘in’ with the Lego decision makers,” Ray admitted. “In fact, we had no visibility at all into what Lego’s retail division was thinking. The retail people were not happy with us. After all, we had created a different product that just confused customers.” Parents whose kids used Mindstorms in their classrooms often came to stores asking for the product. When they found out the two weren’t really compatible, it wasn’t a good customer experience. So Ray Almgren made it a personal crusade to get Lego to use LabView for its next-generation version of Mindstorms—for both the retail and education markets. Ray knew that eventually Lego would need to move off of the 8-bit computing platform that was used in the RCX Brick, on to something more modern. “Every few months, I’d reach out to my Lego contacts to ask about their progress on a next-generation product. And each time, the answer came back negative. I didn’t keep trying with a lot of passion,” Ray admits.

Getting onto the Shortlist of Software Suppliers Finally, in early 2004, Chris Rogers at Tufts University was hosting a get-together for sponsors involved in educational outreach. Ray Almgren couldn’t attend that particular meeting, but he asked his colleague to see who was there from Lego corporate, to befriend them and to plant the idea of the use of LabView as the software platform for both the retail and educational markets. “Remember to tell them how many

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operating systems it already runs on,” he remembers saying, “and that it has been proven for twenty years in the field.” His colleague was successful in getting one of the Lego engineers interested. After talking with Ray, the Lego engineer agreed to travel to National Instruments headquarters in Austin, Texas, to see what National Instruments could do. Apparently, the decision had been made to develop a new version of Mindstorms. But the Lego executives already had a shortlist of potential partners who could help develop software for the consumer market and National Instruments wasn’t on that shortlist. So, it was a real long shot. “That’s when the second stroke of luck happened,” Ray chuckled. “The Lego executives weren’t available until April. In fact, the only time they could come to Austin was on a Saturday, which happened to be the day that we were hosting our annual Robolab Mania! event at headquarters.

Kids, parents, teachers, and National Instruments employees participating in a ROBOLAB Mania! contest to see which kids’ robots (programmed using ROBOLAB) are most inventive.

National Instruments

They spent the morning watching more than 300 kids from all over Texas show off their robots. Our engineers were right in the thick of things, working with the teams they had mentored, and helping kids show off their creations.”

Cementing the Partnership Selling the Lego executives on working with National Instruments was easy once the Lego team recognized how closely the two companies’ cultures and passions matched up. The other commitment the two companies shared was the desire to deliver tools to end users, inventors, and creators of all ages—people who would then use these tools to design their own solutions. National Instruments execs knew that they would benefit from this relationship in three ways: • Further the company’s mission of providing a ubiquitous software tool to customers for measuring and analyzing the world around them. • Learn from the challenge of developing a user interface for kids, something that would make their software for professionals easier to use. • Inspire tomorrow’s engineers and scientists in the K–12 classroom with a fun and exciting tool for invention and innovation. So the two companies’ development teams began their work together in June 2004. By August, they had agreed on the specifications for the user interface. Both companies involved lead customers in the design and development of the software for Mindstorms NXT. “We would bring in some of the teachers in the central Texas area and tell them, ‘We’re the high-end, professional engineering guys. You’re the experts on children. Make the requirements as harsh as you can. That will yield a great product.’ We didn’t assume that the needs of a child won’t satisfy the needs of an adult engineer. In fact, we suspect that an engineer may be happier with some of the user interface things we learn from working with kids,” Ray explained.

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What Does National Instruments Do? “Three guys in a garage” is the literal description for the way National Instruments was started in Austin, Texas, in 1976. The three guys were Jeff Kodosky, Bill Nowlin, and James Truchard (Dr. T), all of whom had met at the University of Texas in Austin. The three founders began by designing general-purpose instrumentation hardware and software that could be used by scientists and engineers for any applications that involved test and measurement. With the arrival on the scene of analog-to-digital circuitry in the early 1970s, it had become possible to hook digital computers up to real-time analog input signals. This enabled engineers and scientists to measure and analyze virtually any type of analog signal, from mechanical vibrations to seismic echoes, EKG signals, temperatures, acceleration and deceleration, chemical analysis, gas chromatography, speech signals—the list goes on and on. The NI team focused on creating a flexible measurement platform that end users (scientists and engineers) could program in order to analyze the signals they were monitoring. After all, the three founders reasoned, the rocket scientist at Cal Tech’s Jet Propulsion Lab knows exactly what he needs to measure. So does the geophysicist who works in oil exploration. Design the Next Generation “Spreadsheet for Scientists and Engineers” The original instruments included both hardware and software. Enduser programming was done in the BASIC programming language. But the advent of the IBM PC in 1982, along with the original VisiCalc spreadsheet, changed all of that. In 1983, NI decided to leverage the PC platform and to develop a general-purpose instrumentation software application that end users could program without having to be a professional programmer. As Dr. T explained later, “The spreadsheet had become a ubiquitous tool that anyone could use to manipulate numbers. We decided to build an analogous software tool that could be used to model, simulate, and analyze any signals.”1

National Instruments

LabView is now in its twentieth year and its eighth major release. It is probably the most ubiquitous graphical programming environment software application used by scientists, mathematicians, engineers, researchers, and students around the world. The product has more than one million registered users; more than 100,000 example programs are downloaded each month; and there are more than 500 third-party toolkits that work with LabView. In 2005 alone, 25,000 companies in ninety countries invested in more than six million measurement channels (channels of data connected to sensors, reading, or generating signals) from National Instruments. Now, with Lego Mindstorms NXT shipping in quantity in 2006, the NI user base will include several hundred thousand additional kids, teachers, families, students, and professors. Dr. T’s dream of making LabView an easy-to-use, general-purpose tool for math, science, and engineering—analogous to the spreadsheet—is in the process of being realized.

Supporting the “Long Tail” of Specialized Applications Chris Anderson’s book, The Long Tail,2 was the wake-up call for many companies. As Chris eloquently proved, the days of generalpurpose, homogenized solutions that will satisfy tens of thousands, or even millions, of customers are over. Any business that wants to be successful now needs to be able to profitably provide solutions to niche markets. These may be markets of one, or they may be markets of 10,000. But each market segment has very specialized needs. LabView is specifically designed to be a platform that enables customers and/or experts in a particular solution space (such as a system integrator or vertical market solution provider) to develop highly-specialized measurement and analysis applications. Here are some examples. • Bobsled Trials Performance Monitoring. LabView is used to monitor trial runs for bobsled competitions. By combining sensors on the bobsled with video of each run, the data and video

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signals are synchronized and analyzed to allow the athletes and coaches to analyze and improve their performance. • Oil Rig Monitoring and Testing. Engineers at Key Energy use LabView and National Instruments hardware to improve oilfield safety by monitoring a widely distributed fleet of rigs. Data such as gas levels and engine performance are collected from each rig and sent via satellite to the corporate office. Having access to quantitative monitoring of rig operations at numerous sites gives the company the ability to see the best operating practices for each area, procedure, and even individual operation. • James Webb Space Telescope Automation. LabView and National Instruments hardware are used to design a test application that can actuate tens of thousands of microshutters for millions of cycles while logging data, acquiring high-resolution images, and monitoring and controlling the test environment. This gives NASA engineers the ability to run custom shutter actuation tests while monitoring and controlling the test environment. • Magnetic Imaging System for Infants. Using LabView and National Instruments hardware, researchers have developed a non-invasive magnetic imaging system to spatially and temporally map the magnetic fields generated by brain activity in infants at severe risk of developing cerebral palsy and epilepsy, so that medical doctors can intervene at an early stage. • Testing Cochlear Hearing Implants. Cochlear Ltd., a world leader in the technology of implantable hearing devices, used LabView and other National Instruments products to create a suite of automated test systems for hearing implants that provide greater flexibility and functionality with 30 percent less development time. • Testing Microsoft Xbox 360 Controllers. Using LabView and National Instruments hardware, Microsoft has developed a comprehensive test system for the company’s next-generation video

National Instruments

game console. The Xbox 360 controllers, available in both wired and wireless versions, undergo more than 100 tests, created with LabView, to ensure a quality gaming experience. LabView software is a critical part of National Instruments’s business, but it’s not the only product. The company offers a range of software solutions for handling all aspects of measurement, testing, and automation. It also offers hardware for sensing and measuring both analog and digital signals, as well as hardware for motion control, machine vision, and signal conditioning. Think of LabView as the glue that users use to tie software and hardware together (both those from NI and from other companies) and to control what those software applications do.

Encouraging Customer Stories as Part of the Corporate Culture Everyone at National Instruments is curious about all the different and esoteric applications that customers come up with. As soon as they hear about a new application in which their products are being used, they share the news with their peers. Customers’ inventiveness is celebrated. At every sales meeting, salespeople vie with one another to tell stories, not just about the deal they closed, but about the nifty things customers are doing with NI tools.

National Instruments’ Vibrant Customer Communities If you want to see a healthy, vibrant, open online customer community, check out the action in the online discussion groups at NI.com.

Online Support. National Instruments provides a huge amount of well-organized online technical support for all of its hardware and software. The customers shape this information by rating all submissions. So when you look at a topic and a solution, you’ll see its user ratings at the top—you’ll see a score (0 through 5) and the number of users who rated the information.

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Online Forums. The online discussion forums are particularly vibrant. That may be because there are so many passionate users. (In 2006, on an average winter evening at 9 pm EST in the United States, there were 250 members and close to 10,000 guests online visiting the discussion forums.) It may also be because National Instruments uses discussion forum software that includes mechanisms for users to rate each others’ posts and for NI to set up different categories of rankings.3 This encourages customers to contribute more in order to rise in the rankings. For each contributor, the forum software tells you how many replies they have posted, what the average user rating is for each of those posts, and how many discussion threads or topics they have started. Based on these statistics (and some others, such as how long they’ve been registered and how frequently they log on), National Instruments forum contributors are rated and grouped into nine categories: Member, Proven Member, Regular, Proven Regular, Veteran, Proven Veteran, Proven Active Veteran, Proven Enthusiastic Veteran (the latter posts more often), and Champions (who have posted more than 1,000 entries, have made a significant contribution, and have been hand-picked as champions). LabView Champions not only reach elite status, they get special entrée to National Instruments’s top R&D folks, they have their own get-togethers at the major conferences, and their advice is often solicited on important topics. These folks are good “lead customer” candidates to consult on next generation products.

NI Customers and Partners Extend Products, Develop Applications, Share Applications At the National Instruments online Developer Zone, end users can find application notes and tutorials, example code, technical presentations, and full-blown applications they can access and share. These are organized by topic (e.g., motion control, sound and vibration, measurement and automation software). Many of these notes are contributed by end users, partners—such as system integrators who are subject matter experts in specific industries—and by NI’s own

National Instruments

field engineers as they work with customers in the field to develop solutions to specific problems. National Instruments encourages the end users of any of its hardware or software products to extend those products and to contribute sample applications, software, and application notes or “how to’s” on how to apply or adapt solutions to solve particular problems.

Applications, Samples, Application Notes, Instrument Drivers Given the wide variety of disciplines in which NI’s customers participate, they may not find a pre-written application that does exactly what they need. However, National Instruments encourages and rewards its users to provide “sample applications” along with notes. This allows customers who are trying to design similar solutions to examine the approach that was taken, lift any useful ideas or application code, and develop their own custom solution. Building on each others’ ideas is part of the ethos of being an engineer and a scientist. Customers, partners, and device manufacturers all develop and contribute device drivers to the LabView ecosystem. If there’s an instrument you want to use to collect data or to plot output and you can’t find an interface on the NI.com site, you are encouraged to develop your own, using the open APIs that LabView publishes. As of early 2006, LabView supported 10,000 different input and output devices.

Customer Solutions Every supplier wants and encourages customer case studies. Many of those found on the National Instruments site come from lead customers and academics who are pushing the envelope in their respective industries. You’ll find descriptions of applications, complete with technical documentation for a wide variety of solutions. In life sciences, solutions include ultrasound, brain cell function analysis, magnetic imaging for infant brain activity, and eye position sensing. In consumer electronics, they range from measuring radiation from cell

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phones to testing digital cameras. Other applications include tracking marine assets (e.g., containers), doing engine simulation, testing spark plugs, detecting leaks in plastic containers, and sizing bras.

National Instruments Actively Solicits Customer Input for New Product Directions National Instruments prides itself on its responsiveness to customerled innovation. Since the company has customers engaged in so many different fields of endeavor, there’s a rich stew of requirements that is always bubbling up. NI’s R&D and product development groups prioritize these user-led requirements. At least 50 percent of the functionality and usability of each new version of any product is the result of customers making requests or outlining requirements through National Instruments forums and community activities. The other 50 percent may be architectural changes that are required to make the products easier to extend and maintain, and/or innovations that NI’s own developers have come up with and tested with customers. National Instruments provides (and documents) five specific avenues for customers to provide product ideas to the company. 1. Requirements Gathered in the Field. National Instruments’s field engineers meet with customers constantly. As engineers encounter new customer requirements, these are fed directly to the product managers for the appropriate product. 2. Discussion Forums. Each NI product has its own vibrant discussion forums. These are primarily used by customers to ask technical support questions. It’s natural to find lots of product suggestions and ideas interspersed among the “how do I do this?” or “has anyone solved this problem?” kinds of questions. But these problem statements and suggestions—many of them really good ones—are buried within the discussion threads. Since the LabView discussion forum alone averages 4,500 posts per month, LabView customers have taken it upon themselves to pull

National Instruments

all of the product ideas out of the general discussions and to post them in a single “product ideas” thread every month. 3. Product Suggestion Center. When customers have specific ideas for improvements to existing features or new features of functionality they would like, they are encouraged to go directly to the online Product Suggestion Center. This public area of the Web site is managed by National Instruments’s R&D group. NI’s R&D managers monitor these customers’ suggestions carefully and incorporate them into their feature planning activities. 4. Beta Program. Like most companies, NI encourages customers to provide feedback on features that are under active development through formal beta programs. Early user feedback in the form of bug reports and usability suggestions are incorporated into the final product. 5. LabVIEW Developer Feature Brainstorming Forum. Even with all of these opportunities for user input, NI realized it still wasn’t tapping the considerable customer brain trust at its disposal when it came to garnering ideas for future versions of the company’s flagship LabView software. So in late 2005, the company added a forum in which the LabView R&D team can solicit direct feedback on new features and technologies it is considering, involving customers in discussions and decisions about design trade-offs, and holding virtual brainstorming sessions.

National Instruments Has Formalized Its “Lead User” Program National Instruments believes strongly in harnessing the creativity of its lead users and customers. Although the company has been doing this organically for three decades, in 2005, NI put a “Lead User” program into place, led by product strategist Hall Martin. Hall divides NI’s lead users into several categories. “Each group has a different

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role to play,” he explained. “Technologists help us to define new products; early adopters help with marketing, positioning and in providing beachhead applications; existing customers help us define and prioritize what should be in the next version of a product; and pragmatists keep us from going too far afield.” Hall Martin works with field engineers and other NI employees to nominate, interview, and designate lead users. Hall Martin and his team are gathering all of National Instruments’s lead users into a single database. “It’s very different from our sales and marketing databases,” he points out. “These lead users may not be big purchasers of our products. But they push the envelope and they’re very influential.” The company is developing a better process for spotting and screening lead users. “Many of these folks don’t participate actively in our online communities,” Hall reported. “Most come to our annual user conference, NIWeek, in August each year. Many will visit our offices once or twice a year. Our people visit with them in the field. We sponsor research with some of them. We interact with them through a variety of channels. But now we have a way of screening them, interviewing them, and collecting that information in one place for everyone to access.” In addition, the company is developing a process for harnessing the contributions of lead users in each of the different roles. “We have about thirty lead user projects underway right now,” Hall told me in early 2006. Hall Martin’s team is also harnessing customer-led innovation to combine with employee-led innovation. National Instruments encourages its engineers to devote up to 10 percent of their time on new, innovative, outside-the-box ideas. In the past, he reports, the decision about whether or not to commercialize one of these internally-driven innovations was somewhat hit or miss. “We guessed wrong a lot of the time,” he said. Now engineers with great new ideas are encouraged to find a group of ten or fifteen lead users who can co-design with them, from the time they build a prototype and test it in the field, all the way through the commercialization and marketing of the product. This concept of piloting internally generated product ideas

National Instruments

with carefully selected groups of lead users is beginning to be institutionalized within National Instruments. By the end of 2006, National Instruments expects to have more concrete data on the success of its formalized lead user program, but Hall Martin had one interesting anecdote to share. When National Instruments was planning to develop a version of LabView that would run on handheld devices, it looked at the market share numbers and projections for PDAs, and decided it should release it on the Palm operating system. “Palm was outselling the other platforms eight to one and it was the least expensive platform,” Hall reports. But before making a final decision, it hosted an “Open Doors” presentation on mobile applications at NIWeek. “We invited people who were really on the cutting edge in a variety of industries. We showed them our roadmap and demo’d the application running on the Palm. These customers said to us: “Why are you on the Palm? You should be on Win CE. We need the memory. We need more processing power. The hundred-dollar difference in the price tag doesn’t matter compared to the convenience of being able to take a handheld out into the field versus a more expensive and bulkier laptop computer.” The lead customers were right, of course, the Win CE version of LabView has dramatically outsold the Palm version. “What all of these users had in common,” Hall recalled, “was the need to move the test equipment to the thing they were measuring, rather than the other way around. Whether they were testing a car’s suspension on the road, or the vibrations on a surgical drill in an operating theater, or mapping the temperature variations over a plot of land, they needed a lot of processing power in their handheld device.”

Customer-Led Innovation Pays Off for National Instruments Going into its thirtieth year, National Instruments has recorded annual revenue growth in twenty-eight years out of its twenty-nineyear history; the only down year came in 2001. The company is debt free. In 2005, National Instruments grew revenues to $572 million,

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an increase of 11 percent from the previous year, and had a record net income of $62 million, a 27 percent increase from the previous year, and a 14 percent operating margin. It also increased the dividend it pays investors by 20 percent to $.06 per share. The company’s goal is to achieve and maintain an operating margin of 18 percent and 20 percent revenue growth annually. National Instruments has been listed as “One of the 100 Best Companies to Work For in America” by Fortune magazine for seven consecutive years. In addition, no one industry represents more than 10 percent of the company’s revenue, and no one customer represents more than 3 percent of its revenue. During the industrial recession of 2001–2003, almost all companies in the measurement and automation industry saw declines in revenues, with some reaching −75 percent. This led not only to significant operating losses for these companies but to significant job layoffs for thousands of employees. In contrast, National Instruments maintained profitability during this period, seeing only a slight revenue decline in 2001 before returning to growth in 2002. Not only did the company continue to be profitable, but it also increased its investment in R&D. NI believes this increased investment, while its peers and competitors were cutting, combined with the lead customer and lead user initiatives discussed above, have paved the way for the recent record revenues and for the company to surpass $1 billion in the next few years.

Recap: Formalizing Lead Customer Innovation Helps National Instruments Design Products for “Inventors” National Instruments built on a legacy of soliciting and following through on lead user input to build products that customers use to create new solutions to a wide variety of problems. National Instruments: 1. Supported lead customers in developing products for unmet needs.

National Instruments

2. Restructured their pricing model to meet the needs of the education and consumer markets. 3. Provided a powerful toolkit with a simple interface that can grow with the user as he becomes more proficient. 4. Recruited passionate lead customers to specify requirements for next-generation products. 5. Created and nurtured vibrant customer communities. 6. Encouraged customers and partners to extend the product, and to develop and share applications. 7. Formalized a lead user program. From the beginning, National Instruments was dedicated to supporting customer innovation by providing toolkits to inventors and creators, with which they could design their own solutions. The company has always harnessed the creativity of lead customers. Recently, National Instruments has added more weight to its support of customer innovation by formalizing a Lead-User Program. This program is led by the company’s product strategist. Further, the company also encourages employees with new ideas to work with a team of lead customers to co-design the new or enhanced products.

TAKE-AWAYS FROM NATIONAL INSTRUMENTS Perhaps because National Instruments has always been in the business of creating toolkits for customers, it is particularly in tune with what customers need from these tools. Customers have input not only into product design and enhancement, but also into business models and markets. Your business can benefit from understanding these best practices: • Support lead customers who take your products into new markets. • Encourage lead customers to recruit your business partners. • Foster and nurture customer communities.

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• Encourage customers to strut their stuff, share their applications, and solve each others’ problems. • Encourage storytelling; celebrate customers’ inventiveness. • Make customer innovation part of your corporate culture. • Create customers for life: start at the age of three and keep going!

Let Customers’ Inventiveness Drive Your Business Best Practices in Customer-Led Innovation

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love these two intertwined stories of Lego and National Instruments! They offer great examples of what happens when you harness customer innovation. The two companies couldn’t be more different on the surface. Lego sells to consumers. National Instruments sells to scientists and engineers. Yet what these two companies have in common is innovative customers who have invented new products, hacked and extended their products, helped each other solve problems, brokered a partnership between the two companies, and been intimately involved in the design of both companies’ next generation of products. The two stories include many of the design principles for outside (customer-led) innovation:

1. Commercialize Lead User Innovations Lego didn’t invent the first Lego robot. Lead users did. Professors and graduate students who needed a way to engage kids in “learn by

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doing” activities invented a way to build computers into Lego bricks. Lead users also developed the software that told the smart bricks what to do. But Lego was sharp enough to recognize and commercialize its users’ inventions, increasing their users’ involvement and their loyalty as it did so.

2. Provide Toolkits to Support Customers’ Inventiveness Lego is in the toy business and National Instruments is in the virtual instrumentation business. Lego’s customers are kids, parents, teachers, and hobbyists. National Instruments’s customers are scientists, researchers, engineers, professors, and students. Yet the two companies have a lot in common. Both sell products that are generalpurpose software tools that end users program to solve problems and perform complex tasks involving hardware and software. In neither case does the company try to predict how customers might use their tools. They know that’s impossible. Their customers are way too diverse and creative for the solution providers to be able to correctly anticipate customers’ needs. But what people in both companies do is notice, celebrate, and reward customer inventions. In the case of Lego Mindstorms, customers—both kids and adults—build robots out of Lego-supplied motors and building blocks, and instruct them to perform all kinds of tasks. Teachers love the kits because kids learn by doing. Kids ranging in age from first grade to college students absorb logic, physics, science, math, and programming while they vie with one another to create their own robots, design their own experiments, and compete in science fairs and robot competitions. National Instruments’ LabView software analyzes virtually any input signal and can drive virtually any output device. Its users are scientists and engineers in literally hundreds of diverse industries performing tasks as varied as oil exploration and gene splicing. National Instruments doesn’t attempt to develop expertise in each of its customers’ subject matter domains. But end users can graphically program LabView to handle just about any measurement, analysis, or design task.

Let Customers’ Inventiveness Drive Your Business

3. Encourage Vibrant Customer Communities Both Lego Mindstorms and National Instruments LabView had spawned very active online customer communities way before either company thought to support communities on their own Web sites. These user communities naturally sorted themselves out by topic and interest. For both Mindstorms and LabView, teachers and educators flocked together to share tips and curricula. Engineers and scientists solving specific kinds of problems with LabView—often across disciplines—gravitated to each other. Hobbyists using either platform had their own forums but also lurked on the fringes of the professionals’ discussions, often contributing new insights and tips. Regional face-to-face user groups formed organically, as people who had met online got together to compare notes and to show off their latest inventions. Both companies hosted national and international user group meetings and encouraged customers to present their creations to one another. Both Lego and National Instruments realized how vital these customer communities were to their own business strategy, so they designed their own online communities, luring customers to migrate over to the company-sponsored community site by offering recognition, and by ensuring that their top product designers were listening and responsive to users’ problems and suggestions. The companysponsored online forums coexist well with the non-company–affiliated discussion forums. By monitoring both sets of discussions, executives get a clear picture of what their users really care about. 4. Let Lead Customers Recruit Your Partners It took Chris Rogers, a professor at Tufts University, to bring the two companies together. But he did it for selfish reasons. Like many lead customers, Chris had a problem to solve. Lego’s retail version of the Mindstorms programming environment only ran on the PC. But Chris was involved with teachers and students in schools that had standardized on Macs. So he solved his problem (and the Lego educational division’s problem) by taking LabView—a program he already knew and loved and that ran on both the PC and the Mac—and

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wrote his own graphical user interface, ROBOLAB for kids. Lego’s educational group was happy to help fund the software development effort, because it gave them the Mac platform they needed. Chris brought Lego and National Instruments’ together to work out the licensing deal so Chris could roll Robolab out to his teachers and students, and Lego’s educational group could sell the software.

5. Support a Customer-Driven Ecosystem Both Lego Mindstorms’ and NI LabView’s tools and user communities have spawned entire ecosystems of suppliers, partners, peripheral manufacturers, consultants, authors, professors, and many people for whom either platform has become a big part of how they do their jobs and, in many cases, how they earn a living. When a new input sensor, camera, plotter, or measurement instrument comes onto the market, customers notice it and tell the supplier that they need to interface to the software. If the peripheral supplier doesn’t move quickly enough, customers will write the interfaces themselves and offer them back to the community, for free or for sale.

6. Encourage Customers to Strut Their Stuff Both Lego and National Instruments like to encourage and sponsor friendly competitions among users. School students and classes compete within states and regions in robotics design competitions. National Instruments hosts contests and gives out prizes to its most innovative customers at user group meetings. In fact, National Instruments landed the business to become the software platform for Lego Mindstorms NXT largely because the Lego executives turned up in Austin on the day that National Instruments employees and mentors were hosting a Robolab Mania! event with more than 500 participating students. When the Lego executives saw how passionate the National Instruments employees were about helping kids have fun with science and engineering, they knew they had found the right software partner.

Let Customers’ Inventiveness Drive Your Business

7. Recruit Lead Customers as Designers and Consultants When Lego decided to produce a next-generation version of its Mindstorms robotics kit, the toy company did something that was unusual. Lego recruited lead customers to co-design the new product. Lego, like most toy companies, is extremely protective of its intellectual property. Yet it took the risk of recruiting and involving customers as co-designers early in its product development cycle—eighteen months before the product would be commercially available. The customers that Søren Lund, Lego’s director of Mindstorms, recruited were among the most advanced users of Mindstorms. Each had been using Mindstorms since it was launched in 1998 and each had invented new ways to extend the functionality of the original product. They were all well-respected heroes among Mindstorms AFOLs (Adult Fans of Lego). National Instruments’ LabView’s lead customers have also been actively extending the functionality of the LabView software for the twenty years since its original introduction. In fact, 50 percent of each new LabView software release is comprised of modifications and extensions that customers have contributed. Both Lego and National Instruments take advantage of the natural selection process in surfacing lead customers from mainstream customers. They actively recruit and recognize the customers who have proven their innovativeness by designing new products and extensions and by sharing their inventions with others in the user community.

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E E R H T R E T CHAP Help Customers Reach Their Goals Capturing Customers’ Context and Desired Outcomes

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hether you’re launching a start-up company or redesigning your business to be more customer-centric, the basic principles are the same. In this section, you’ll learn how existing firms— Staples, Hallmark, Unilever, Kraft, RC2—are increasingly working directly with customers to co-design new business processes, new products, new marketing ideas and better product positioning. You’ll also be reading stories about how two startups—Koko Fitness and Zopa— got into the hearts and minds of their target customers, figured out what pain points, problems, or issues those customers cared about, and developed innovative products and solutions to meet those customers’ needs. No matter how far along you think your organization is in “outside in” or customer-centric business design, it’s my hunch that you’ll find some important design principles in this section. 1. Engage in Deep Customer Research and Ethnography No longer content simply to survey customers or to run focus groups, all of the companies described in this section also engage in some

Help Customers Reach Their Goals

form(s) of ethnographic research. They study how target customers do things in situ. They engage with customers in deep dialog and listening. They run discovery sessions with groups of customers in which customers reveal their deep feelings—both negative and positive. They observe customers. They watch what they are doing. They don’t ask customers “What do you want from us?” They ask, “What are you trying to do?”

2. Bathe Your Entire Organization in Deep Customer Knowledge Notice that none of these firms confine customer research to their market research organizations. Lots of people from many different departments participate in these “deep dives” into customer context. One trend that makes this dissemination of customer knowledge easier is online customer communities. As we saw in the Lego and National Instruments stories, these firms’ vibrant customer communities are monitored by lots of people within those organizations. Customer communities form the heart and soul of the company. In this chapter, you’ll see how a number of companies have established and maintained private online user communities—many of which have been active for several years. The customers in these communities become virtual members of the company’s own cross-functional product development and marketing organizations. People from all over the company “listen in” on these customers’ dialogs and ask questions. These customer consultants become “real” to people all over these companies. In one case, the customers’ actual pictures and verbatims adorn the walls of conference rooms (Unilever). In another example, the customer “personas” that were developed as a result of deep ethnographic research were put on posters and carried along to meetings (Staples).

3. Discover What Customers Care About Most Passionately The purpose of this ethnography and deep customer research, of course, is to understand what customers care about deeply. What

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outcomes are they trying to accomplish? This is completely different from asking customers what they like or don’t like about your current products and services. You’re trying to understand what things in their own lives or jobs are hard for them to do. You’re seeking to learn which of these things they actually care about deeply. Unless they’re emotionally connected and motivated to do the things you’re offering to help them with, you’re unlikely to gain a lot of traction in engaging them to help design new and better solutions or business processes. In fact, the depth of passion (positive or negative) can be a good criterion in screening and recruiting lead customers to involve as customer consultants in your co-design activities. If they don’t care, they’re not going to be very helpful.

4. Identify and Streamline Customer-Critical Scenarios One of the most powerful insights that customer-centric executives have gained over the past few years is the significance of Customer Scenarios®. If you can identify what “job” a customer is trying to do from their point of view (not yours), and clearly define (with the customer’s help) their desired outcome, their conditions of satisfaction, and how they’d ideally like to achieve their goal, you now have a framework for customer-led innovation. By contrasting how customers do something today with how they’d ideally like to accomplish their desired outcomes, you’ll unleash many more creative ideas. Sometimes Customer Scenarios® spawn new product ideas (as in the case of Koko Fitness). But just as often, meeting or getting closer to customers’ ideal scenarios requires fundamental business process or business model redesign. Staples’ redesign of an industry-wide practice—how rebates are handled— is a great example of redesigning a multiparty process from the outside in.

5. Engage Customers in Co-Designing Their Ideal Scenarios and Solutions If you engage passionate customers in design activities, they’ll work with you to co-design their own ideal solutions. In the examples in

Help Customers Reach Their Goals

this chapter, you’ll see a variety of ways in which customers have become an integral part of companies’ design and marketing teams. They’ve played a variety of different roles. Customers acting as guides decided how Staples merchandise should be categorized. Customers co-designed Zopa’s financial exchange and then became marketmakers engaged with Zopa to lend and borrow money. Customers from Hallmark, Unilever, and Kraft created new product ideas.

6. Build a Brand Identity and Customer Experience around Customers’ Scenarios Your brand is your customer experience. The companies in this section have very strong brand personalities. What I noticed is that these companies’ brand promises, and the customer experiences that are wrapped around those brand promises, address the scenarios that their customers care about most. Staples’ “We make it easy to buy office supplies” is a customer scenario and a brand combined. Koko is “Fitness Made Easy. One to One”—in other words, highly individualized exercise that’s easy to do. Zopa’s “People are better than banks. Our lenders are better than banks. Our borrowers are better than banks.” sums up Zopa’s brand promise nicely as well as embodying the two key scenarios: borrowing money and investing money while helping someone else.

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Staples Customers Help Bring a Customer Experience Promise to Life

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any companies have focused on “making it easy for customers to do business with us.1” Staples has taken “easy” to the next level—making it easy for customers to buy office supplies, making it easy for customers to do their jobs, and making it easy for its associates to do their jobs. Over the past five years, in particular, Staples has been increasingly involving its small business customers in co-designing easier ways for those customers to get things done. The company’s tag line, “Staples: that was easy!” and the now-ubiquitous red Easy Button, which has become a brand icon, are great examples of customer-led innovation in designing and continuously refining Staples’ “Easy” brand promise.

Making It Easy for Small Business Customers to Buy Office Supplies Tom Stemberg, a former supermarket chain executive turned entrepreneur, was working on a business plan over the Fourth of July weekend in 1985, when his printer ribbon broke. His regular stationery store was closed for the weekend. Tom spent several fruitless

Staples

hours driving around in search of a replacement ribbon. He decided then and there that what the United States needed was an office supplies supermarket—a place that small business–people could count on to be open and to provide everything they’d need to run their businesses. Stemberg co-founded Staples with Leo Kahn, opening the first office supplies superstore in Brighton, Massachusetts, on May 1, 1986. Staples’ office superstore formula filled such an obvious need that twenty competitors sprang into being within a couple of years. But through natural selection and consolidation, by early 2000, there were only three major discount office supply superstore chains in North America—Staples, OfficeMax, and Office Depot. By 2005, Staples’ revenues topped $16 billion. The company had 69,000 employees, 1,491 stores in North America, a delivery business (for small business orders placed online and by phone), and a booming contract business (for medium and large enterprises), and was serving markets in twenty-one countries through acquisitions and joint ventures. North American retail accounted for 56 percent of revenues and North American delivery accounted for 31 percent of total revenues in 2005. Although Staples organizes its business operations and financial reporting by channel—delivery versus retail—most of Staples’ small-business customers shop alternately across channels: calling in delivery orders by phone, placing delivery orders using the Staples.com Web site, and popping into the nearest retail store.

The Genesis of the Easy Brand and Customer Experience Promise After rapid growth in the 1990s, Staples’ wake-up call came in 2000, the first year in which same-store sales were flat and the company’s operating margin hovered around 5 percent. Anecdotal evidence pointed to the fact that office supplies customers had little brand awareness or preference. “We’d hear stories from stores where, when it came time to pay, people would pull out their Office Depot credit card,”2 Staples’ vice president of marketing, Shira Goodman, reported.

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Tom Stemberg ordered a full review of operations, including detailed customer research. The marketing department surveyed thousands of customers. The in-store merchandising group hired ethnographers to help them observe customers’ shopping behaviors in the stores. The executives dissected product sales and customers’ transaction histories. The results of all this detailed customer research caused Staples to focus on its most profitable customers: home-office and small-business customers. In late 2005, Staples’ CEO Ron Sargent described the learnings from that early in-depth customer research to Tim Smart, a reporter for U.S. News & World Report: Even though home- and small-office customers contributed two-thirds of the revenues, they accounted for 90 percent of the profits. “We heard the product mix was a little too consumerish,” Sargent says. “Also the marketing. We heard our service was average.” What’s more, customers thought the store format “was a little ’80s, a little too warehouse club,” he adds. “The other big complaint we got from our customers was “I know it’s here in the store, but I can’t find it.”3 This customer research led to a refocusing of Staples’ business strategy around the needs of its customers. Management called it the “Back to Brighton Strategy.” a renewed focus to the business customer through changes in merchandise mix, marketing and customer service. We eliminated more than 700 products that were consumer-oriented and low margin or slow turning and replaced these goods with 450 stock keeping units, or SKUs, directed at power users and small business customers . . .4

Staples

STAPLES EXECUTIVE SUMMARY

Staples, Inc./Office Supplies Retailer Staples invented the office superstore concept in 1986 and today is the world’s leading office products company, operating 1,491 retail centers in the United States and Canada, along with more than 250 stores in Europe. It also sells products via joint ventures in Asia. Staples serves customers through mail order catalog, e-commerce, and contract business.

Case Study Focus

1. How to redesign processes and policies to make it easy for customers to buy office supplies— the Easy Rebates program.

2. How to align your corporate culture around your customers’ issues and your brand promise. 3. How to use deep ethnographic research to identify key customer concerns. 4. How to engage customers in co-design.

Target Customers

Customers’ Issues

Small-business office managers Home-office customers

Customers want it to be easy to shop cross-channel, finding the right stuff. They also want easy rebates.

Key Customer Scenarios®

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Customers’ Results

Business Results

Customers are finding the new store layouts so appealing, that the customer satisfaction level has skyrocketed to an all time high. Time from submitting a rebate request to receiving a check has been reduced by two-thirds.

At the end of its 2005 fiscal year, Staples reported that worldwide e-commerce sales had reached a record high of $3.8 billion, a 27 percent increase over 2004. Total company sales for 2005 reached $16.1 billion, an 11 percent increase over the previous year.

Making the In-Store Experience Easy for Customers Staples’ merchandising group has been carefully evolving its store layouts to make them easier for customers to navigate since 2001, a layout called the “Dover” format. The layout improvements are first tested in Staples’ prototype store laboratory and then tested in pilot stores, closely observing customers’ actual shopping behavior and surveying them after their shopping experiences. For example, many aisles are now laid out in “race track” elliptical displays, with complementary products located on the “back stretch” of the race track. Better store security has enabled stores to place expensive computer electronics and printers out in the open, so that customers can touch and feel them, rather than have them locked away. And ink cartridges and paper are now at the front of the store where customers can run in, get what they want, and leave.

Launching the “Easy” Brand Promise Shira Goodman, Staples’ vice president of marketing, and Dave Almeda, vice president of human resources, readied the company for the launch of the new brand promise, “We make buying office products easy,” and the new advertising tagline, “Staples: that was easy!” The two executives worked closely together to ensure that the “easy” focus was clearly exemplified in the ways in which the company communicated to its employees as well as the ways in which Staples related to its customers. “We treat our employees as customers, too,”

Staples

Jim Sherlock, Staples’ director of sales and merchandising, commented in early 2006. “At headquarters, we’re really conscious that we need to make it easier for the people in our stores to get information and to be able to assimilate information easily. We’re rarely in a meeting when someone doesn’t say, ‘that was easy!’ ”

Good Examples of Focusing on Customers’ Critical Scenarios Staples has undertaken many initiatives in the past five years to deliver on its “Easy” brand promise. Each began by identifying a customer pain point—something that a large group of customers really cared about. In several of these efforts, the Staples team engaged in deep customer research, including ethnographic research as well as more traditional focus group research. In each case, the design effort started by identifying a key Customer Scenario—get my rebate, order weekly office supplies, replenish supplies, take advantage of promotions, and so on. Staples’ usability team clearly identified the particular types of customers—customer personas—for which it was targeting its redesign efforts to ensure that each of these different types of customers’ needs would be met. Staples’ employees are engaged and aware of customers’ critical scenarios and key pain points, and understand how their jobs relate to making it easier for their customers to get things done. Finally, Staples engaged customers in many of these redesign efforts, by giving them roles to play in designing its Web sites, in-store kiosks, and product categorization. “That was easy!” has become much more than lip service—it’s the rallying cry that helps Staples keep customers’ scenarios front and center in its business decision making.

Designing the Easy Rebates Process “For years, customers had been telling us how much they hate rebates,” Jim Sherlock said. “ ‘Why don’t you just eliminate rebate programs altogether,’ customers would tell us, ‘and reduce the prices for the products, instead?’ ”

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“From the beginning of Staples,” Jim Sherlock explained in early 2006, “everyone, including our founder, Tom Stemberg, has tried to get product manufacturers to eliminate the use of rebate offers to promote products. And he’s a pretty convincing guy!” However, up to this point, nobody has been successful in changing this long-held industry practice.

Why Rebates “Work” and the Practice Persists Of course, customers love getting a good deal. “There’s no question that people respond to offers. Everyone’s driven by price. They’re going to go where it’s least expensive to buy a product they need,” Jim Sherlock admits. “What manufacturers like is that not everyone applies for the rebate,” he points out. Customers feel they’re getting a great deal, but in practice, only a percentage of customers actually follow through to submit the necessary paperwork required to get a rebate check in the mail. The difference between a 100-percent rebate redemption rate and what customers actually do is called “breakage.” High breakage—when 40 percent or more of customers don’t bother to submit their rebate forms 5—is good. Low breakage—less than 40 percent—is bad, because it increases the cost of the promotion and lowers product margins. Retailers also benefit, of course. When customers are drawn to Staples because a product they want has been discounted with a rebate offer, those customers typically buy additional products at the same time. Every shopping trip (either in the store or online) provides the retailer an opportunity to sell more products, some of which (like Staples-branded goods) may have higher profit margins.

What Customers Hate about Rebates Customers love getting a deal. What they hate is the work they have to do to get it. Requesting a rebate typically involves filling in a form, locating the sales receipt, cutting the UPC code off of a box, finding an envelope that’s large enough to mail everything in, figuring out the correct postage, and getting it into the mail. Of course, that’s exactly why rebate breakage is so high. What seems like a good idea at the

Staples

time of purchase becomes just one more thing to do in a very long list of demands on customers’ time. Customers also hate how long it takes to get their rebate, and the fact that sometimes they never do. They don’t know whom to blame: should they call the retailer or the manufacturer? Often customers wind up contacting both. By far the majority of calls that Staples received were “Where’s my check?” Although Staples didn’t issue the rebates, the quality of its customers’ experience was negatively impacted by customers’ dissatisfaction with the current rebate process, and customers’ irate calls and e-mails were costly to handle.

Goal: Streamline the Rebate Process for Customers It took between ten and thirteen weeks for customers to receive their rebate checks from the manufacturers. “We decided that if we could change the rebate fulfillment process dramatically for Staples customers and show them we could reduce the amount of time it took for them to receive a rebate check to three or four weeks,” Jim Sherlock recalls, “they would be less dissatisfied with the rebate process and they wouldn’t call as often looking for their checks.”

First Step: Fix the Back End—The Rebate Fulfillment Process Although manufacturers launch rebate promotions, rebate fulfillment is typically handled by third-party service providers. Customers’ rebate forms go directly to these fulfillment houses. But the provider can’t send out the rebate checks until they receive the rebate funds from the manufacturer who is running the promotion. Most manufacturers will wait eight weeks, on average, after the end of the promotion until all of the rebate requests have come in. Then the manufacturer provides the funds to the fulfillment house. The fulfillment provider cuts the checks and mails them to the customers. Jim Sherlock’s solution to shortening the time it takes for the customer to receive a check was for Staples to manage the rebate fulfillment process for its customers and for the manufacturers. In late

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1999, Staples entered into a partnership with Parago, in Texas, a provider of rebate fulfillment services. “Then, we went to each of our 300 suppliers and offered to handle the rebate fulfillment process for them. All they had to do was to join the new Staples Rebate Program. They were delighted,” Jim reports, “Manufacturers want their customers to have a good experience.” As each manufacturer joined the program, Staples took over the responsibility for funding that manufacturer’s rebates, so the fulfillment house didn’t have to wait eight weeks to start cutting checks. “Each week, Parago sent us a list of the rebates they had received, and each week, we transferred those funds to them,” said Jim. “We took control of the funding by getting our manufacturers to agree to let us deduct the rebates from their open invoices.” From the manufacturers’ side, making the adjustment was easy. It’s common practice to use deductions from open orders to handle a variety of business arrangements between manufacturers and retailers. So funding rebates in this manner was easy for manufacturers to implement from an accounting standpoint. It was just another deduction.

Results: Shortened “Time to Receive My Rebate” by Two-Thirds The new Staples Rebate Program was a win for customers because they received their checks eight weeks sooner, on average. “We’ve been delivering on our goal of getting rebate checks to customers within three to four weeks since 2003,” Jim Sherlock reported. Staples launched its new “Easy” branding in 2003. The fact that this streamlined rebate process was in place helped reinforce that brand promise. The process had good synergy with Staples’ “make it easy to buy office supplies” vision. But there was a lot more to do before customers would say “that was easy!” in getting a rebate.

Second Step: Streamline the Front End—Customers’ Rebate Application Scenario “We already had plans to offer an online Easy Rebates option. We knew we needed to go the next step and eliminate the need for cus-

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tomers to cut up their boxes and submit their UPC codes along with their sales receipts,” Jim Sherlock recalled. “We had some ideas but we wanted to validate them with customers.”

Getting “Customers’ Moments of Truth.” Staples’ marketing department is constantly talking to customers and running focus group research, so the rebate team piggybacked on that ongoing customer research. From November 2003 through January 2004, Jim recalls, “we included questions about rebates in all of our focus groups and surveys. Customers were outspoken and consistent in their opinions about what they wanted. In essence, they told us: ‘If you can’t eliminate rebates entirely, then let me apply online. No cutting up of boxes. No searching for UPC codes. No receipts. If you make this rebate submission process easier for us to do, you will retain (or gain) our loyalty.’ ” Notice that customers did a lot more than voice a loud dissatisfaction with the current process. Customers provided explicit parameters—what we would call “customers’ moments of truth” in our Customer Scenario methodology, and others might call “critical-toquality” (from the customers’ standpoint). They even provided “customer metrics”: zero cutting, zero requirement for UPC codes, zero receipts. And customers provided another metric of success: if you improve this process for us, we’ll reward you with our business. These clear customer directives gave the Staples team the confidence it needed to continue streamlining the rebate process. But there was much more to do than to design a few Web pages. First they had to convince the manufacturers to change their rebate programs. Convincing Manufacturers to Trade Higher Redemption Rates for Reduced Fraud. Jim Sherlock reports, “We went back to each manufacturer with the results of our customer research. As we anticipated, they said ‘You’re going to make it too easy for customers to redeem rebates. This is going to increase fraud. It will increase the redemption rate. Our rebate program will get too expensive. We’ll exceed our budgets for rebates.’ “We presented the way we were going to prevent each of the problems they were concerned about,” Jim explained. Instead of requiring

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receipts and UPC codes, Staples would provide customers with two numbers at the point of sale: a unique transaction number and a promotion number for the specific rebate program. Customers in the store would receive a rebate form with their purchase with the two numbers already filled in. All they would have to do is add the address to which they wanted the check sent and stick it in the mail. (That was easy!) Or if they preferred, they could go to the Staples Easy Rebates6 Web site, fill in the two numbers, verify their profile and address information, and hit enter. (That was easy!) This approach satisfied manufacturers’ concerns about increased fraud. There would be no way for people to fabricate these numbers generated at the time of each sale. “The other financial control that we built in was to eliminate double-dipping,” Jim Sherlock explained. In the past, a customer could buy a product, submit a rebate request and then return the product for credit. There was no easy way to correlate the returned product with the rebate and/or to recover the rebate. Staples’ return policy is that you can return electronics for a complete refund, no questions asked, within two weeks of purchase. (After that time, you would need to prove that the product was defective and get a replacement, not a refund.) “When a customer buys a product on say, February 1st, and applies for a rebate, we’ll put the rebate request in a suspense file. We have a fourteen-day hold on the rebate. Once the return period is over, we’ll process the rebate,” said Jim. Manufacturers liked these controls a lot, Jim reported. “We haven’t just reduced rebate fraud. We’ve eliminated it!”

Results for Manufacturers. Staples’ goal for the new Easy Rebates program was for it to be cost neutral for the manufacturers. In other words, the savings from the elimination of fraud and double-dipping, along with the increase in customer satisfaction, would compensate for the increased costs from a rise in redemption rates. After fourteen months of offering Staples Easy Rebates, “we’ve seen a slight increase in redemption rates, but a complete elimination of fraud and double-dipping,” Jim Sherlock reports. Not one

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manufacturer has stopped participating in the program. In fact, the rebate process is now so smooth for all concerned that manufacturers are increasing the number of rebate offers they’re running with Staples.

Results for Customers and for Staples. During the first four months after the launch of the Easy Rebates program, Staples offered an optional survey for customers to take after they’d completed their rebate request online. “The level of participation was amazing,” Jim Sherlock exclaimed. “675,000 people took this survey during the first four months. That was more than a 15 percent response rate. These were all people who were willing to give us detailed feedback: ‘I liked this, I didn’t like that.’ ” Seventy percent of participants rated the Easy Rebates experience a 5 on a scale of 1 to 5. In a survey about a year later, customer satisfaction had increased. Eighty percent of participants rated the overall rebate experience a 5 out of 5. Eighty-two percent of respondents said that they were extremely likely to use Easy Rebates again. Sixty-one percent said they were extremely likely to recommend the Easy Rebates program to a friend or colleague. Fiftyfour percent said the Easy Rebates will definitely influence them to shop at Staples for the next product with a rebate. For those customers for whom Staples was not currently their primary provider of office supplies, 55 percent said they were going to shift from their current provider to Staples as a result of the Easy Rebates program.

Streamlining Customers’ “Order Office Supplies” Scenarios In 2002, Staples’ executive team wanted to know how their customers in small businesses went about ordering office supplies for delivery. If they could understand customers’ internal business processes that led up to placing an order for office supplies, maybe they could figure out how to streamline their operations to make the orderingthrough-delivery process even easier. The usability team, led by Colin Hynes, decided to look at “the life of a delivery order” from end to end. When customers ordered on Staples’ Web site, and/or picked up the phone and ordered out of the catalog, what internal processes did

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they go through before the order was placed? And what processes did they do upon receipt of the order?

Deep Ethnographic Research “We did all kinds of research,” Colin Hynes reported. “We held executive roundtables to better understand what our executives wanted to learn. We listened in on customers’ calls to our call centers and we interviewed our call center representatives. We rode around in our delivery trucks to watch orders being delivered.” The most useful form of customer research turned out to be extended visits with actual customers. Colin’s team hired the American Institutes for Research to conduct field research with customers. This was a blind study. The customers weren’t told that Staples was the client for the research. But Colin and his team members did accompany the field researchers, so that they would be able to experience, first-hand, what customers’ actual ordering processes were. The twentythree companies visited were a mix of home offices and small offices in three different size categories: two to seven employees, eight to nineteen employees, and twenty to fifty employees. The research team visited eleven companies in the Los Angeles area and twelve in the Boston area, in both urban and suburban settings. “We told them ahead of time that we wanted to watch how they ordered office supplies, so in about 75 percent of the cases, the people we were visiting had planned to place their orders on the day of our visit so that we could actually watch them do it.”

How Customers Selected Which Items to Buy in the Office The research team found a lot of similar patterns across the twentythree companies. One pattern had to do with how items were selected and aggregated. Generally speaking, the office manager or other person responsible for placing the office supplies order would gather requirements from his or her colleagues, sometimes via the office supplies catalog. The catalog was passed around, people put stickies on the pages with the items they needed and indicated how many they wanted. “The

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pictures were important to people,” Colin recalled. “Passing the wellworn catalog around was a weekly or monthly ritual in some firms.” In other cases, the office manager would e-mail out spreadsheets with the most commonly ordered supplies and people would add their requests. In yet other firms, the supplies maven would pass around a copy of the last order and people would mark that up. And in still others, the office manager would poke his or her head in peoples’ offices, ask them what they needed and add to the list.

Make Lists Based on Previous Orders. “We saw a lot of list-making,” Colin reported. The team noted that customers’ behavior was really similar to what a family does in aggregating the weekly grocery list. You have a list of things you normally order and you add special needs to that list. “We realized that we needed to make it really easy for people to reorder things,” he said. Select Items that Go Together. The other thing the research team noted when watching peoples’ behavior around the catalog was that it was easy for people to find items that go together in the catalog: file folders and file folder labels, for example. Yet when they tried to find all the related items on the Staples.com Web site, it took too long; there was no obvious mechanism to show related items on Staples.com at that time. Customers preferred to make their lists from the catalog.

Observing How Customers Shopped and Ordered Online According to Colin Hynes, the “Life of an Order” project gave the design team great insights into what customers cared about when aggregating and placing orders, but the usability team felt it needed a lot more information about customers’ online shopping behaviors and preferences. So Colin’s team ran an additional online shopping study. Again, this was a blind study. Representative office supplies shoppers (both Staples and non-Staples) were invited into an online research lab setting, in which they were asked to select and to purchase items they actually needed from a variety of online sites, including Amazon.com, Best Buy, the existing Staples.com site, and those of competitors in

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the office supplies category. Customers were asked to bring lists of things they wanted or needed to purchase. “People were spending their own money, using their own payment mechanisms and selecting items from their own lists,” Colin explained. “We wanted to understand the full end-to-end experience from selecting to purchasing to order confirmation. For the first half of each session, we asked customers to buy from the sites they were used to. In the second half of the session, we watched them try to purchase from sites they weren’t familiar with.”

Let Me Get through My List. The ROI on the online study was tremendous, according to Colin. “We found that a consumer electronics site did the best job of presenting all the information that customers needed to make a purchasing decision. We also noticed that none of these customers were open to exploring other product options until they had gotten through all the stuff on their lists.”

Added Easy Reorder Feature on the Web Site This detailed customer research led to the design of Staples’ Easy Reorder functionality. Here customers can see a list of each of their past orders, open up an order, and see both a picture and a description of each item, the quantity ordered before, the current price, and any specials or promotions. What Colin Hynes’s team didn’t anticipate, but discovered a few months after the launch of the new Web site, was that Easy Reorder didn’t replace customers’ need for a “Favorites” list. They wanted both. Now customers can also create lists of frequently purchased items under named Favorites lists.

Let Me Find What I Need by Category. The usability team also learned a lot about how shoppers looked for items. “We watched people going to these Web sites and looking for cues to find the items they were seeking,” Colin reported. “They were looking for lists of categories on the home page. Often they would select a category, discover that it didn’t contain the products they were seeking, then back up and try again. Customers seemed to find this up and

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down ‘pogo-sticking’ navigation through categories very frustrating. Yet we noticed that the customers who could successfully browse the categories and find what they wanted, bought more per shopping trip.”

Customers Co-Designed Staples’ Merchandising Categories Once the usability team realized what a huge difference it made to customers’ online shopping experiences to have products listed under the right categories, they decided to involve customers in selecting the categories that made the most sense to them. They used a usability technique known as “card sorting,” and had 5,000 Staples online customers participate in this online exercise. Customers were sent an e-mail invitation to participate. Participants who joined the online study were given a list of products and the opportunity to create category names and move items into categories. The result of the study is that the 5,000 customers converged upon seventeen categories of products in office supplies (down from twenty-four) and seventeen categories in electronics (down from twenty-five). Also, because customers “voted” on what items belonged in each category, they were much more likely to find things where they expected them to be. The results have been gratifying. Colin Hynes reports that conversion rates (ratio of view to buy) have seen double-digit increases since Staples.com implemented the new customer co-designed categorization scheme.

Customers Self-Select the Personas that Describe Their Behavior Web site home page design can be a highly political and emotional undertaking. Every marketing manager wants his or her products featured on the home page. Colin Hynes realized that the best way for Staples to make rational decisions about what functions and products to feature on its home page would be to start from the customers’ point of view. He decided to use the concept of “personas”—a customer-centric design concept that was introduced in 1999 by Alan Cooper in his seminal book about software design, The Inmates Are

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Running the Asylum. The idea is to identify the defining characteristics of the different types of customers or end users. Give each type of customer a name and then optimize your product and/or interaction design for the customers who fit those categories. Based on the extensive customer research the usability group had already done, Colin Hynes began by defining his own personas. He realized that his small-business customers fell into seven distinct types. He came up with self-explanatory names like Sally Sleuth, Lisa Listmaker, Billy Browser, Sammy Specific, and so on, and a defining quote for each one. For example, Lisa Listmaker’s quote was “I have all the numbers for the products I need, I just want to select and order them.” Colin now had to convince Staples’ top executives that these customer categories and behaviors were, in fact, valid. So, he went back out to Staples’ customer base. This time, the team selected more than 1,000 of Staples best customers—customers whose repeat buying history was well-documented—and invited them to participate in an online survey. In the survey, they asked the buyers to select which of the seven quotes best represented the way they thought about and purchased office supplies. “Of the 1,050 people who participated in the survey, only seven placed themselves in the ‘other’ category, which goes to show that we actually did know our customers pretty well,” Colin reported. As it turned out, most customers fell into two of the categories: Here’s how Staples describes these top two personas: 1. Lisa Listmaker is an office manager whose main goal is to get the order done as quickly as possible. She usually has a detailed list of her “standard order” with item numbers for each product handy while ordering. She shops most often via Staples.com, in addition to using her Staples catalog and visiting her local Staples store, and usually completes the order in one visit—true to her “in-and-out” nature. She likes special deals if they’ll help her save the office even more. 2. Sammy Specific runs a small business and is not a planner when it comes to buying office products. Among other

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characteristics, Sammy typically does not shop by item number, but knows the products he needs by brand and/or general specifications.7 These personas became the embodiment of Staples customers for all of the design and development meetings that ensued. “We made posters for each persona and took them into our meetings,” Colin reported. That way, when someone came up with a new idea, the group could quickly invoke their personas and decide whether the new idea would work well for each of them.

Involve Customers in Web Site Usability Testing Staples carefully recruited customers who represented the seven different target personas for its Web site usability testing. “We brought 140 customers into our corporate headquarters to do usability testing of our different home page concepts and Web site designs. This gave us a tremendous amount of customer intelligence to work from,” Colin reported. “We now knew how customers from each group interacted in the purchasing process, how they wanted to return items, what they needed on the home page, on the product pages, and how they wanted the purchasing process to work.” The resulting Web site design went live in June 2005 and has been a resounding success. “This was the most customer–co-designed Web site launch we’ve ever done. It really paid off,” Colin Hynes reported. “Both our conversion rates and our customer satisfaction ratings are at all-time highs.” At the end of its 2005 fiscal year, Staples reported that worldwide e-commerce sales had reached a record high of $3.8 billion, a 27 percent increase over 2004.

Co-Designing the Shopping Process with Customers Let Staples Keep Its Promise to Make It Easy By taking to heart the promise of making it easy for customers to buy office supplies, Staples has used deep customer insight and the use of

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lead customers as consultants to create a business that addresses its customers’ key scenarios. Staples: 1. Redesigned an industry-wide rebate process in order to address a customer-critical issue; took on the role of facilitator between customers and suppliers to make the rebate program a win/win for both sides, while improving the Staples experience. 2. Articulated a customer-centric vision “Make it Easy” and fostered a corporate culture in support of the vision; refocused its business strategy around customer needs, aligning corporate policy around the Easy brand promise. 3. Hired ethnographers to help them observe customers’ shopping behavior and participated in ethnographic research. 4. Developed customer “personas” based on deep ethnographic research and validated them with customers; used those personas and customer scenarios to help employees get into customers’ shoes—as they make decisions. 5. Identified key customer points of pain and redesigned all channels to ease customers’ concerns. 6. Engaged customers to define merchandising categories to make products easy to find. 7. Tested improvements with customers in all channels.

Getting Customer Input and Validation for New Shopping Process Across Channels Staples’ success in making it easy for the customer can be attributed directly to obtaining a deep understanding of customers’ scenarios and points of pain. By living with the customers as they went about the business of ordering and shopping for office supplies, Staples was able not only to observe what went well and what went wrong, but also to identify different shopping styles and codify them into customer personas.

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TAKE-AWAYS FROM STAPLES Not content with just being a leader in office supplies, Staples went the extra step in engaging customers in a consulting role to create truly innovative shopping processes across channels. Here are tips for what you might do to engage customers for process innovation: • Tie your customer-centric vision to corporate policies, including communications practices and compensation packages. • Watch your customers as they do business with you; they will identify the pain points. • Solicit ideas about process, content, and products from your customers, and implement improvements based on these ideas. • Test new processes/products with customers; validate all assumptions with customer consultants.

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Bathing Your Organization in Real-Time Customer Context Using Online Communities to Understand Customers’ Passions, Issues, and Needs

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’m worried about how many of our 200 store managers will really use this tool to share ideas and insights,” said Tom Brailsford, Hallmark’s manager of knowledge leadership on the eve of launching a collaborative workspace for Hallmark’s elite store managers. Diane Hessan, CEO of Communispace, the Watertown, Massachusetts, startup whose future depended on this project going live, gulped, looked her client in the eye and said, “Frankly, I’m worried too.” Diane knew that out of a group of 200 employees, typically only about 18 or 20 were likely to become active members of an online community designed to support how they did their jobs. Her firm’s software had been originally designed to support internal communities of practice—people who work in the same discipline, use the same vocabulary, and care about the same kinds of issues, like the Gold Crown store managers who ran Hallmark’s retail stores. Communispace software was already in use in a dozen or so companies, and employee participation in those accounts was growing.

Bathing Your Organization in Real-Time Customer Context

But Diane knew she couldn’t guarantee her client that 100 percent of his store managers would use the collaborative workspace to share tips and solve each others’ problems. Tom was silent for a few minutes. “I have an idea,” he countered. “What if we used it to get customers to talk to us and to each other and to help guide our growth in the future?” Diane remembers getting really excited; her client had just hit upon a much more valuable application for her company’s online community-facilitation service. “From that point, we shifted our focus to building customer communities, and we have never looked back,” she recalled. “It was the smartest move we ever made.”

WHAT DOES COMMUNISPACE DO? Communispace builds and runs online customer communities. A Communispace community is a password-protected site where up to 400 prospects and/or customers are prescreened and invited according to a company’s criteria. Community members spend an average of thirty minutes per week as active participants in the marketing process: brainstorming ideas, offering advice to one another and to the company, commenting on market trends, responding to surveys, helping the company address business issues, and more. Most community members stay connected for at least a year and engage in an average of four activities each week. Unlike most public customer forums and message boards, private communities are designed to be candid and intimate, resulting in high levels of trust and insights. They are actively facilitated to keep the discussions fresh and strategically relevant. A well-run community can provide multiple benefits, including deep insights “overnight,” a continuous connection to the voice of the customer, and faster innovation. More importantly, when community members become involved and realize that a company is not just listening to their ideas but acting on them, their loyalty and willingness to recommend the sponsoring company to others soar.

“In the past, companies like Hallmark have run focus groups as one way to understand customers. These sessions are time consuming

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to set up, very few executives get to attend them, and by the time you’ve analyzed what the customers said, you have more questions, not fewer. Having an online community is like keeping those customers in a conference room forever. Any time you have a question, you just pop in and ask them. In the meantime, they continue to chat among themselves, sharing information about their busy lives, posting pictures of where they work and play, brainstorming new ideas about how to improve their lives. It’s a form of online ethnography,” Diane Hessan explained, “and the customers love the experience of being insiders.”

Hallmark Idea Exchange: 24 × 7 Customer Communities Hallmark called this customer community the Hallmark Idea Exchange (IdEx). For their first pilot community, launched in November 2000, the Hallmark/Communispace team recruited a group of 200 customers—mothers with young children—and invited them to participate in ongoing activities in exchange for modest incentives. The Hallmark and Communispace team set participation guidelines that members need to meet in order to qualify for the incentives. “Customers are usually asked to devote thirty minutes a week to participating in the community, and to average at least one contribution a week,” Julie Schlack, Communispace’s vice president of innovation and design, explained. Since 2001, this group of Hallmark customers has been “brainstorming ideas, reacting to pricing recommendations, commenting on merchandising strategy, and talking about their wants, needs and product preferences. Hallmark, in turn, introduces strategically relevant topics, keeps the discussions flowing and ensures the voice of the customer is quickly accessible to senior executives for action.”1 The greeting card company hopes to glean new product ideas by watching the lives of 200 consumers unfold through online conversations held on its “Idea Exchange” Web site. In return, the participants receive Hallmark gifts every month and have a little fun. Many say they love tuning into their

Bathing Your Organization in Real-Time Customer Context

own soap opera every day. They sign on when they have a moment, chat among themselves, post pictures of home decorations at Hallmark’s prompting, and answer the company’s questions about products and ideas.2

New Product Ideas. Every month, Hallmark asks its community “What ideas do you have for us?” And every month customers have come up with between ten to fifteen very concrete ideas. Julie reports, “the ideas have ranged from gift boxes, specific gift items, or new offers like ‘let me buy my birthday cards in bulk. I need cards for all 27 kids in my child’s third grade class.’ ” Many of these suggestions have been implemented. For example, you can now buy a set of twenty or more birthday cards and envelopes, and select from four different options: “ship the cards to me with no personalization; personalize my cards and ship them to me; personalize, address, and ship my cards to me; or personalize, address, and mail my cards directly to my recipients.”3 Baby books were common gift items. But baby journals didn’t exist. Yet when Hallmark asked community members how they felt about keeping journals, they got a flood of responses. Many people included stories about times they kept journals, how they felt when they went back and read their journals, the value of journals that had been passed down from other family members, and what features they would like to see in journals. While journal writing isn’t a regular activity for most of the community members, most have kept a diary or journal at some point in their lives. Many began when their children were born or during some life event, such as an engagement.4 So Hallmark began offering baby journals as well as journals for other special events (honeymoons, new grandparents, etc.).

Maintaining a Customer Community. Since launching its first Communispace community in October 2000, Hallmark has continued to add user communities to help the company listen deeply to the needs

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of different types of customers. Some consumers have dropped out and others have been recruited to replace them, thus keeping the community vibrant. The original community is still going strong, six years later. “Twenty or thirty of the original women we recruited for Hallmark’s original community are still active members,” Diane said in early 2006. “They are ‘wired into’ Hallmark and feel very connected to the company.” Lori Givan, the senior consumer research project leader at Hallmark who oversees the IdEx customer communities, refers to her IdEx members as “consumer consultants.” Hallmark’s executives now rely on these customer communities. “One product team asked online groups about plans for Valentine’s Day and followed up with questions about what they actually did. The second set of responses led to valuable information about aspirations vs. reality.”5

Quick Answers. Hallmark finds the customer community a great resource for other purposes, too. In the spring of 2005, a reporter called with a query, “What’s the right amount to spend on a graduation gift these days, and is it OK to give money?” Hallmark’s trend spotters turned to the Idea Exchange to get real-time answers. Within forty-eight hours, they had received 195 answers. Here’s what they learned: • 95 percent believe money is an appropriate gift for graduation from high school or college, while less than 25 percent find it right for lower grades. • 67 percent believe that $50 or more is appropriate for a close relative. • 88 percent give $25 or less for a not-so-close relative. • $25 is about average for a close friend (or child of a close friend); 25 percent give more than $25; 50 percent give $20 or less. • Less than $20 is the average for a not-so-close friend; and many would give no gift, but they might send a card.

Bathing Your Organization in Real-Time Customer Context

Respondents tended to believe that graduates are “just starting out” or heading off to college and would appreciate being able to use the money for what they need. Some recognized that taste varies with young people, and gift-givers want the recipient to be happy with what they get. The consensus is that “money is always welcome.” “Using this kind of ‘instant’ feedback is an excellent way for Hallmark to keep close to consumers and provide more of what they are looking for,” says Ali Nicolle, who helps plan graduation cards at Hallmark. “For example, Hallmark has dramatically increased the number of money-holder cards it offers, and this online research confirms that the need is genuine.” 6

Reinventing Humor In 2004, Hallmark’s executives realized that American consumers’ sense of humor had changed. There were several factors: the aftermath of 9/11, the war in Iraq, and the aging of the baby boomers. (Most of us baby boomers don’t think of ourselves as “over the hill” at the age of forty or fifty! I still remember being appalled when I received a “humorous” card on my fortieth birthday featuring a tombstone with R.I.P. on it!) Hallmark launched “Project HaHa!” to better understand how people’s thinking about humor had changed. The project team used the Hallmark Idea Exchange as part of that process. They asked community members to post the stock numbers of the cards they found “funny” when visiting the store or searching online. Many Idea Exchange members did more than that, they logged the jokes they liked and the ones they didn’t like. As you can imagine, this set of activities was engaging and fun for customers. The result? Revisions were made to the Classic Humor offering and to some Shoebox cards, which were relaunched in 2005. Both have posted positive sales gains.

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TAKE-AWAYS FROM HALLMARK: USING CONSUMER CONSULTANTS Hallmark has found that members enjoy the experience of being part of an online community—the Hallmark Idea Exchange (IdEx). They form bonds of association with others in the group and are honest with Hallmark and each other, providing both positive and negative feedback. These community members have found commonality with other members. They spend much more time hanging out in the community, and offering insights to Hallmark, than they are asked to contribute. Can your organization create communities of like-minded customers who will value the connection? If you can, these customers will feel they owe you their ideas, insights, and feedback. They will also feel part of your business, and be concerned with its success.

Kraft: Using Deep Insights for Successful New Products Kraft Foods also saw the benefit of reaching out to consumers via online communities. In early 2003, Kraft set up a pilot of one online community comprised of 250 women. When it came time for the pilot to end, the Kraft team easily came to the conclusion that not only did that one community need to continue, they needed to think about how to expand the program. Today, Kraft has five active communities that give them 24 × 7 access to key consumer groups. They do about 600 research activities a year and have access to more than 1,500 consumers on a daily basis. With the pilot, we immediately saw the benefit of having consumers talking with us and with each other around the clock. It enabled us to stay in almost constant touch with our consumers. While Kraft certainly benefits from getting their reactions to new product ideas and the like, the true benefit is developing deeper relationships and the dialogs that result. Our consumers were no longer demographic statistics—they became real people with strong opinions, deep feelings and daily challenges that they were willing to share with us.

Bathing Your Organization in Real-Time Customer Context

Knowing our consumers at this level is invaluable in helping us deliver the best possible products and programs to meet their needs. ~ Gretchen Waitley, senior consumer insight manager, and manager of The Kraft Consumer Channel

One of the first tangible success stories coming out of “The Consumer Channel” was the work they did on Nabisco 100 Calorie Packs. It’s no secret that Kraft Foods’s 100 Calorie Packs of its signature brands—Oreo cookies, Chips Ahoy! cookies, Cheese Nips crackers, Honey Maid crackers, Ritz crackers, and Wheat Thins crackers—have been blockbuster successes since their introduction in July 2004. In fact, Nabisco 100 Calorie Packs hit $100 million in sales in less than one year.7 What is fascinating is how the 100 Calorie Packs came to be. In addition to a number of initiatives to identify marketplace trends, Kraft’s Nabisco division also had access to the company’s five different Communispace consumer communities. Through their deep dialogues and interactions on health and wellness, Kraft learned that consumers didn’t want to think about “diet” foods. And they told Nabisco as they discussed these things among one another online, they wanted “treats,” not privation. They were interested in portion control. They didn’t think in terms of low fat or low carbohydrates; they preferred to think in terms of total calories. The right number of calories for a “pick me up” was 100, customers agreed. Having a good understanding of the basic consumer needs and wants, the brand team was busy developing the details of the product. The community gave them real-time access to consumers. This allowed the team to hear what consumers thought of their ideas, tweak elements of the new product, go back for more reactions, yet get to market in an unusually short period of time. According to Jamie Borteck, marketing, on the Nabisco 100 Calorie Pack launch team, “We found that The Consumer Channel offered benefits that traditional qualitative research did not—wider regional dispersion, larger number of consumers to talk to at any given point, consolidated learning available immediately, and quick turnaround.

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The Consumer Channel research helped us pinpoint key consumer insights that strengthened our positioning for both future testing and in-market execution.” Kraft’s success with 100 Calorie Packs really points to the benefit of building relationships with consumers. “Because these consumers were so comfortable with us and with each other, they were able to talk about things that otherwise might have been difficult to discuss in front of relative strangers in a traditional focus group. Focus groups definitely still have their role, but this clearly adds a new dimension to our understanding of consumers. The community members take pride in being able to give honest input to a major corporation, and it’s very gratifying for them when they see the products they helped create show up on store shelves,” says Waitley. The community members support this sentiment: “I’ve been part of this forum for quite some time, and have really enjoyed being a participant. I think that the forums (dialogue) are a very nice place to discuss your ideas and opinions. Additionally, the surveys have always been really fun for me because I’ve seen products that I “voted on” come out on my grocery shelf. (I love (and my family loves) the 100 calorie packs!!)” “I applaud Kraft for helping us to learn how to make better choices, and I’m excited about being a part of their research process. I think it’s great that they honestly want our opinions about their products . . . it means a lot, since we’re the ones buying them.” ~ Consumer comments

TAKE-AWAYS FROM KRAFT: LISTENING TO CUSTOMER DIALOGUES Are your customers discussing their deep concerns with each other? Can you listen and learn? Kraft created and monitored a number of online customer communities, learning how their customers viewed diet food and customers’ concerns about health

Bathing Your Organization in Real-Time Customer Context

and fitness. By listening, Kraft came up with its winning 100 Calorie Pack snack product. Are you communicating with your customers as individuals rather than demographics? Are you creating loyal customers by letting them contribute to the product research process? Are you building trust with your customer community?

Bob the Builder® Click Bricks™: Easy-to-Use Toys for Toddlers Another successful product design that can be attributed, at least in part, to customers’ ideas solicited through Communispace’s online communities is the popular Bob the Builder Click Bricks series of toys, made by RC2 Corporation’s Learning Curve brand. Originally a supplier of NASCAR models and John Deere model tractors, RC2 has been producing kids’ toys since 1999, under license from popular brands like Thomas & Friends and Bob the Builder. In 2004, RC2 created a Communispace community to have an ongoing vehicle for involving customers in its business, including helping in the design and testing of these new toys. This year women like a 34-year-old mother in East Brunswick, N.J. will help RC2 make as many as 250 decisions about toys and retail programs. In 2004, the first year RC2 worked with a group of consumers, they vetted 25 new products. They helped design Click Bricks, to arrive on store shelves in July. This toy consists of magnetized building blocks for boys. After a group of 150 women electronically critiqued color illustrations of Click Bricks last February, the company used their ideas to build 3-D prototypes, which were sent to 30 moms. That group had sons aged 2 to 4. They were required to keep a daily diary for two weeks, detailing when, in what ways and how often their boys played with the plastic blocks. RC2 also sent disposable cameras, asking the women to take and send pictures of their children playing with the toys. The

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company requested suggestions for names, prices and packaging ideas. The East Brunswick mother thought the colors weren’t bright enough. “If the shades are dull,” she says, “parents won’t pick them up in the store.” RC2 made those changes and more. It added more shapes, textures, and bricks—all mom suggestions. The company shaved eight weeks off the time it would have taken to do conventional research. “In the old days—a couple of years ago—we would have built this before we tested it,” says RC2 Chief Executive Curtis W. Stoelting. “We’d have pushed the product out there without as many insights, and we would have made more mistakes.”8

Why and How Do Customers Participate in Ongoing Customer Insight Communities? From the examples we’ve provided so far, you may be thinking, “OK, so this is just another form of customer connection, but how does it lead to or support customer innovation?” And “it must be something women are willing to do, but guys wouldn’t contribute anything meaningful.”

Getting into the Hearts and Minds of Active Traders The day I visited with Communispace, a new community had just gone live. It was a community of 400 active stock traders recruited for Charles Schwab. Some were Schwab traders; others were not. Many were guys. In the twenty-four hours since the community had launched, there were already 153 detailed customer profiles, more than eleven different dialogue topics were already underway. Only four of those had been seeded by the community facilitators. The rest were created by customers around issues they cared about. Fifty people had already added brainstorming ideas and more than seventy people had answered surveys and several had launched their own surveys on topics they cared about. Traders were asking each other things like: “What’s the best way to generate a short list of stocks

Bathing Your Organization in Real-Time Customer Context

based on the current news?” and “How do you track your trades across sites?” One trader had already submitted his own personal spreadsheet to share with others. “Here are the attributes that I track, Schwab,” he commented. “Notice how many of them you don’t currently include on your reports.” “When customers are passionate about a topic, this level of participation is typical,” Julie Schlack explained. Customers are really excited to be listened to at this level of detail. They know what they need. They’re thrilled that Schwab cares enough both to listen and to take actions, according to Julie.

Guys Talk to Guys about Getting Girls (and Body Odor) On the same visit to Communispace, we peeked into a completely different kind of community—since October 2003, three hundred 18- to 24-year-old guys have been swapping stories about the best approaches to steal girls from other guys. The day I eavesdropped on the community, the guys were posting pictures of how they spent their last weekend—at least the partying part. Another hot topic was about the gadgets they had designed to improve their lifestyles, again, complete with pictures. For example, one guy had strapped a plastic wine jug around his waist, with a plastic tube leading directly to his mouth. As the mother of a 36-year-old guy, I had never heard of Axe. I had obviously missed a major blockbuster product “win” and marketing phenomenon. Business Week described Unilever’s online marketing strategy for Axe in May 2005: When Unilever first launched Axe in the U.S. in 2002—at a stroke inventing a whole new male grooming subcategory called body spray—it relied more heavily on television. The first ads were certainly sufficiently racy to catch young guys’ attention: They showed beautiful women ravishing store mannequins that had been sprayed with Axe. Unilever also deployed Axe Angels—girl-next-door types who roamed store aisles lifting men’s shirts and spraying them with Axe.

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But pretty soon, Unilever began channeling more dollars into the Internet. Next came too-racy-for-TV video clips on www.theaxeeffect.com, which included graphic content aimed at getting twentysomething men to e-mail clips to their friends. . . . It’s all part of Unilever Group’s latest attempt to sell Axe deodorant body spray to young guys. The streaming video, plus downloads to cell phones and Sony (SNE) PlayStations . . . a video game, blogs, and chatrooms are all helping Axe keep its position as the top-selling male body spray, with 80% of the market.9 Besides the commanding market share lead, Mike Bloom, senior vice president for drugstore chain CVS Corp., says he has never seen such an explosive launch in the deodorant aisle, nor a product that drove as many young men to those shelves. “[They’re] buying two to three cans at once,” says Bloom.10 But what’s behind the Axe Effect Web site, the award-winning ads, the new product launches, and the continuous buzz that surrounds the Axe brand and keeps it in its 80 percent marketshare position, is, among other things, Unilever’s use of this online community to “bring the AXE guy to life,” according to Alison Zelen, director of consumer and market insights for deodorants at Unilever. Axe body spray was originally launched in France in 1983. It has become the #1 global male grooming brand. Unilever launched Axe deodorant body spray in North America in August 2002. A year later, in October 2003, Unilever opened up the private Communispace community. Alison described the role of the Axe community in a presentation to the American Marketing Association in September 2005. “We recruited 300 men, 18 to 24 years old. We wanted guys with very active social lives. Guys who care a lot about their personal appearance. They had to be up on the latest cultural trends (fashion, music, etc.). We wanted some who weren’t familiar with the brand. And we went for both geographic and ethnic diversity. They were screened via e-mail. The unifying theme of the discussions

Bathing Your Organization in Real-Time Customer Context

and the site was based on the emotional premise: ‘AXE helps guys get the girl.’ ”11 “The guys helped design the community,” she explained. “We want them to be engaged. So they decide what topics to discuss. They decide how they want to be compensated. They receive a modest incentive ($15 every 6 weeks along with free products). They know that they’re part of our marketing team. They’re encouraged to do their own thing,” she explained. They’re expected to log on once a week and participate in several online activities. In practice, most guys check in every day to see what’s going on. These guys feel that they’re part of the product team. They know that their voice and their ideas are being heard. Their photos and their quotes are plastered all over the walls in the Axe conference room. What’s different about the way that Unilever is leveraging and involving the members of the Axe community is clear both from the level of energy among the group members and from the number of people at Unilever who really watch and listen closely to everything they say. According to Alison Zelen, “This customer community was critical in shaping the AXE Bodyspray Limited Edition 2004 product and coming up with its R&R tagline (Relapse and Recovery). They gave feedback on the proposed name of several fragrances. They are actively involved in helping us and our agencies create new promotional campaigns and develop ideas for customer marketing programs, they’ve validated new product names and descriptors and ideas for advertising campaigns and they are challenging the value of a planned print campaign.” The Axe community vets every ad Unilever runs. According to Forbes, the reliance on the “consumer’s voice” has smoothed some potentially rough patches: “Esther Lem, a vice president for the company’s deodorant business, routinely draws on that group for new fragrance ideas. Unsurprisingly, the young men loved a raunchy campaign featuring a hairy armpit as its central character. ‘I heard from the president of marketing of Unilever. I heard from the COO,’ Lem recalls. ‘I had to say, “Okay, you need to stay out of the way. What matters to me is what the guys say.” And that stuck.’ ”12

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TAKE-AWAYS As these companies prove, online communities of customers are not limited to any one demographic (women, mothers, etc.). Vibrant communities can be established to help you interact with your customers and let them interact with each other about your products. Think about how you can make these communities dynamic and compelling. What can you offer as an incentive for participation? How can you tap into the concerns and creativity of your customers? Do you have formal mechanisms in place to solicit the right feedback? Do you have someone who is responsible for the health and growth of these online communities?

Koko® Fitness Discovering Baby Boomers’ Health and Fitness Issues

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ittle did Mary Obana and Mike Lannon know, but when their first baby was born in 2002, so too was the genesis of their next entrepreneurial venture. Like most new parents, they both put on “baby weight.” But at age 43 (Mike) and 39 (Mary), losing it was proving to be more difficult than ever. Both were already healthy eaters and regular runners, but this time, running and diet alone weren’t cutting it. “I trained for a half marathon after the baby. Running was always the way that I’d lose weight, but my body definitely wasn’t responding to exercise like it did in my 20’s,” Mary lamented. “I knew there were a lot of people like us. Everyone our age seemed to be struggling with weight.” About that same time, “We noticed a lot of grey hair in our health club and it got us thinking about how baby boomers will define, or redefine, the fitness industry as they enter their 50’s and 60’s,” Mary reported. “We had no preconceived notions about what kind of business we wanted to build or the kinds of products we would offer. We figured that this major lifestyle trend—80 million people growing old at once—was a golden opportunity.” They began their customer research in the spring of 2003. “We

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interviewed 600 mostly middle-aged people—both men and women from a variety of ethnic and socioeconomic backgrounds. We interviewed them individually and in groups,” Mary recalled. “We watched them in health clubs as they used the treadmills and exercise bikes, we watched them in yoga and Pilates classes, we watched them lifting weights, and interviewed them afterwards. We even talked to personal trainers. We also talked to men and women in the same age bracket who weren’t exercising. We started very broadly, simply asking what being healthy meant to them. Then we dug deeper to see how their views today compared with their perspective when they were younger and then further still to see how they will define ‘healthy’ when they’re in their 70s and 80s. We got an earful of hopes, anxieties, likes, dislikes, ideas . . . it was a treasure trove of information.” KOKO FITNESS EXECUTIVE SUMMARY

Koko Fitness/Interactive Software and Exercise Equipment A start-up that just introduced its first product in spring 2006, Koko Fitness is a developer of integrated, interactive software and exercise equipment for the fitness industry.

Case Study Focus How to design a business, product, and brand from the outside in, based on deep customer research.

Target Customers

Customers’ Issues

Koko Fitness is targeting its Koko Smartrainer personalized strength training system for the baby boomer generation as they approach their senior years. Although built for the healthconscious equipment user, the equipment is sold to owners of health club facilities (gyms, hotels, corporate fitness centers).

Aging baby boomers fully expect to live longer than previous generations and they want to delay the effects of aging so they can enjoy a better quality of life than their parents. Health facility owners are primarily concerned about customer churn and improving profit margins.

Koko® Fitness

Key Customer Scenarios®

Customers’ Results

Business Results

After participating in the eight-week program, the average overall strength gain with beta testers was 37% for men and 34% for women. After the beta testing period, customers insisted that the prototype remain in the health club.

Based on the success of the early tests, Koko Fitness had orders in hand for its first fifty machines, five months before availability of the first commercially-produced machines.

Uncovering an Outcome that People Felt Passionate About It wasn’t long before Mike and Mary began to find a common pattern. Baby boomers fully expect to live longer than previous generations and want to delay the effects of aging so that they can enjoy a better quality of life than their parents. What was surprising to Mike and Mary, though, was the huge interest and demand for strength training. Women over forty, in particular, knew that maintaining muscle was a key to weight loss and fighting osteoporosis. They felt guilty about not doing anything about it. And for both men and women, the problem was they felt that strength training was too time consuming and the equipment was not simple to use correctly on their own.

Understanding End Customers’ Current Context and Issues Once Mary and Mike had honed in on strength training as an unmet need, they conducted more interviews as to why, if this is something boomers felt strongly about, weren’t they doing it? Both men and

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women mentioned time as a big inhibitor. Although men felt they didn’t have enough time to work strength training into their weekly routines, they did feel that they had some control over their time. “I can get away at lunchtime if I really want to,” one busy business exec reported. “I can usually get to the gym at the end of the day,” others said. Women, on the other hand, felt they actually had very little control over their time. Between work, kids, and errands, it was quite difficult for them to find the time to exercise regularly.

Women’s Issues around Strength Training. Apart from finding the time, women’s biggest issues around strength training had to do with “feeling dumb.” “I look into the weight room and there are all those complicated machines.” “I know the trainer showed me how to use them once, but I can’t remember any more.” “I don’t want to wander around feeling stupid.” These were the common refrains that women repeated over and over again. Men’s Issues around Strength Training. Mary and Mike’s research uncovered the not surprising reality that most men felt more comfortable than women working out with weights and weight machines. They didn’t have as much trouble self-navigating the weight room, but they were concerned that “I may not be doing it the right way.” “I do the exact same routine each time. I know you’re supposed to vary what you do, but I don’t.”

Defining End Users’ Desired Outcomes and Conditions of Satisfaction Interestingly, both men and women voiced the same goals: They wanted an easy approach to strength training—something they could do on their own without taking a lot of time, that could fit realistically into their schedules and allowed them to get the most benefit from the time spent. Their outcome: They wanted to feel great at the end of each thirty-minute session and be able to see and feel the results of the strength-training program quickly. Their conditions of satisfaction? They wanted a structured approach: “Tell me exactly

Koko® Fitness

what to do.” Women called it a “no-brainer.” They didn’t want to think about it. Just do it and leave. Oh, and they wanted both variety to keep them engaged and a personalized program—something that would help them meet their personal goals—whether that was to keep osteoporosis at bay, improve their golf game, train for a marathon, or for overall body conditioning.

Researching the Market While Mary Obana spent most of her time interviewing people, Mike did most of the market research. Health club membership has been on the rise in the past decade, and it’s a big market with more than 44 million members in the United States alone. “That was good,” Mike said, because “as a start-up, we knew we weren’t going to have the luxury of time to build a retail distribution channel or the marketing budget to fund a consumer advertising campaign. Selling direct to businesses made the most sense. There are roughly 30,000 gyms in the U.S. that currently own and maintain strength training equipment. If you add in hotel fitness rooms, workout rooms in apartments and condominiums and retirement facilities, police stations, colleges and high schools, you have close to 160,000 venues for which someone purchases fitness equipment, including strength training. It’s relatively easy to reach this market through direct selling, distributors, trade shows, and other means.” Mike Lannon also learned how many blockbuster successes there had been in the fitness equipment market, and how quickly you can tell whether your product will take off. “Product ‘hits’ in this industry can easily generate many tens of millions of dollars of revenue in the first year of its rollout. Just think back to the Stairmaster or the Precor Elliptical Trainer introductions, to name just two. These products became ‘must haves’ by every health club almost overnight,” Mike explained. “Health clubs are all fighting over the same members. In order to lure exercisers, they need to have something new, or at least be at parity with the other clubs. If there’s a piece of exercise equipment that consumers want and you don’t have it, they’ll quit and join the club that does.”

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By the summer of 2003, Mike and Mary had decided to invest in developing a strength-training product that would appeal to baby boomers. The product had to address their end users’ strength-training scenarios. But they would be selling the product direct to the owners and managers of health clubs and fitness centers. Mike and Mary needed to understand those paying customers’ scenarios, outcomes, and conditions of satisfaction.

Uncovering Health Club Owners’ Scenarios “Health club owners have two major issues,” Mike explained. “Reducing membership churn and increasing profit margins.” The typical health club loses between 30 to 50 percent of its members each year, either because people give up or because they switch to a rival health club. So retaining customers and recruiting new customers who will remain is a critical issue. The second half of the formula is, of course, increasing the average annual revenues per member. “You do that by offering child care, extra classes, selling bottled water, and installing juice bars,” Mike Lannon said, “but most of all you increase profitability based on the percentage of members who work with personal trainers.” That number is currently very low, typically 3 to 5 percent of all members. If you can help move that up even a little, it translates to a nice jump in profitability for clubs.

Uncovering Personal Trainers’ Scenarios The trainer’s desired outcome and the owner’s desired outcome are the same: sign up more members for personal training and help them achieve great results. However, “most personal trainers don’t enjoy the selling part of their jobs,” Mike Lannon explained. They need to recruit new clients from the members working out in the club, but other than referrals and “free” introductory evaluations, there isn’t an easy and natural way for them to engage with prospective clients. Mike and Mary knew that a strength-training machine that provided an eight- or twelve-week do-it-yourself program would be a natural relationship-building and lead-qualification tool for personal

Koko® Fitness

trainers—a personal training feeder system. These people have already expressed an interest in structured strength-training regimens and the machine is a natural way for a trainer to check in on members, offer them tips, or even just introduce themselves. After the initial training program, that client may be ready to go to the next level. The personal trainer can stroll by and offer encouragement and advice. He or she can use the data generated by the strength-training equipment to develop and recommend a more specialized and advanced program for each client.

Designing the Product—with Domain Experts and Customers By the summer and fall of 2003, Mike Lannon and Mary Obana had enough data, knowledge, and confidence to begin designing a strengthtraining system that would appeal to their target audiences—the end users, health club owners, and personal trainers.

Design Principles Based on the feedback Mike and Mary had received, particularly from the women who were intimidated when faced with a roomful of steel machines and weights, they knew they wanted to create a single, userfriendly multipurpose strength-training machine—not a roomful of machines. From the outset, Mike and Mary knew that they wanted to combine the latest digital technology with the latest sports engineering technology in order to offer each user a personalized, interactive training experience. By collecting the data from each user’s workout, they reasoned, their as-yet-undeveloped software would be able to adjust each training session based on the user’s progress.

Recruited Subject Matter Experts The first thing Mike and Mary did was go out and hire subject matter experts.

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• Equipment Design. Mike Lannon hired Carl Spöeth, a product engineering specialist who had designed, developed, and patented a number of consumer fitness products. Mike Lannon and Carl Spöeth then teamed up with Dr. Kim Blair, the director and founder of the Center for Sports Innovation at the Massachusetts Institute of Technology (MIT). Throughout the summer and fall of 2003, they experimented with off-the-shelf gym equipment and a laptop computer, testing the best ways to interface the equipment and provide feedback to the exercising end user. Rounding out the product development team was Jeff Pearson from Nautilus, Inc., who had designed and developed eight major Bowflex product designs during the past five years— products which accounted for over 70 percent of the company’s revenues. • Strength Training. Mike and Mary then hired Michael Wood as Koko’s chief fitness officer, to be their expert in strength training and to specify the training regimen for the company. He ran Sports Performance Group, a fitness consulting company, and is a nationally recognized certified strength and conditioning specialist. • Industrial Design. Mary, who had a lot of background as a brand manager, marketing manager with Keds, Converse, and Coca-Cola, and advertising agency executive, wanted the industrial design to be consumer-friendly. “I wanted a look that was closer to the Apple iPod than a weight room. One thing we heard loud and clear in our research is that many exercisers are intimidated by the equipment in health clubs. An essential part of our strategy was to create a product that looked approachable, friendly, unintimidating,” she said. As it turned out, the industrial design of the Koko Smartrainer was one of the hardest parts. “We went through three different industrial design firms until we found a team that could design a housing and look to cover up all the pulleys and weights that was consumer-oriented enough,” Mary Obana said ruefully. “Finally, we found some

Koko® Fitness

industrial designers who had designed baby products and other consumer goods. I told them I wanted it to look like a giant iPod. They got it right,” she reported. • Software Development. Recruiting their software development team was quite a bit simpler. Mary Obana and Mike Lannon tapped Josh Roman and Jon Hazelwood to head up their software development. Both had worked with Mike and Mary at their previous company, Send.com.

Involved Customers in Software and Interface Design The design team had determined that it would be feasible to have a flatpanel color video screen that swivels into position in front of the user as they exercise, guiding people through their regimens. Obviously a keyboard wasn’t appropriate, so they opted for a touch screen user interface. It fell to Mary Obana to design the user interface and user interactions with the Smartrainer, which she did based on user input. “I started with what customers had told me,” she said. “They wanted to be told exactly what to do, step by step. They wanted to be shown exactly how to do each exercise as they went. They wanted to be reminded about the right form for each routine—when to keep your shoulders back, reminders to keep your chin down—everything that a personal trainer would be telling you if he were standing right there watching you. They also wanted feedback on whether they were doing each exercise correctly, as they went.” In consultation with Michael Wood, who had developed the initial thirty-minute program, Mary mocked up each screen for each step in every exercise. Then, she took her “paper user interface” and sat down with target users one-on-one and had them go through the routine—chest press, leg extension, lat pulldown, leg curl, ab crunch, standing upright row, bicep curl to press, biceps curl—noticing where they got confused and where they asked questions. “It took seven rounds of user interface designs with customer feedback after each round, before we had it down,” Mary recalls.

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Highly Interactive Experience with Real-Time Feedback. The result is an interactive experience that is so compelling that users find themselves completely focused on the high resolution screen in front of them while they’re working out. As you push, pull, and lift, you get immediate real-time feedback about whether you are using the optimal pace for each movement. Mary describes the interaction as a real one-to-one experience, so appealing to users that she decided to name the company “Koko,” which comes from a Japanese word meaning “one by one; individual.” Customers Wanted a Variety of Ways to “Keep Score.” At the close of each step of the routine, you see a display that tells you how you did on that exercise in terms of total pounds lifted, total calories

© 2006 Koko Fitness

Koko’s Smartrainer is a single unit that is much less intimidating than the usual strength-training equipment, in part because the weights are concealed in an attractive housing.

Koko® Fitness

burned, and pace score (did you go too fast or too slow?). Mary discovered that her female customers also wanted to grade themselves based on both calories burned and Weight Watchers points (or equivalent). As customers realized that there was a “right way” and a “wrong way” to do strength training, they wanted a way to know how they were doing compared to other Koko users—regardless of gender, age or fitness. How well were they doing in actually executing the training session that had been designed for them? Mary and Mike came up with “Koko Points.” You earn Koko Points based on how correctly you perform each strength training session. “This gives an 80year-old great-grandma the opportunity to ‘beat’ her 42-year-old bench-pressing grandson!” Mary exclaimed. “Our beta customers loved it!”

Field Testing with Actual Customers By late September 2004, the Koko Smartrainer was in its sixth hardware prototype, and the beta version of the software was working. “We had several hand-built machines created, so that we could get users to start testing them,” Mike Lannon reported. Through one of his investors, Mike was introduced to the president of the YMCA in Springfield, Massachusetts. He was nervous about proposing that his still-untested machines go into a setting in which “real people” worked out. He needn’t have worried. Steve Clay told him that Springfield prided itself on being a “city of firsts.” “Basketball and volleyball were created in Springfield,” Steve exclaimed. Mary Obana put up a poster in the gym describing the new strength training machine along with a sign-up sheet. “We could accommodate eighteen to twenty people in the eight-week trial program. I expected about five brave people to sign up,” she said. “Within five days, we had over fifty signed up and a waiting list!” The people who volunteered came in all shapes and sizes as well, from middle-aged men and women to younger, more athletic types, to octogenarians. “We even had a few people, like the 50-something female accountant from the Y, who had never exercised before. We partnered with Springfield College’s Department of Exercise Science to measure everyone

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pre and post the trials, including their body fat. We interviewed them before they began the program to find out what issues they had with strength training. We interviewed them at the mid-point, and at the end of the eight weeks.” This first group of beta testers fell in love with the Koko Smartrainer even though the software was still pretty buggy and they were doing updates all the time. “They didn’t think of themselves as beta testers, but as users of the equipment,” Mary reported. “We spent hundreds of hours observing people on the machines, to identify where they seemed to get stuck, their response as results were displayed on the screen, their demeanor after exercising, and how they talked about their experience with others. Aside from the over twenty mechanical and fifty software improvements that were made as a direct result of this testing, we learned an invaluable amount about the unique ‘relationship’ people had with this product—something you can’t get unless you have people working out on it regularly.” The best results of all, Mike Lannon reported, were that the users in Springfield wouldn’t let Koko remove the machines at the end of the beta test. “These were the ugly, ‘guts-exposed,’ unshrouded, early versions of the machine, before we had the slick industrial design. But they still didn’t want them taken away.” “They had to place an order,” Mike said. “Their members were completely addicted to it!” What were the results for the study participants? After participating in the eight-week program, the average overall strength gain was 37 percent for men and 34 percent for women. Here’s what several of the beta testers had to say: “I can’t stop ‘yakking’ about it! I feel really good after working out on the Smartrainer. Before I couldn’t stay on my ‘plan’—I am very committed now!” extolled one 54-year-old woman. “I got stronger, and I lost weight and 2 notches on my watch band. I loved that it told me how much I lifted and how many calories I burned at the end of each session. It gave me motivation. I feel like it’s helping me get rid of my diabetes,” crowed Peter.

Koko® Fitness

Each Koko user has a personalized program that is contained on his or her personal USB Flash Drive. After each session, the user’s latest statistics from the workout are stored on his Koko Key and transmitted to Koko for analysis and backup. The next training session may be modified based on the user’s progress. Koko users can plug their personal training programs into any Koko Smartrainer in any club to continue their personalized strength training program. Users can use pseudonyms, if they prefer, to remain anonymous.

“It’s FUN and interactive. I’m doing something I need to do that I otherwise wouldn’t because I don’t know how,” said 45-year-old Lydia.

Seeding the Market with Lead Customers By early 2006, based on both the enthusiasm and the tangible results from end customers’ beta tests, Koko Fitness had orders in hand for its first fifty machines, five months before availability of the first commercially produced machines in May 2006. Early customers included

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the lead health clubs in a number of national chains, the Starwood Hotels, some well known owner-operated local gyms, like Beverly Athletic Club in Massachusetts, and a number of other “seed” venues sprinkled between New York City and northern New England.

Koko Fitness Identifies and Fills an Unmet Need for Baby Boomer Health Concerns Koko Fitness’s founders created a business based on an unmet need of a large—and easily identifiable—customer segment. Through deep customer knowledge, they identified an area where the customers had a lot of passion and pent-up demand. It was through this understanding of the customer that Koko Fitness was able to design an innovative product to fulfill a key customer scenario. Koko’s founders:

1. Observed the target audience as they exercised, then interviewed them about their experience, including their emotions surrounding their exercise regimen. 2. Explicitly asked for their scenarios (“What do you want to accomplish?”). 3. Conducted deep market research on exercise venues and how they bought equipment. 4. Identified key scenarios for venue owners and employees (trainers). 5. Involved customers in the design of the content and user interface for the software program that would guide them through their exercise regimen. 6. Tested proposed strength-training regimens with customers one-on-one to obtain real-time feedback. 7. Field-tested an early prototype, interviewing users before they started using the equipment, midway into the eight-week regimen, and at the end of the eight weeks.

Koko® Fitness

TAKE-AWAYS FROM KOKO FITNESS As true entrepreneurs, with a history of successes, Mike Lannon and Mary Obana understand the power of an unmet need in a readily identifiable market. They paid attention to what they saw and validated all their observations with their potential customers. Here are the lessons to be learned from Koko Fitness: • Keep your eyes open to a potentially new product that will fulfill an unmet customer need. • Identify the customers’ scenarios and desired outcomes. • Recognize where the “passion” is, because that’s where customers will go. • Test new processes and products with customers; validate all assumptions with customers.

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Zopa Creating a New Financial Services Exchange: Peer-to-Peer Lending and Borrowing for “Freeformers”

Moment of Truth: You Don’t Qualify for Credit! On his third day of freedom after leaving a grueling, high-powered job, Richard Duvall walked into a mobile phone store in his neighborhood to the west of London. He thoroughly enjoyed selecting a sleek new mobile phone to replace the one his former employer had provided. He pondered the various service plans and selected the one that would fit his new, independent lifestyle working from home. As the helpful sales associate walked him over to the checkout desk, the associate said, “I just need to ask you a few questions to complete the application.” “Of course,” Richard replied, still enjoying the fun of settling into his interesting new lifestyle. The sales associate asked: Q: “Where are you employed?” A: “I’m self-employed, actually.” Q: “What’s your current income?” A: “I’m just launching my own business, so I have no current income, but my prospects are great!”

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Q: “How long have you lived in your current residence?” A: “We just moved into this neighborhood in the last few months; we like it very much.” Q: “I’m so sorry, but I can’t let you have this phone. You haven’t passed our credit criteria.” All of a sudden, Richard’s lovely picture of his enjoyable new lifestyle began to crack. He was naturally offended and upset by the experience. “He never asked me how much money I had in the bank. He didn’t inquire about any of my assets. If he had, he would have known that I was an excellent credit risk. But the screening process he had to use was designed for slavelaborers. I had just cut the shackles of a steady job working for a large corporation. I was proud of my financial independence and my newfound freedom.” ~ Richard Duvall, CEO, Zopa

Richard went elsewhere to procure his mobile phone, now forewarned that he’d either have to prepay or demonstrate his ability to pay according to lending rules that were biased toward people with conventional, salaried jobs.

ZOPA EXECUTIVE SUMMARY

Zopa/Money Lending Exchange

Case Study Focus

Zopa, which is sometimes called the eBay of banking, offers an online exchange that allows would-be borrowers and would-be lenders to deal with one another on terms of their own choosing.

1. How to identify a new customer behavior and concomitant need through deep ethnographic research. 2. How to design a business based on that need.

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Target Customers

Customers’ Issues

“Freeformers” who want to borrow money but don’t meet the traditional requirements laid out by financial institutions. Freeformers who want to lend money to like-minded individuals, get a good return, and know they are helping others meet their goals.

Zopa’s customers do not trust traditional banks and want more control over their money. Many freeformers aren’t employed full-time and don’t pass credit tests, even if they have assets and the ability to repay.

Key Customer Scenarios®

Customers’ Results

Business Results

Anecdotal customer response has been tremendous, with hundreds of testimonials stating that the loans arranged via Zopa have changed the borrowers’ lives for the better. Similarly, lenders have expressed their delight at the results of the loans. As of April 2006, over 63,000 members had used the service and the missed-payment percentage was only 0.05 percent. The average gross (pretax) return to lending members is 7 percent a year.

Although no specific revenue figures are available, Zopa has garnered a lot of positive press attention and customer testimonials, has just secured $15 million in venture capital to open a San Francisco office, and launched its business in the United States.

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Spotting a New Customer Trend: Entrepreneurial Lifestyles Over the next few months, Richard noticed that there were a lot of people in the same situation he was in. My perceptual filter was set. I was in that state you get into where all of a sudden you see the same thing repeated time and time again all around you. I had a lot of friends who had left their corporate jobs. They had taken up doing a bit of this, a bit of that, generating multiple income streams from multiple skills while spending more time with their families, becoming more active members of their communities, working on their fitness and health, and drinking green tea! They were finding that they could get along quite nicely and have much more freedom and control over their lives. If you think about it, this isn’t a new phenomenon; there are lots of tradespeople—plumbers, electricians, handymen— who have run their own businesses for centuries. But now there are also young people coming into the workforce who don’t want to follow in their parents’ footsteps and join a firm with the idea of working their way up from the bottom to the top. They realize that there probably won’t be a ‘top’ for them. They prefer to design their own lifestyles and incomes around the things they care about. Everywhere I looked, I saw people leading more independent lives, defining themselves as individuals and by the projects that they take on. I began to wonder if this was a pervasive trend. ~ Richard Duvall

How Big Is This Customer Segment? Richard began to research the size and characteristics of the people in the working population who were self-employed, rather than employed with a steady wage and a retirement pension. He concluded

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that there were as many as six million people in the U.K. and 30 million people in the United States who fit this description who seemed to be living extremely well. He also learned that the size of this customer segment was growing. An astonishing percentage of the working population seemed to be looking for something very different. And the number one reason cited by 93 percent of new and would-be entrepreneurs was gaining the freedom to adopt their own approach to work.1 Richard Duvall had been one of the founders of Egg, plc, the innovative direct bank that launched in the U.K. in the fall of 1998.2 Although he had no intention of launching another financial services company, his entrepreneurial juices were flowing. He sensed an opportunity to develop a new business to serve the financial needs of this growing, vibrant group of free-thinking people—needs that were not being well-served by traditional financial institutions and credit card lenders.

The Brainstorm that Lasted Five Days! So he invited a group of excolleagues, friends, and thinkers he respected, including Bruce Davis, a notable consumer researcher, to an afternoon of brainstorming in the barn attached to his home. The meeting was very stimulating: “It felt like peeling the layers off an onion and with every layer, the pattern that was emerging got clearer. It was fascinating, compelling, and addictive—we talked and talked and talked until we were exhausted. I think Bruce eventually left some five days later!”

Spotting a Business Opportunity: Financial Services for “Freeformers” What Industries Have Adapted to This New Customer Behavior? Richard Duvall’s brainstorming team began to describe these new customers as freeform lifestyle entrepreneurs, part of a new lifestyle trend that was likely to last for a couple of decades. Richard and his colleagues realized that some industries were

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already adapting to this individualization. They could see examples of businesses that were letting customers do their own thing and giving them more control over their lifestyles: • Music. Apple’s iTunes had commercialized customers’ desires to create their own music mixes and “Podcasts.” And with independent music, independent record labels, independent radio stations, we now listen to a much broader selection of music. • TV. Instead of watching the same four television channels as everyone else, you can choose your entertainment from hundreds of channels or even put together your own television channel using services such as Tivo or, in the U.K., SkyPlus. • Travel. In Britain, packaged travel tours used to dominate the vacation market. Essentially, people went to the same resorts, stayed in the same hotels, ate the same food, and went on the same excursions. Now, all the growth is in independent vacations—people putting together for themselves, often through the Internet, a unique vacation experience. • Retail. We are seeing strong growth in retailers offering a more individualized service—from fashion houses that help people put together their own look to food retailers that offer more authentic, natural, organic produce. EBay now lists some 20 percent of all second-hand cars sold in the U.K. and has become one of the largest retailers in the world by providing an environment where people can buy and sell directly with each other on their own terms.

Financial Institutions Hadn’t Caught On Yet many institutions, particularly financial institutions, hadn’t caught up to this lifestyle shift. So the brainstorming group decided to put some money in a pot and fund some additional customer research.

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IDEA: Design a Company to Meet the Financial Needs of People Like Us. At this stage, in April 2004, there were six people involved in exploring and designing what was soon to become Zopa. Three things that Zopa’s founders had in common were: • They were all self-employed with distinguished track records as successful executives. • They all had assets: homes, money in the bank, investments. • Several had had difficulty getting loans since going off on their own. For example, James Alexander, the former strategy director for Egg, plc, found that he didn’t qualify for a new mortgage, since he was self-employed. And, of course, Richard Duvall couldn’t get a mobile phone. They quickly determined that they were not isolated cases. There were a lot of people in all walks of life who shared a common problem of not being able to get credit because of their “unconventional” lifestyles and income streams. The small team decided to find out what other people’s financial needs were and how these needs could be met by a company that was designed by freeformers for freeformers.

Customer Research Richard and his team commissioned Bruce Davis’s firm, Freemarket, to conduct some ethnographic observations—literally, to live with people for up to four days to understand how they live and how they think. Rather than use interviews to discover people’s attitudes, Bruce’s work “is based on long periods of observation of people as they go about their everyday lives. It’s an approach to market research that is particularly revealing, as the attitudes and opinions that people give to interviewers are not the same as the ones they demonstrate through their actions.”3

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Performed Deep Ethnographic Research: What Can We Tell from Watching People’s Behavior? Bruce’s team carried out a series of ethnographic observations, focusing on attitudes and needs around technology and money. They studied quite a range of people: • People who were self-employed in small businesses • People who were “long-term” employees • Families with single parents • Multi-generational families • Traditional 2 + 2 (two parents plus two children) families • Plumbers, bakers, and other tradespeople • Fashion designers, photographers, and other professionals • Others varied by age, ethnicity, region, relative wealth, suburban/ urban What the ethnographers observed led the group to christen a new customer segment. At first, they dubbed them “everyday entrepreneurs.” Then they created the term “freeformers” to better describe this group, since many of them still held traditional jobs along with their side jobs.

Identified Freeformers and What They Care About Freeformers weren’t defined ethnically or by age. People with these shifting attitudes turned up in all ethno- and demographic segments. They included some older people (in their fifties and sixties) who had been forced out of the workforce or had chosen to leave. They included younger people (in their twenties and thirties) who didn’t want to defer their chosen lifestyles until retirement. There were also people in all age brackets who wanted to spend time doing things they loved, like the forty-year-old policeman with two small children who gave up his job and his state pension to become a full-time Tai Chi instructor.

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Freeformers Choose to Be Self-Employed and/or Have Multiple Assets/Income Streams. The ethnographers reported that more than 50 percent of these people had multiple income streams—they did not rely on a single nine-to-five job for their income. Freeformers Take Technology for Granted. Although this customer segment spans a broad range of incomes, ages, and ethnicities, they all rely on mobile phones, e-mail, and Internet access as part of their lifestyles. While they aren’t leading-edge users of technology, they consider it to be a lifestyle enabler. Freeformers No Longer Define Themselves by Their Labor, but by Their Lifestyles. A significant number of people were changing their lifestyles from being defined by what they consumed to being defined by how they spent their time, how they spent their money, and what projects they took on in life. To them, the important thing was that they got to express themselves as individuals. Freeformers Want Freedom and Control Over Their Work and Leisure Time. Freeformers care a lot about freedom and control. Charles Leadbeater is a good example. In 1996, he left his senior executive post after a successful career in journalism (working for the Financial Times and the Independent). He quit his job, left his fancy office, and set himself up as a freelance writer and researcher working out of his home. He set up his work schedule so that it revolved around his family time. Then he chronicled his new lifestyle in a bestselling book, Living on Thin Air: The New Economy.4 Freeformers Have Little Respect for Impersonal Institutions or Businesses. There’s a big gap between the values of freeformers and those of most of the institutions they deal with day in and day out. Freeformers don’t trust institutions and don’t believe institutions are relevant to them. Freeformers are unwilling to be labeled and categorized by institutions. They get to say who they are: “No one defines me but me.”

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Freeformers Want Tailored Solutions. Freeformers eschew the “one size fits all” culture. They prefer tailored solutions. They mix and match songs to create their own iPod playlists. They design their own careers. They reject the homogenized service they get from many of the organizations they deal with, demanding that they be treated as individuals. Freeformers Trust Member Communities. Freeformers trust themselves, their friends, and the network of people they know. They also relate well to online communities.5

How Do Freeformers Relate to Money? Having satisfied themselves that there was a new, important, and growing customer segment with specific beliefs and behaviors, Richard’s team ran a series of “Discovery and Exploration groups” with consumers. Each session of six to eight people explored their attitudes and needs around money.

Held Discovery and Exploration Groups: Understanding Customers’ Context and Issues around Money The team learned that freeformers: • Had little regard for banks and traditional financial institutions; in fact, they wanted to avoid them! • Felt responsible for generating enough income to live in the lifestyle they preferred, now and in the future (and were not counting on a pension or retirement income). • Had investments they wanted to make in their homes or their businesses, but often did not meet the usual credit-screening criteria. • Hated borrowing from traditional lenders like banks; preferred to borrow from friends and family.

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• Wanted more investment opportunities that felt tangible to them and within their experience and control. • Saw their money as a small business would—in terms of cash in and out of the home, and in terms of assets—things from which they could earn an income.

Want to Avoid Banks and Other Financial Institutions. Zopa’s founders were amazed, but not surprised, by the level of hostility freeformers have towards financial institutions. “I hate my bank,” is the refrain they heard over and over again. On the investing side, freeformers also reported a great deal of mistrust. “We give our money to a financial institution to save—they do something with it, we don’t know what, and we get back a financial return that seems lower than it should be. It’s all completely outside my control.” Want More Control over Their Financial Destinies. Freeformers want more control over their investments and the flexibility to borrow in a way that makes them feel secure, more like they are drawing down against their assets or against their future income. Have a Home-Centric View of Money. The freeformers who participated in the discovery sessions drew pictures of how they viewed their relationships with money. Many drew essentially the same picture. Whether they were homeowners or renters, they placed their homes in the center of the page. They depicted income sources flowing into their homes and expenses flowing out of their home. Money Enables My Life Projects. A freeformer’s view of money is that it is an enabler for the things they want to do with their lives. Accumulating wealth isn’t an end in and of itself. Saving for retirement isn’t particularly valued. Freeformers don’t plan to “wait” to enjoy the lifestyle they want until the last 10 or 20 years of their lives. View Credit Cards as Expensive and Dangerous. Many freeformers have a love/hate relationship with credit cards. They use them to

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finance their businesses and to smooth out their cash flow. But they resent the interest rates they pay on the money they use. They like the convenience of being able to buy on credit, but not the dangers of running up a large credit card tab.

Want to Borrow on My Terms; Not Yours. Most freeformers are responsible borrowers who repay their debts. Freeformers resent having their creditworthiness judged based on criteria that don’t apply to them, such as the number of years in a salaried position, or the number of years they’ve lived at one address. Ideally, they’d like to set their own interest rates and payment terms. They’d like to be able to borrow money when they need it, pay it back as soon as possible (with no early payment penalties), and adjust their loan repayment plans to accommodate their payment plans to their often “lumpy” income streams. Want to Invest on My Terms; Want to Know Exactly How MY Money Is Being Used. Freeformers invest in things they can see, touch, experience, feel, and understand. They like to put their money to work in tangible ways—their businesses, their homes, their gardens, their neighborhoods. They are willing lenders who prefer to lend to people they know. Want to Invest in People Like Myself. Many freeformers said that they had lent money to friends and family members and would do so again. They wondered if there was a way to find more people like themselves they could invest in. One Indian entrepreneur wanted to invest in smart, young Indian expatriates, who like himself had good ideas and lots of energy, and who would see ideas through.

Co-Designing a Lending Exchange with Customers After listening to how customers felt about traditional borrowing and investing, it didn’t take long for Dave Nicholson, the former head of strategy for Egg, to come up with the idea of a borrowing and lending exchange, a sort of “eBay for lending and borrowing.” After all,

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they’d found a ready market of creditworthy people with unconventional lifestyles who wanted to borrow money along with a ready group of people who wanted: 1) to get a good return on their invested money; 2) wanted to know how the money was being invested; and 3) wanted to feel confident they had done something “good” with it to benefit people who would spend it wisely. What if, Dave surmised, they could put together an online exchange that would match ready borrowers with ready lenders? Of course, they’d need to vet borrowers’ creditworthiness and to ensure that lenders were protected. But if they could design an online exchange that would meet freeformers’ key scenarios, it was likely to be successful and to grow by referral.

Recruited a Group of Customers to Co-Design the Exchange The Zopa team recruited a representative group of freeformers. They selected a cross-section of traditional entrepreneurs, people who had been in business for themselves for some time; “domestic entrepreneurs,” people who were investing in their homes as home offices and as assets they could sell or leverage to fund their lifestyles; “lifestyle entrepreneurs,” people who organized their work lives to support their preferred lifestyles; and “personal entrepreneurs,” people who spent money to express their individuality. The customer co-design group started at a dozen people, and grew to 18. These customers were actively involved in every step of Zopa’s design, from the business model to the Web site navigation. Customers continue to co-design the exchange through their informal feedback and through formal co-design activities.

Designing an Online Exchange for Borrowing and Lending Learning from eBay: How to Build a Marketplace At the same time that the Zopa team was co-designing its business with potential customers, Zopa’s founders were searching for venture capital funding. Not surprisingly, they found a cordial reception at

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Benchmark Capital (the original investors in eBay). Through Benchmark, the Zopa team met with eBay executives to discuss Zopa’s plans to form a peer-to-peer borrowers’ and lenders’ exchange along the lines of eBay’s popular auction site.

Focus on the “Customers” with Pent-Up Demand What, Richard and James asked the eBay executives, was the most important key to success in growing a vibrant electronic marketplace? Their advice: Identify your tightest target group and treat them like kings and queens. Learn from them, do what they ask for, and they’ll introduce the next layer of members. They also advised: Focus on the demand side of the market—where there’s a demand that’s not being filled. In eBay’s case, the biggest pent-up demand came from sellers who had goods to sell—antique store owners, dealers in memorabilia— who were looking for buyers. In Zopa’s case, the biggest pent-up demand was on the borrowers’ side, whose needs weren’t being well met by traditional financial institutions. Zopa needed to attract borrowers who were well able to repay, who didn’t like borrowing from banks, and who would prefer to borrow money from actual people. If Zopa could lure enough borrowers to a marketplace, it was sure it would be able to attract lenders to offer funds to a ready market of creditworthy people who would be happy to pay reasonable, but not usurious, interest rates.

Designed the Exchange Concept and Tested It with Borrowers and Lenders Zopa’s founders evolved the principles and the design of the Zopa exchange in the six months between October 2004 and March 2005. As they did so, they bounced all of their ideas and concepts off of their 12-member customer advisory panel. These customer advisors helped design the exchange, conferred on the pricing and policies, tested the prototype Web sites, and contributed to the development of the Zopa brand personality and the language used on the Web site.

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Launch in March 2005 Zopa launched in early March 2005 with a storm of media interest. In “Introducing the People’s Bank,” the Motley Fool said: “Unless you’ve had your head in the sand over the last few days, you can’t have failed to hear about the latest dot-com phenomenon—Zopa. In theory, it shouldn’t work, but in practice, even in these early days, it looks as if it might.”6 In “Is Greed Good?,” The Economist said: “British banks are the world leaders at confusing their customers and extracting extra charges . . . Zopa is trying another idea: cutting out the intermediaries in borrowing and lending.”7 Zopa was even mentioned in the House of Commons: “Many new ideas are emerging in the field of lending and borrowing at present, such as the work being undertaken by companies such as Zopa, which is using the internet in a manner that totally changes the way in which people borrow and lend money. These changes could be of great benefit to both lenders and consumers . . .”8 Within days, the site had attracted thousands of registered members, with enough of these credit-rated and able to lend and borrow on Zopa to jumpstart the exchange. By the end of 2005, 45,000 people had become Zopa members—with 16,000 credit-screened and able to borrow or lend money.

Borrowers’ Feedback As they get matched for a loan, borrowers can leave messages for the people that they’ve borrowed from. Here are some of their comments about how they planned to use the money: “Hi there. Thanks for the loan. I’m a photographer and I’m investing this loan in equipment and transport to make me as independent and versatile as possible . . . getting as far away from a dodgy salaried job as possible. Have already seen loads of success this year in going self-employed. Onwards and upwards.”

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“I am an orthopedic surgeon just setting up my practice and expect to become a lender as opposed to a borrower in due course.” “I will be using the loan to buy a newer car as I am currently spending too much on fuel with the car I have. If any money is left over from the loan it will be used to go towards my Open University Degree course that starts in February 2006. Thanks.” ~ Borrowers’ comments

Lenders’ Behavior

The “I Can See My Money” Factor. Zopa lenders like having a good idea where their money goes. Although borrowers are anonymous, their profiles and comments are shared. Lenders like seeing who’s borrowing it and what they’re doing with it, and they like seeing the money get paid back. The Gaming Factor. As with eBay’s auction buyers, what really appealed to Zopa’s lenders is the ability to play the game and win. Lenders like being able to see what terms and rates are currently on offer in the market. They can check out different combinations of amounts, terms, and interest rates. They can make an offer but withdraw it or change it if nobody bites. As with an auction, there’s the thrill of the chase. The “Stuff It to the Banks” Factor. Zopa’s brand resonates with potential lenders who don’t like dealing with traditional financial institutions any more than the borrowers do. They get a kick out of being part of an alternative ecosystem. The “Do Good While Doing Well” Factor. Zopa’s lenders tend to have a streak of altruism as well. They like knowing how their borrowers are using their funds. They enjoy helping people along by loaning them money, but without the personal involvement that you’d have with a friend or family member.

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Unintended Consequences When you build a platform for customers to become market makers, you need to be prepared for unintended consequences. In the first version of Zopa’s matching engine, a few lenders quickly figured out that if they offered a low interest rate, they would not only lend their money out first, but they would get a much higher interest rate than the one they had offered! Here’s why: Lenders made offers of money at the interest rates they wanted to receive. Rates for money on offer typically ranged from 5 percent to 9 percent and each lender’s offer was divided into 50 micro-loans to mitigate against bad debt. Borrowers were then offered enough micro-loans to fulfill the amount they wanted to borrow. And while they were offered the cheapest set of micro-loans to fulfill their loan, the whole loan (and all the micro-loans within it) was priced at the same rate as the most highly priced micro-loan within the set. In this first version of the exchange, a few lenders quickly figured out that they could offer money at a low interest rate—say 1 percent—in order to move to the top of the lending queue, yet be likely to receive a rate that was 6 percent or even better. Within six months, Zopa revamped its matching engine and changed the algorithm so that each lender receives exactly the rate they offer into the markets, and borrowers receive a blended rate of all their lenders’ rates. The result for lenders is that they will no longer be able to game the system in this particular way. They will, however, receive the interest rate they expect. The result for borrowers is that they will be able to get better rates.

Giving Lenders More Control. At the same time, the new matching engine gives lenders more control over the two factors they care about the most: • What rate to offer in order to get a match • How quickly their money will be lent out

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Some lenders care the most about the interest rate. They’ll hold out for a long time in order to get a higher rate. Others want to put their money to work quickly, get repaid quickly, and go back into the market with more offers.

Priming the Pump: Luring More Borrowers and Lenders to the Market By November 2005, after eight months, the Zopa team members were confident that they had shaken the bugs out of the exchange and were ready to attract more borrowers and lenders to grow the exchange. They used the pre-Christmas season as a hook to attract borrowers—“Don’t put Christmas on a card! Take out a low-cost loan at Zopa!” And then, to attract lenders to offer attractive low rates, they offered a Zopa bonus of 2 percent interest for the lenders who offered to lend money for three years to borrowers at a rate of 4.9 percent or less before midnight on December 31st. This strategy worked well to attract both lenders and borrowers. • There were a lot of loans consummated at 4.9 percent. • There were a lot of loans being made by the same people at much higher rates as well. As of mid-December, the ratio of lenders to borrowers in the Zopa exchange was three to one. The total amount of money available in both the A (borrowers with a solid credit history) and B (borrowers with a slightly tarnished record) markets on an average day had increased to £2.5 million. Offering a Referral Fee Zopa also grew its membership through referrals. If you referred a friend to Zopa and that person completes a borrowing or lending transaction, you received a £25 referral fee.

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Early Results Within its first nine months of operation, after a soft launch, Zopa attracted 45,000 members, many by word of mouth and from the very high level of interest in Zopa from the press, TV, radio, and magazines like Vogue and The Economist. Zopa established liquidity within its first two months of operation—with an average of £2 million available for borrowing on any given day. As Zopa was increasingly attracting new members through partnerships with, for example, lastminute.com, Yahoo!, and USwitch, and as it was increasingly appearing in best-rate tables and being discussed by personal finance commentators, the cost of attracting new, transacting members was tumbling. The number of loans arranged through Zopa was increasing by 80 percent month-on-month. More than £500,000 of loans were arranged in December 2005—and not a single borrower had missed a single payment. By April 2006, over 63,000 members had used the service and the missed-payment percentage was only 0.05 percent.

How Zopa Makes Money Since its inception, Zopa’s primary source of income has been the commission it receives from its insurance underwriting partner from selling Repayment Protection Insurance to borrowers. It also, officially, had a 1 percent charging structure for borrowers, but this fee had been waived up through April 2006. Instead of the borrowers’ fee, a 0.5 percent charge is now being levied on both borrowers (as of April 6, 2006) and lenders (as of April 13, 2006). However, founding members of the service will still be able to lend fee-free for life.9

What’s Next for Zopa? The Zopa team is working on Release 2.0 of the Zopa.com Web site. The underpinnings of the marketplace and the matching engine will remain the same. But the Web site and the exchange will become even simpler to navigate and use. At the heart of the Web redesign will be

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support for the two key scenarios: 1) borrowing money on my terms to accomplish my goals; and 2) investing money safely, on my terms, to grow my income. Borrowers and lenders both need even better tools to help them optimize their offers. Zopa will be opening up new markets soon. We expect these markets to be organized not only by creditworthiness (which is currently supported), but also based on other criteria that lenders value. For example, many customers have said that they’d like to lend to “people like me—Indian entrepreneurs,” or “single working moms,” or “gay professionals,” or “people in my neighborhood,” or to people with certain aspirations and causes, such as growing a business or supporting the environment. Zopa has also been approached by HR benefits managers who would like to offer Zopa to their employees as part of their companies’ investment and borrowing options. So stay tuned—Zopa may be coming soon as an option within your company’s benefits portfolio. In 2006, Zopa has plans to launch a U.S. version of its exchange— one that will conform to U.S. regulations and norms. In late 2005, Zopa conducted customer research in the United States similar to the Discovery sessions they had run in the U.K. before launch. Richard Duvall reported that the researchers found a very close match in lifestyle, motivations, and concerns among freeformers in the United States. Some things will be different. For example, in the United States, it is not common practice for borrowers to take out repayment insurance on loans. So, Zopa will need to find a different value-added offering it can provide in the United States to supplement the 1 percent borrowing fee that it charges now. A competitor launched in the U.S. market just before Zopa was scheduled to do so. Prosper is backed by the same venture capital group—Benchmark. This seems to me to be a violation of trust on the part of Zopa’s Benchmark backers, but Benchmark claims that the U.S. fund and the European fund are separate entities and therefore there is no conflict of interest. Of course, any Web-based business is wide open for others to see and to copy. Prosper looks to us like a fast follower of Zopa. There are some important differences between the two offerings. Zopa splits your

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loan across 50 borrowers; Prosper does not (although it recommends that you diversify your loan portfolio). Prosper started with groups of like-minded borrowers—employees from the same company, people with similar ethnic backgrounds, people who live and work in the same community. The groups are self-forming. Each group has a leader who is contacted if someone in the group is late in paying. If someone does pay late or defaults, the group’s reputation suffers. But the sites look similar to the undiscerning eye, the value proposition is close, the matching engine looks similar, and much of the verbiage on Prosper’s Web site looks like it has been cloned and Americanized from Zopa’s. To his credit, Richard Duvall is undaunted. “Frankly,” he said, “I’m looking forward to facing Prosper in the marketplace.”

The Zopa Exchange Was Predicated on Customers’ Needs and Co-Designed by Lead Customers What the Zopa founders did by taking the idea of an online exchange and creating the Zopa business model is a classic example of codesigning a customer-led innovative business: 1. Identify a new customer behavior and concomitant need. 2. Validate the customer segment, market size, and market impact. 3. Research how other industries were responding to this customer segment. 4. Research opportunities in the financial services industry. 5. Perform deep ethnographic research to truly understand customers’ motivations, behaviors and needs. 6. Engage representative customers in exploration and co-design sessions on their attitudes and needs around lending and borrowing. 7. Recruit “lead” customers to co-design the business model and value proposition, business policies, business processes, Web site, branding, and messaging.

Zopa

Customer Innovation Powers Zopa What did Zopa’s founders do? They identified a unique group of customers with a set of under-served needs. They listened carefully to what these customers cared about and learned how they viewed their worlds. They designed a customer-powered business that enabled customers to perform their critical scenarios—as would-be borrowers and/or would-be lenders. They focused in particular on addressing borrowers’ and lenders’ customers’ conditions of satisfaction and moments of truth as their key design center. They gave customers control over how they wanted to configure their loans or their borrowing. Customers provide the money that is loaned out and borrowed. Customers ARE the business. They make the market. And, as they use and evolve the Zopa exchange, Zopa’s customers have become key change agents in the financial services industry.

TAKE-AWAYS FROM ZOPA Customers have been at the center of the design of Zopa’s business. Here are some best practices we noted. Think about which of these practices are applicable for your business. • Design for and with a very specific audience • Understand their emotional motivations • Build your brand and your culture to mirror the self-image of your target customers • Focus on a critical unmet need • Address customers’ key scenarios • Address customers’ pain points within those scenarios • Monitor customers’ behavior and adjust quickly • Evolve rapidly based on customer feedback

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R U O F R E T CHAP Let Customers Strut Their Stuff Profiting from Customer-Created Intellectual Property

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ost people like to show off—to show how smart and creative they are. In this section, you’ll see how organizations from the venerable and staid—the American Institute of Physics (AIP)—to the new and sexy—Flickr—have created thriving businesses out of content created completely by customers. You’ll learn how companies like Amazon and IgoUgo complement and enhance their primary products with customer-supplied reviews and ratings. There are companies, such as Snap-on, that leverage their lead customers’ expertise by hiring their customers as guides to embed their latest learnings into Snap-on’s diagnostic software. The American Institute of Physics also hires its customers as guides to tag and categorize content to make it easy for other scientists to find what they are looking for. Tripod (now part of Lycos) learned quickly that there is a business model for giving people a place to show off their creativity and points of view. The same human passion for sharing ideas, insights, and private thoughts has fueled the explosion of the blogosphere, which is reinventing journalism.

Let Customers Strut Their Stuff

There are important design principles to be discovered in this section on customers creating content and acting as guides for others:

1. Give Customers a Role in Creating and Contributing Content Most of the companies profiled in this section make their money by providing a place for “publishing” customers’ content. None of them pay for this content, and in one case, customers actually pay the American Institute of Physics for the privilege of having their articles published. IgoUgo and Amazon significantly enhance the value of their offerings with freely donated product reviews and recommendations. The people contributing their opinions on, say, vacationing in Bora Bora, enjoy having a forum for their opinions, and customers benefit greatly from this customer-supplied information.

2. Give Customers Tools to Make it Easy and Safe to Create and Share Content Almost a decade ago, Tripod recognized that not only do customers want to create and share content, they need effective and easy-to-use tools to do so. The company, now owned by Lycos, offered the first tool for easily designing your own Web page. Today, companies like Flickr (part of Yahoo!) have made it easy for photographers not only to post their pictures, but to make their photos available to others. This involves tools to specify digital rights, to specify categories, and to comment about their and others’ photos. The result is an addictive Web site that has generated a creative community of contributors and fans. AIP provides tools for its authors to help them submit their papers in the right format and to let them track the peer review process.

3. Help Customers Find the Recognition they Crave We humans are ego-driven, craving approval and accolades. Amazon recognizes this not only by giving people a mechanism for publishing product reviews, but also by encouraging feedback from those who

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rank the reviews. The American Institute of Physics has made it an honor for customers who are accepted for publication and makes it clear to the scientific community that the published articles are the definitive and authoritative research on the subjects.

4. Recruit Subject Matter Experts from your Customer Community to Build Expertise into your Products And how do the AIP-published articles become the definitive research? The publisher has created an editorial board that acts as referees for the journal, vetting all submissions. Scientists vie for positions on this board. The world of auto mechanics is pretty far afield from scholarly publishing, but Snap-on, supplier of auto repair tools and diagnostic systems, also relies on industry experts to vet the company’s content.

5. Encourage Customers to Add Value to your Content by Acting as Guides for Others As in the Amazon and IgoUgo instances, customer-provided reviews significantly add value to the customer experience on those Web sites. Equally valuable is having customers categorize and “tag” content to make it easy to find and so that the results are actually what you are looking for. All AIP-published research is carefully tagged by customers/experts using a standard classification scheme. Flickr allows customers to group and organize their photos in many different ways by allowing each photo to have multiple tags. Even more value—and creativity—is added by allowing others to assign tags to your photos.

6. Pay Attention to New Trends in Customer-Provided Content and what that Means for your Company You never know where that next great idea for a business will come from. But a great way to start is by observing new or growing trends in people’s behavior. The exploding growth of the blogosphere, and the human need to share ideas and get feedback on those ideas, proves

Let Customers Strut Their Stuff

that people want to strut their stuff and be recognized for their ideas and creativity. This free network of personalized viewpoints is now impacting the world of journalism by offering new insights into world events, but also potentially promulgating misinformation about the same events. Good or ill, this massive trend is something to watch to see how it might impact your company and your business model.

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Tripod Built a Multimillion-Dollar Business from Customers’ Creations Early “Publisher” Shifted to User-Created Content

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n 1997, Bo Peabody gave me a tip I have never forgotten. “Let customers strut their stuff!” Back then, 26-year-old Bo was the creator and founder of Tripod, a Web site that he designed for college kids and recent grads like himself who needed help learning about the basics of life after college: How do you get a job? How do you save money? When should you move in with your girlfriend and when is it better to keep separate pads? Should you rent an apartment or buy a condo? Should you buy or lease a car? What kind of insurance do you need? There was no good place for college kids to get the answers to these types of questions. College classes didn’t address these issues. (You definitely didn’t want to ask your parents!) Magazines for young adults, like Teen, People, Rolling Stone, and YM, missed the mark. So Bo created Tripod to provide “Tools for Life” for college-age kids. Bo Peabody’s original business plan was to attract lots of college

Tripod Built a Multimillion-Dollar Business

kids to the Tripod.com Web site via a magazine distributed on college campuses, and to generate revenues by selling ads to businesses that were trying to reach the young adult market—car manufacturers, insurance companies, banks, and so on. That’s what he did, reasonably successfully, for the first two years of his fledgling business. What Bo stumbled upon in evolving Tripod was that it wasn’t the carefully-targeted content that drew the most traffic and buzz. The magic formula that turned Tripod into a phenomenal success was letting customers strut their stuff. Tripod attracted one million customers in twenty-seven months— customers who returned to the site several times a week and brought their friends, generating millions of dollars in revenues from fees and advertising. Bo Peabody and his co-founders sold Tripod to Lycos for $58 million in stock in 1998. Here’s what they did.

Tripod Offered the First “Design Your Own Web Page” Tool At launch, the Tripod site included a résumé builder. Within the first six months, responding to suggestions from his customers, Bo’s team launched an easy-to-use “Design Your Own Web Page” wizard. All of a sudden, thousands of people—not just techies, but all kinds of folks—began to create their own Web sites. Up until 1996, only corporations, universities, and a handful of technology-savvy individuals had Web sites. Tripod’s do-it-yourself Web page builder and hosting model changed the landscape of the Internet forever. Instead of sporting a few thousand well-funded corporate Web sites, the I-way suddenly sprouted tens of thousands of personal billboards.

Customers Chose Ads or Membership Fees Soon, Bo Peabody and his young team realized that the customercreated Web sites were taking up a lot of disk space and beginning to cost the small firm serious money to host. So Bo asked his customer community how they’d feel about a new business model: What if they sold ads to defray the cost of “free” Web pages? If Tripod customers wanted ad-free Web sites, they could pay an annual fee. If they wanted

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free Web sites, ads would appear. Tripod’s customers were fine with that idea. Many members thought it was cool to have their Web site “sponsored by” BMW or Sony. Others didn’t care one way or another, and were happy to trade off ads for free Web site hosting. About 10 percent opted to pay for ad-free sites.

Personal Diaries, Travelogues, and Résumés The early Tripod-hosted Web pages were résumé sites—a place to post accomplishments and interests. Many were diaries and travelogues. Others were passionate “zines” on focused topics. They all had one thing in common: The subject matter was created by, and revolved around, each Web page’s creator. Each site was saying “Let me show the world who I am and what I care about.”

Customers Visited and Updated Their Personal Web Sites Often Tripod was the forerunner of the blog phenomenon that has since permeated the Web. Although it wasn’t possible at that time to “comment” on someone else’s Web page, people did enter into spirited discussions in Tripod’s discussion forums. The Tripod community grew stronger and more vibrant as more and more customers revealed more about themselves through their personal Web pages. During the late 1990s, Tripod’s parent, Lycos, also snapped up Angelfire, an online Web hosting and community site for teens, Wired .com, the digital news companion site to Wired magazine, and a few other Web properties. Tripod and Angelfire, which run on the same platform, remained the core of the company’s Web site hosting and customer-community business, drawing millions of members back to the Lycos portal site several times a week. Members came to update their home pages and to see what cool things other members had done. Lycos’s value and reputation had peaked by 2000. At that time, Lycos was the third most visited portal in the United States, with a strong presence in both European and Asian markets. That’s when Lycos was acquired by Terra Networks, a Spanish Internet service

Tripod Built a Multimillion-Dollar Business

provider (at the time a subsidiary of Spain’s Telefonica Group). Terra paid $12.5 billion in an all-stock deal. Terra Lycos had operations in 37 countries, including North America, Latin America, Asia, and Europe. Unfortunately, Lycos did not do well in the hands of its Spanish owners. Lycos was acquired in October 2004 by Daum Communications, a South Korean Internet media group. Lycos’s traffic and revenues have continued to fall, yet as of early 2006, Tripod and Angelfire member sites combined still accounted for more than 23 million monthly unique visitors. What became of Bo Peabody? When he sold Tripod to Lycos, he was paid in stock—stock he was required to hold on to for two years. During that two-year period, the value of his shares increased tenfold! He founded his own venture capital firm, Village Ventures. And he wrote a book entitled Lucky or Smart?,1 chronicling his experience as a young entrepreneur.

From Customer-Created Web Sites to Blogs to “Planets” In October 2005, Lycos launched its next-generation tools for customers—mostly teens and tweens from around the world—to use to strut their stuff. Called “planets,” these user-built sites include tools for users to create and contribute photos, blogs, slideshows, animation, special effects and “TV shows.” Each user-created planet has its own “skin”—a customized look and feel. You can create your own skin and contribute it to the community or reuse a skin that someone else has created. Users create and share TV shows out of digital photos and animation with special effects like swipes, fades, rotates, and spins, as well as animated captions and soundtracks. You can add buddies to your planet, linking their planets to yours. And you can “scrap” (as in scrapbook) any public item from anyone else’s planet to use on your own planet. It’s too early to tell whether Planets will take off. But my hunch is it will. The animations and graphics that (mostly young) people have been posting in their TV shows are pretty amazing! Although MySpace has the current lead in the U.S. market, there are many Asian teen community sites, like those from which Lycos’s

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Planets has evolved, that offer better tools and have the most active users.

TAKE-AWAYS FROM TRIPOD: LET CUSTOMERS STRUT THEIR STUFF What 26-year-old Bo Peabody learned back in 1996 is a lesson that most businesses still haven’t figured out. The way to attract customers to your business and your products is to give them a role in creating and contributing. The best way to do that is not to solicit their input about your products and services, but to enable your users, fans, prospective customers, and actual clients to show off their creativity, their expertise, their insights, and their points of view. If you play your cards right, as Bo Peabody did, you’ll find that your end users—your paying customers—will create your content for you. In fact, you can even build a multimillion-dollar business around customer-created content. Whether customers are writing political essays, composing and performing songs, telling jokes, or designing new homes, they love to be “published,” acknowledged, and heard.

American Institute of Physics A 200-Year Tradition of Publishing Customers’ Content

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on’t assume that only kids want to strut their stuff. It’s human nature for people to want to share their creations, their ideas, their accomplishments, and their brainchildren. Also, don’t assume that the only business model for profiting from customers’ creations is to sell advertising. You can also sell customers’ contributions, with their blessing. Take scientific and technical journals, for example. Scientific, medical, and technical journal publishing is a 200-year mature $12.5 billion annual global business. Who creates the content that’s published in these scholarly journals? The customers do! That’s right, the authors who submit their research for peer review, acceptance, and publication to scholarly journals are the most important customer segment for these publishers. Without this customer-created content, the journals wouldn’t exist. The authors (or the institutions that employ them) actually pay for the privilege of being published. Those author payments defray some of the costs of publication. Of course, there are other customers as well: the institutional librarians who purchase subscriptions to the journals for their clientele, the individual researchers who follow the field and who may

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subscribe to a journal or may simply buy rights to a particular article of interest. But the most forward-thinking publishers—like Tim Ingoldsby, director of business development for the American Institute of Physics (AIP), a publisher of scholarly journals in the field of physics, astronomy, etc.—have long recognized that the authors who create the journals’ content are the most important customer base of all. AIP is both a publisher and a service provider of publishing services to other publishers. AIP is a not-for-profit organization serving the physics community. It publishes eleven well-respected scholarly journals, including Physics Today, the Journal of Applied Physics, and the Journal of Chemical Physics, containing more than 250,000 articles. And AIP’s online publishing platform, Scitation, hosts more than 1,000,000 articles from 150 scholarly publications for twentyone learned society publishers in fields including physics, chemistry, geology, engineering, acoustics, and other sciences.

Peer Review and Acceptance in a Journal Is Critical to a Scientist’s Reputation End customers—subject matter experts—handle the entire peer review and acceptance process. Each journal article is submitted by a customer/researcher, reviewed by customers/researchers, and approved for publication. Who are the expert referees who decide whether or not a scholar’s work is significant enough to be published? Tim Ingoldsby explains, “Scientists must first create a body of work by publishing in journals, then they apply to the editor or editorial board to become referees for the journal.” Being published in an AIP journal is a prestigious event for scientists and a major milestone in their careers. So it is customers who create, vet, and approve the content in scholarly journals. Today, drafts of most of these articles are made available online well before official journal acceptance and publication. Many researchers post their articles for peer review on their institutions’ Web sites or on domain-specific sites, as well as on their own home pages. By the time an article has been refereed, accepted,

American Institute of Physics

and published in an authoritative journal, the chances are great that it has already been noticed and even cited by fellow researchers in the field. Nevertheless, what the researcher cares about is the prestige of being published in these authoritative journals.

Meta-Tagging Content to Make Research Easy to Find After journal publication, the next major milestone is to have your article found, noticed, cited, and cross-referenced by other scholars. Tagging and classification is the key to making information “findable.” AIP goes out of its way to make it easy for researchers to find relevant journal articles. Each article is carefully tagged by customers/experts (acting as knowledge guides) using an ever-evolving Physics and Astronomy Classification Scheme (PACS). AIP recruits and pays physicists to evolve and maintain this official taxonomy. Great tagging and classification helps researchers find articles that are important to them. AIP also makes it easy for customers to subscribe to feeds of abstracts of new articles in their field.

Summary As a scholarly publisher, the American Institute of Physics recognizes the importance to authors of being published in an authoritative journal. AIP provides tools to help authors submit papers and tools to let them track the peer review process. AIP adds value to the author’s work by carefully classifying it with the terms that are the ones most likely to be searched by others in the field.

TAKE-AWAYS FROM THE AMERICAN INSTITUTE OF PHYSICS What can we learn from scholarly publishers like the American Institute of Physics? First, notice that customers’ content can become your content. Why invest in creating content when your customers may be delighted to do it for you? Why not give them the tools they can use to make it easy for them to create content for you to use, make available to others, and/or re-sell (as in the case

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of journal publishers)? What do customers ask in return? They want recognition—recognition by being published by an authoritative source, and recognition by being cited by other researchers. They want you to make it easy for others to find and appreciate their work. They want you to spread the word as widely as possible.

Harnessing Customers’ Contributions as Guides, Problem Solvers, and Reviewers Customers Will Contribute Much of Your Content, If You Make It Easy for Them to Do So

Snap-on Hires Lead Customers as Subject Matter Experts Snap-on is the world’s leading supplier of tools and diagnostic systems for professional automotive technicians. Each year, the worlds’ automobile manufacturers introduce at least fifty new or redesigned car models. Snap-on Diagnostics works closely with the manufacturers to get the information they need to make sure that their electronic diagnostic equipment will work with the new models as they come out. Top Technicians Write and Update Automotive Diagnostics To stay on top of the diagnostic game, however, Snap-on Diagnostics relies on real-world automotive repair experience. Snap-on Diagnostics

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hires top drivability technicians for each make of vehicle their products cover, to create and update the troubleshooting logic that powers their diagnostic systems. Every day after 4 pm, top-notch technicians begin reporting for duty at the company’s diagnostic facility in San Jose, California. These technicians have already put in a full day’s work repairing cars. Now they’ll spend a few extra hours taking what they’ve learned on the job and turning that knowledge into real-world diagnostic solutions that will be embedded in Snap-on’s products, combining information with instrumentation, and bringing the repair information where the technician needs it, to the point of repair. These in-house customer experts also test and critique many of the new products Snap-on is developing. As a result, they both contribute to and improve new product ideas.

Cisco’s Customers Solve Each Others’ Problems Cisco Systems was one of the first companies to harness customers’ contributions to solving each others’ problems. This story, which I originally told in 1998 in Customers.com, bears repeating. It’s a classic example of harnessing customers’ willingness to help each other solve problems, and, as a result, to build a valuable knowledgebase of customer-generated solutions. Much of Cisco’s success in doing business over the Internet stems from a set of decisions made back in 1993 and 1994, when Doug Allred was the company’s vice president for customer advocacy. He had seen how fast sales of internetworking routers were increasing. He was concerned about the company’s ability to provide adequate technical support for all these new customers. As he plotted the run rate for the company’s sales and then calculated the number of technical support engineers he’d need to service all those customers, he realized he was in trouble. He’d need to grow from the few hundred support engineers he had to an army of close to 10,000—that was every engineer west of the Mississippi! It also hadn’t escaped Allred’s notice that the Internet itself was becoming a useful tool for customer support. Since 1989, Cisco customers had been downloading software from the company’s Internet

Harnessing Customers’ Contributions

site. By 1990, customers could also access Cisco’s bug report database via the Internet. So they could quickly find out whether the problem they were having was a known bug or something that needed to be reported.

Harnessing the Customer Community to Provide Customer Support In 1993, Doug Allred put a call-tracking system in place so that the company could monitor each technical support call that came in, find an answer to the customer’s problem in a database of known problems and solutions, and track that call to completion. What was unusual about the approach Doug Allred’s team took, however, was the fact that it designed this system to run both as a telephone-based call center and as a virtual call center via the Web. Of course, the Web was in its infancy in 1993, but as one of the pioneering suppliers of Internet technologies, Cisco was plugged into the action. This virtual call center application started out as a typical help desk service for Cisco’s “enterprise customers.” A customer would visit the Web site with a question or a problem, search the database to see what similar situations had been encountered in the past, and see how they had been resolved. Then, if he couldn’t find an answer to his particular question, he would post the question. Here’s where things got really interesting: Cisco’s technical support staff would begin to work on finding the answer to the customer’s question, but miraculously, so would other Cisco customers! Whoever came up with the answer first posted it. As soon as any answers began flowing into the database, an e-mail was triggered and sent out to the customer, alerting him that answers awaited him at the Web site. Allred had found a solution to the technical support engineer gap: Let customers, all of whom had been trained and certified by Cisco, help one another out. Cisco called this customer support Web site Cisco Connections Online (CCO), and it was an absolutely vital resource for the company, its customers, and its channel partners. By 1997, an average of 4,500 technical questions were answered each week in CCO’s Open Forum. And each week, those Q&As were polished and added to the company’s growing technical base.

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As Cisco’s business grew by leaps and bounds, the call center didn’t have to expand proportionately. Customers were happy to go help themselves on the Web site first. Most important, Cisco had succeeded in creating an environment of trust—the most important ingredient for fostering community. Today, Cisco’s formal site for customers helping customers is called the Networking Professionals’ Connection (NetPro). Between 2,500 and 3,000 new questions and answers are posted each week, and almost 18,000 weekly visitors find answers without even having to ask.

Amazon Uses Customers’ Reviews and Ratings (and Transactions) to Power Its Success Amazon.com is another e-commerce poster child. Take a fresh look at Amazon.com and you’ll see that a huge percentage of the content on Amazon’s Web site is contributed by customers, while the basic product information is supplied by other “outsiders” (the book publishers and the suppliers of the other goods that Amazon sells). Customers review products. Customers offer their “favorites” lists to one another. Customers aren’t paid or rewarded for writing reviews or rating products on Amazon, or for creating and sharing their favorites lists. But hundreds of thousands of people have contributed content to Amazon. And, of course, Amazon’s famed recommendation engine is able to provide recommendations that “other customers who bought this, also bought that,” based on the clever use that Amazon makes of its huge database of all the transactions its customers are doing all of the time.

IgoUgo: Online Travel Business Based on Customers’ Content IgoUgo is one example of the growing number of Web businesses that are based entirely on customer-contributed content. Founded in 2000 by Tony Cheng, Jim Donnelly, and Rajib Ghosh, the vision for IgoUgo was “a Web site by and for the people.” It’s a Web site with nothing but first-hand travel information provided by travelers themselves— reviews, information, advice, and stories. People write these reviews

Harnessing Customers’ Contributions

because they want to share their experiences with family and friends, and they are also happy to share them with strangers. They like offering advice and guidance. They want others to avoid the bad experiences they had and to gain from the good experiences. The other people who contribute content are locals. Not only do they offer up their favorite out-of-the-way places, they also often offer to meet travelers, to show them around, and to share a meal or an evening out with them. Travelers rate and review hotels, restaurants, and activities (golf, snorkeling, museums, and so on). Travelers submit travel journals, which include their impressions, their photos, and their suggestions. All journal submissions are actually checked and rated by an IgoUgo editor, in order to ensure that the entries are high quality, grammatically correct, and not offensive. Photos are checked for quality as well. Travel agents or other experts may also participate on the site. Their advice is separated out and their services may be featured. Now a subsidiary of Travelocity, IgoUgo makes money through advertising and partner programs. As of early 2006, there were 350,000 active members contributing content to the IgoUgo site, covering 4,000 destinations around the globe, ranging from Bali to Sharm el-Sheikh. More than 300,000 reviews had been submitted (and checked), and members had posted more than 200,000 photos from their travels. Members who post reviews and travel journals receive “GO Points” that are redeemable for travel and other rewards.

TAKE-AWAYS What kinds of expertise would your customers be willing and happy to provide to one another? Do they already answer each others’ questions? Do you make it easy for them to do so? Do you capture their questions and answers, and make sure that they’re kept available for other customers who may have the same issues? Do you harness customers’ mutual problem-solving instincts? Do you recruit lead customers and subject matter experts from your customer community as “consultants” to build their expertise

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into your products, the way Snap-on does by hiring the top automotive technicians to build their knowledge into its diagnostic products, or the American Institute of Physics does in hiring physicists to correctly categorize information? Do you invite customers to act as guides? To rate products, to write reviews, to submit their own photographs, to log their own experiences? If so, have you succeeded in building a vibrant community of active contributors (like Amazon)? If not, perhaps you should encourage this behavior by offering points and/or running contests, the way that IgoUgo does and many other such sites that are built on customers’ contributions.

The Blogosphere Customer-Created Content Run Wild

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he blogosphere is a giant customer-led innovation. Weblogs— online public journals, now called blogs—have been springing up since the late 1990s. Customer-created content is reinventing journalism. Thanks to blogs, more people are communicating publicly than ever before in the history of the world. Unlike broadcasting, or even podcasting (time-shiftable narrowcasting), blogging is, by definition, a social and interactive phenomenon. To create a blog is to invite comments by others. Most (but not all) blogs build on, link to, and comment upon other bloggers’ contributions, as well as on news, cultural, or real-world events. The blogosphere is reshaping how we communicate with one another, how we make sense of the world around us, and how we take action. To ignore the blogosphere as irrelevant to your life or to your business is to ignore the rise of customers as creators and as shapers of the future. By contrast, if you realize that the blogosphere gives you an excellent window into what customers, end users, and lead users are doing and thinking all over the world, you can harness those customers’ contributions as they emerge. Anybody can be a blogger. The diversity of bloggers—by age,

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ethnicity, geography, and interests—is immense. According to Technorati, a service that tracks blogs and links, the blogosphere continues to double in size every five months. As of March 2006, Technorati was tracking 30.1 million blogs (which is nowhere near the total out there!). According to its statistics, “a new weblog is created every second of every day. Technorati tracks about 1.2 million new blog posts each day, about 50,000 an hour. 13.7 million bloggers are still posting three months after their blogs are created.”1 (In other words, many people start a blog but don’t keep going after the initial thrill subsides.)

Two Business Model Enablers: Keyword-Supported Content and Innovations in Licensing Intellectual Property It’s entirely possible that creative writers, photographers, musicians, and videographers wouldn’t have been quite so eager to share their creations with the rest of the world if two important business enablers hadn’t come of age at the same time that the user-led blogging phenomenon began to take off.

New Advertising Models Empower Customers as Creators How can so many people around the world afford to contribute their scarcest resource—time—to self-publish day in and day out? Many blogs are partially “funded” by online ad placement through Google AdSense, Yahoo!’s Content Match, and other similar ad programs. Businesses purchase keywords, and their ads appear, not only on Google or Yahoo!’s own sites, but also on a variety of blogs whose tags and/or topics match the advertiser’s keywords. If you’re blogging about investments, the ads that will turn up on the borders of your blog will probably be related to investment options or investment advice. Every time a reader clicks on an ad, the blogger earns a share of the advertising revenues. Many blogs also use more prominent sponsorship ads. The blog offering investment advice might feature an advertisement for a BMW or a Porsche. Advertisers tend to rely on blog ad placement specialists such as Blogads or Adbrite to match their ads with the correct blog

The Blogosphere

content. Blog ads also need to be carefully written to appeal to the members of the microcommunity who are interested in the topic(s) being blogged. Many blogs are informal. Many are humorous or iconoclastic. The ad copy needs to reflect the tone of the blog in order to be acceptable to the readership. In short, the ability for end users/customers to generate revenues from posting and sharing their own creations has helped to unleash customers’ creativity. Of course, those people who find they can support themselves through the ad revenues and sponsorships associated with their creative contributions eventually turn professional—in much the same way that amateur athletes who attract big sponsorship deals with companies like Nike, etc. are no longer, strictly speaking, amateurs. For most customer creators, the ad revenues are incidental. Making money is not the reason they feel compelled to share their insights with the world. It’s more important to be seen, heard, and acknowledged. Yet the ability to generate revenues through click-throughs associated with their blogs, their photos, their music, or their movies has made it possible for many people to contribute their creations.

Intellectual Property Rights are Becoming Better Defined Thanks to Customer-Contributed Content and Creative Commons Licenses The second enabler relates to intellectual property protection for the creation of derivative works. Lawrence Lessig has created and promulgated a variety of Creative Commons flexible licensing models2 for intellectual property which are alternatives to full copyright protection. These licenses allow the creators of intellectual property to manage the rights associated with their works. In particular, creative commons licenses let content creators permit their creations to be included in derivative works, with or without attribution (usually with!), and to permit or prohibit commercial use (e.g., resale) of those derivative works.

Customers Are Becoming Journalists The rise of “citizen journalism” has created quite a bit of debate. Do grassroots and amateur bloggers and opinion voicers improve the

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quality of the news and analysis that’s available to us? Or does the blogosphere amplify misapprehensions, spread misinformation, and promulgate lies faster and more permanently than the traditional news media? My personal opinion is that blogs do both. Blogs often challenge the commercial mainstream media, pointing out discrepancies, and offering opposing analyses. Blogs often also spread misinformation more rapidly than ever before. Veteran blog expert John Hiler provided a thoughtful and useful description of the relationship between the blogosphere and commercial media in 2002 in a blog post entitled: “Blogosphere: The Emerging Media Ecosystem.” In it he said: The blogosphere is pioneering a new form of iterative journalism. First, stories are increasingly being broken by

Source: John Hiler, “Blogosphere, The Emerging Media Ecosystem,” May 28, 2002, Microcontent News, http://www.microcontentnews.com/articles/blogo sphere.htm

The Blogosphere

weblogs doing grassroots reporting. The best of these stories are filtered through a combination of Blogdex, community blogs, thematic blogs, and blog indices. Savvy journalists— both blogging and non-blogging alike—take the best of these blog-inspired story ideas and write articles. Then bloggers link to the most interesting articles by journalists, fact checking and filtering the stories. As new developments break in the story, they’re picked up by bloggers and journalists alike . . . and the next iteration of the Media ecosystem begins anew.3 In the same post, John Hiler discussed the downside of iterative journalism and the fact that the iterations can often reinforce, rather than correct, misinformation. By the time the truth is uncovered, the bloggers have usually moved onto some other hot topic. Very few bloggers actually bother to correct earlier misinformation—just as, in the traditional media, the errata notice (when and if it appears) is usually buried in small print in a later edition.

End Users Tag Content, Adding Their Own Meaning and Categories One of the most important functions of commercial publishers— newspapers, magazines, technical journals, book publishers, broadcast media, and music labels—is categorizing and classifying the content they publish to make it easy for end consumers (readers, listeners, viewers) to know ahead of time what genre it is (comedy, adventure, breaking news, symphony), what the topic or subject is, who the author, composer, and performers are, and when it was first published, performed, and so on. These descriptions and classifications are referred to as metadata (the data about the data, or more understandably, the tags that describe and characterize the content). When users create content, the burden of classification and tagging falls on their shoulders. Naturally, end-user contributors don’t necessarily follow the same rigorous taxonomies or classification schemes

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that professional publishers have built up over generations. (See our description of the expert customer–generated and maintained physics taxonomy at the American Institute of Physics).

Users/Creators Tag Their Content to Make It Easier to Find When you create a blog post, the software you use will automatically capture the basics: the date you published the post, the title you used, and your name as the author. But it’s up to you, the author, to decide what additional tags to use to categorize your content so that other people (and automated tools like search engines, tag aggregators, and newsfeeds) will spot items of interest to them. When you register and/or update your blog with any of the aggregators (Technorati, Wink) or search engines (Google, Yahoo!, etc.) you can add additional tags or categories (business, marketing, technology, etc.).

Users/Readers/Consumers Tag Content to Make Sense Out of It But it’s not just the users-as-publishers who create tags in order to classify their information. Information consumers—readers, listeners, viewers—also tend to categorize, classify, and organize information in ways that make sense to them. So information consumers also tag content. End users typically add their own tags/descriptions as a way to organize information into categories that are meaningful to them.

Summary In the blogosphere, customers contribute content, challenging and building upon journalists’ work. Customers compete with traditional media for ad revenues. Customers add value to information by tagging and categorizing it.

The Blogosphere

TAKE-AWAYS: HOW CAN YOU HARNESS THE POWER OF THE BLOGOSPHERE?

• Track What Bloggers Are Saying about Your Firm and Your Products It’s easy to set up automated feeds that will tap you on the shoulder electronically every time someone mentions your name, your company’s name, or your product’s name(s). Staying in touch with what users, customers, critics, and other influencers are saying about your company and its products is essential.

• Find and Acknowledge Fans and Critics; “Support” Their Blogs End users’ or critics’ blogs are big opinion influencers. Think of them as not-so-free PR. You can get great buzz and credibility from a small mention in a popular blog. But don’t try to buy those mentions with overt sponsorship or advertising. Nor should you lash out against those who criticize your firm on their blogs. What works best is to give bloggers recognition and acknowledgement from you. Let them know you’re reading and listening to what they have to say. Thank them for posting. Ask them if they have any questions. Offer them more access to the inside scoop. This will raise their creditability and their reputation.

• Invite Your Customers to Blog on Your Site Offer them enticements by way of free products or prizes to post pictures and comments about how they use your products, what works, and what doesn’t. For example, skin care products maker, Vichy, solicited its Korean customers to try out its Myokine antiwrinkle cream and to share their results every day with photos and comments. More than 9,000 consumers participated.4

• Put Your Fans to Work! Ask your fans to co-create with you. In early 2006, Showtime Networks, Inc., created quite a buzz around its TV series, “The L Word,” by inviting fans to compete in writing scenes for an episode of the show. Each week, fans submitted their own scenes.

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And each week fans voted on the best scene. The following week’s scene built on the winning scene, and again was voted on. Showtime actually didn’t promise to produce the final fan-written episode (perhaps fearing repercussions from the Writers’ Guild of America). But the network did offer winners prizes, acclaim, and a mentoring session with one of their top screen writers.

• Gain Insights from Users’ Own Blogs You’ll be amazed at how much customers will tell you about their lives and their workplaces. You can engage in virtual anthropology by looking at users’ blog offerings. You’ll find everything from today’s latest fashions from the streets of Toronto, Paris, London, or Shanghai, to pictures of the insides of peoples’ refrigerators. No matter what behaviors or trends you want to track—whether it’s the latest fashions in footwear, or the equipment on peoples’ office desktops, the furniture in their living rooms, or the food on their pantry shelves and inside their refrigerators—chances are you can find a lot of “virtual anthropology” contributed free of charge by business users and consumers from all over the globe. (If you want imagery, don’t limit your searches to conventional blogs, look as well at video blogs and photo blogs, like those found on Flickr.) You can also get expert analysis of users’ blog commentary from companies like Umbria that specialize in analyzing the blogosphere for patterns.

• Participate in the Blogosphere By 2000, any company or organization that didn’t have a Web address was considered as “out of it” as a business without a fax machine or a telephone. Now, the same can be said of blogs. You aren’t credible if you don’t have a blog!

Flickr Attracts Both Amateur and Professional Photographers from Around the World Organize and Tag My Photos, Appreciate and Study Yours

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riends had been telling me about Flickr for months before I finally got around to checking it out. I’m not much of a photographer. My husband tends to be the person in our family who chronicles trips and family gatherings. But when I finally visited Flickr.com, I got hooked. I found the most amazing artistic, professional, and near-professional photos on display for everyone to see, enjoy, collect, and use. Even now that the newness has worn off, I still find myself able to spend a couple of happy hours in an evening browsing through other peoples’ pictures. If these were typical family snapshots, I would lose interest quickly, but the fact is that good photographers from all over the world are using Flickr for two reasons: to store and organize their photos, and to show off. Co-founder Caterina Fake says that the best

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part of the service is finding like-minded shutterbugs and getting recognition for your art. “There’s a real magic to getting reactions to the work you’ve done,”1 she explained.

Strut Your Stuff and Explore Others’ Stuff Flickr is a great example of an online business that is designed to support customers’ creativity and interest in strutting their stuff. Like everyone else, I knew about and had explored a number of the photoorganizing applications and Web sites that sprang into being to help customers manage, organize, and print their digital photos. Web sites like Snapfish (acquired by HP), Ofoto (acquired by Kodak), PreClick (with its PhotoWiki), and Picasa (acquired by Google) all have great features for editing and cropping your photos, organizing them into online albums, writing captions, and creating slideshows, calendars, and prints. But Flickr, a relative latecomer to the online photo business, quickly overtook these more established players to become the place to post and share your digital photos in 2005. Flickr was founded by Caterina Fake and her husband, Stewart Butterfield. It was launched in February 2004 on a shoestring and within a year it had attracted 3.5 million images from 230,000 avid users, of whom many were paying $60 a year to post and store their digital photos on the site. By early 2006, Flickr had more than 2.5 million registered users and 100 million photographs, of which 80 percent were available to the public, and most are licensed under one or more Creative Commons licenses. Here’s Stewart Butterfield’s description of how Flickr came to be: We did not set out to build an online photo sharing site at all. We started our company to build an online massively multiplayer game. The game was built to enable people to meet, share the things they had created, and form communities. By adding photos to this idea, Flickr was born. Flickr started out as a side project that grew like a 97-lb weakling into Charles Atlas. It eventually took over the whole company.

Flickr Attracts Both Amateur and Professional Photographers

We . . . shared it with the blogging community of which we were longtime members. Along with our incredible team of developers, we watched its popularity grow, enchanted by the tremendous creativity [of] the Flickr users, and entered into a constant feedback-loop of new feature development and user feedback on an incredible 24-7 development schedule. We microwaved ramen, eschewed paychecks, and perfected our monitor tans.2 What distinguishes Flickr, and what ultimately made that business worth a rumored $25 to $30 million to Yahoo! when it was purchased in April 2005, is that its founders made some interesting assumptions (based on input from their designer friends in the blogging community) about what customers want to do with their creations: their pictures.

Organize My Digital Photos in Lots of Different Ways The most important innovation that Flickr offered—and one reason that the photo storage service appeals to many professional photographers as well as to serious amateurs—is the fact that, through tagging and grouping, you can organize and share your photos in a lot of flexible ways without making duplicates of any of them—a key customer scenario. Photo albums—the traditional metaphor—don’t really cut it when you have lots of pictures and you want to showcase the same photo in five different collections. For example, you might want to put a great picture of a smiling three-year-old girl in a red sweater in a variety of different collections: Red, Children, Girls, Happy, Family, Sophie, Grandchildren, Toddlers.

Publish My Creations, Subscribe to Your Creations Caterina and Stewart discovered that many customers would be happy to share their photos with the world, not just their friends and family. But sharing didn’t just mean sending a link to a Web site with a photo album. For people on the go, sharing photos includes posting

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their photos (or others’) on their blogs, quickly posting photos from cell phones, subscribing to new photos in a photostream feed, letting others subscribe to your photostream, and letting others add their tags to your photos. As a result of all of this flexibility around posting, tagging, sharing, and subscribing, Flickr has quickly become the world’s largest repository of digital photos.

Adding Meaning through Private and Public Tagging Flickr’s founders realized that there’s fun and inspiration in sorting and organizing other peoples’ photos into lots of different categories. So as you’re browsing other peoples’ photos, you can add them to your “favorites” collection, make comments about them, and add your own tags to them. By adding tags, you’re doing two things: You’re making it easier to find all the photos of a particular type, and if yours is a new tag, you are adding a new distinction or attribute to the photo— a dimension the original creator hadn’t considered.

Protecting Intellectual Property (IP) Watching Flickr in action immediately brings up the question of rights ownership and management. Flickr seems to be addressing IP in a way that’s acceptable to its members. Photos can be completely private (not viewable by anyone), or they can be public, or they can be licensed under any of the Creative Commons licenses (with attribution, with or without the right to use them commercially, with or without the right to make derivative works, and/or share alike—I’ll license yours under the same terms you license mine). One of the things I really like about the way Flickr both protects intellectual property and makes it easy for people to find photos they can post, play with, and include in new designs of their own making (including for commercial use) is the fact that you can search for photos by license type. For example, in March 2006, there were more than 870,000 photos that you could use any way you wanted to as long as you attributed them to their creators. And there were 250,000

Flickr Attracts Both Amateur and Professional Photographers

additional photos you could use in any way you wanted to as long as you didn’t mess with them (e.g., make derivative works).

Building a Creative Community Caterina and Stewart knew how to build true community. Flickr is a place where people do more than hang out together—where they critique each others’ work and co-create together. Many digital photos are posted with all of the camera settings automatically included so that photography buffs can learn from one another. The tone of the site is important. It’s respectful and thoughtful, appreciative, and fun. The tone was set early on by the founders and has been maintained by the community. People make serious comments and suggestions about each others’ photos. They give each other constructive criticism and kudos. Another important element for building a trusted community is the responsiveness of the business to customers’ suggestions and questions. From the outset, Flickr’s founders have been quick to implement customers’ suggestions and to respond to queries (in the rare cases where a fellow customer hadn’t already provided a good answer). Customers were concerned about a decrease in responsiveness after the Yahoo! acquisition, yet judging from the commentary on Flickr’s vibrant online forum, that responsiveness has continued since the Yahoo! acquisition. Probably most important to Flickr’s value (to customers and to Yahoo!) was the buzz it created and the fanatical loyalty that Flickr engendered in its customers. How good is Flickr? I now spend more time on the site— and by extension on my photography—than I do on television, videogaming, and my other hobbies combined. . . . I’m amazed at how quickly Flickr’s staff make changes and fixes, and even more so at how avidly they solicit—and actually incorporate—feature requests from their user base. ~ Thom Watson—Arlington, Virginia, USA

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Flickr, Flickr, Flickr. How do I love thee? Let me count the ways: 1. Beautifully designed site, intuitive interaction, revolutionary usability. 2. Wonderfully supportive community of artists. I’ve never received a comment that was anything less than helpful. 3. Social networking taken to the next level. Yes, you can find others who love “massive attack, snatch, and the count of monte cristo,” without the ridiculous testimonials and fake images on some “other” sites. 4. Ownership that is involved. Caterina and Stewart are regular users, spending time to update the blog, post in the forums, and even cruise starving artists such as myself to leave positive feedback. 5. It’s the first photo community that I’ve been happily willing to part with cash for. I’ve never been motivated enough to visit any online community on a daily basis until now. Yes I’m raving about it. . . . And yes, it is THAT good. Cheers from Indonesia. ~ JavaJive (brandon)—Jakarta, Java, Indonesia3

Flickr’s Platform for Customer Innovation and Development One of the smartest things that Flickr’s founders did was to make it easy for customers to create new designs out of their own or each others’ photos. There are two levels on which you can do this. The first level, which doesn’t require any programming, is to leverage the capabilities of tags and groups to pull together photos with a common theme (squared circles, dog’s noses, black and white, grid patterns, flowers, etc.) and combine them in a “badge,” a slideshow, a poster, a calendar, or any of the types of collages or compositions for which other Flickr users have posted instructions. The second level of inventiveness is enabled by the fact that Flickr’s developers have published the interfaces to the Flickr services. So any developer can write their own programs to manipulate Flickr photos. Here are just a few to whet your appetite. • Flickr Color Picker—Using images from the Color Fields group, just click on a color, use the slider to adjust lightness and darkness, and it will show you photos with that color.

Flickr Attracts Both Amateur and Professional Photographers

• Flickr World Map—When you roll over a city, a search is done through the Flickr tags looking for the most recent photo with tags that match the city and country name. • Flickr photos on your TiVo is an application for the new TiVo HME which can display Flickr pictures on your TiVo • Magazine Cover—Make magazine covers from your Flickr photos. • Flickr Soduku—Play soduku with Flickr images.4 Some of these Flickr-based Web applications are examples of the genre of customer-created applications now commonly referred to as “mash ups.” A mash up is when you combine two or more different Web services into a new application—like monitoring a real time news feed from the BBC and showing pictures from Flickr for each location mentioned in the news.

Summary Caterina Fake and Stewart Butterfield stumbled upon a critical Customer Scenario® as they were designing Flickr: photographers’ unmet need to categorize and organize photos in many different ways. What they also stumbled upon was the fascination and interest that customers would have for viewing each others’ photos. Then, by letting people tag each others’ photos, create thematic groups, and invite others to add their photos to these groups, Flickr unleashed even more creativity. People quickly began assembling their photos into all kinds of new combinations. Flickr empowered the next level of user innovation by making it easy for users to create collages, slideshows, badges, and other ways to combine a group of photos into a static or dynamic work of art. Then Flickr empowered developers to create new applications based on Flickr, and to combine Flickr-based applications with other Web applications as mash ups.

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TAKE-AWAYS FROM FLICKR What tools for creating do you currently provide for your customers? • Do you make it easy for customers to share their creations with others for review and critique (either privately or publicly)? • Do you give them ways to learn from each other and to create new mixes building on each others’ work? • Do you provide them with ways to classify and categorize their own and each others’ creations? • Do you enable them to get to know one another based on shared interests and passions? • Do you give them tools to enable them to create new applications based on your services and their creations?

Why “Mash Ups” Matter Customers Mix and Match Web-Enabled Services from Different Companies to Support Their Scenarios

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n mid to late 2005, the Internet reached a “tipping point.” Internet end-users began doing a lot more than creating and posting their own content (text, music, photos, videos) and commenting (via blogs) on each others’ content and ideas. Internet hobbyists—lead users— began to develop thousands of new applications by combining two or more Web services to create fun and useful combinations. These customer improvisations which build on others’ work are referred to as “mash ups.”

What Are Mash Ups? The term mash up came from the field of music. A musical mash up is a remix of two or more songs into a new piece of music. A Web 2.0 or Web Services mash up is a mixture of applications and data coming from different companies or Web sites.

Musical Mash Ups. Musical mash ups are sometimes also called “bastard pop.” The form originated when musicians would mix audio

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tracks from different songs together, for example combining the a capella vocals from one song with the rhythm and bass from another song, along with the guitar and piano from yet another. The result, when well done, is a brand new artistic creation that is derived from the originals. Obviously, in the music world, musicians and other copyright holders (record labels) aren’t always thrilled when someone creates a derivative work. So in 2005 the Creative Commons licensing organization, which is always on the look out for ways to support users’ creativity while enabling copyright holders to control the uses for their works, created a Web site—ccMixter—that features audio samples that are specifically licensed to be mixed. Many musicians, some of them quite well-known like David Byrne, the Beastie Boys and Chuck D, have contributed remixable versions of their music. At ccMixter, “you can legally download, sample, and remix the music on this site and share the results with anyone, anywhere, anytime. You can also upload your original songs to ccMixter so that other people can remix your work. Download, sample, cut-up, and share—ccMixter lets you interact with music in whatever way you want.”1

Web Mash Ups. A Web mash up is a new application that is created by pulling together two or more complementary Web-based applications and/or data sources; for example, mapping a database of scheduled events onto a map. Every time a new event is added (or removed) from the calendar, the location is automatically added or removed from the map. Maps are popular platforms for mash ups. People have created dynamically updated maps showing traffic jams on their commute to work, crime incidents in their neighborhoods, all the public WiFi locations within a five-mile radius, new sightings of animal or plant species they care about, the locations of public bathrooms, the actual movement of buses along their routes, the impact of global warming on bird migrations. You simply combine a mapping service—such as Google Earth, YahooMaps or VirtualEarth—with any geo-coded data set, and you have an application that updates itself every time the data changes.

Why “Mash Ups” Matter

Photos are great fodder for mash ups as well. Popular photo mash ups include combining news feeds, maps, and a set of tagged photos to provide an interactive view of what’s happening. Weather is another great platform for mash ups. In the United States, NOAA publishes interfaces to its weather services, as do Weatherbug and NASA.

Web 2.0 Technology is Enabling Customers to Mix and Match Services into Custom Applications The spread of this improvisational mash up behavior from music to Internet applications is part of the phenomenon that Tim O’Reilly christened as “Web 2.0.”2 A number of converging trends enabled the Web mash up phenomenon: the emergence of open and humanreadable application interfaces (APIs), using protocols like Extensible Markup Language (XML), the widespread syndication of information (newsfeeds, databases, etc.) through Really Simple Syndication (RSS), and an Internet social etiquette that strongly promotes “opening up” applications and information for reuse and remixing. At the same time (2005), the tools and services for developing and combining Web applications were becoming easier to use. You don’t have to be a programmer to create a mash up. You don’t need formal training. You can figure out how to create your own mash ups pretty quickly by reading a few “how to’s” on the Web. The smartest companies are the ones creating end user–level tools that will enable your grandmother to create her own mash ups! By mid-March 2006, there were tens of thousands of documented mash ups (not counting music mash ups). Even more impressive was the speed with which mash ups were appearing. New mash ups were being registered3 every day. The number and diversity of these highly specialized and often idiosyncratic customer-built applications is amazing. We describe them as “customer-built” because by and large, each of these mash ups was created by the person who actually wanted to experience the functionality. I predict that mash ups will take off at a rate that will surprise even the most optimistic of us. You have only to look at the amazing customer creativity that is already rampant online—from the hundreds of

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thousands of anime videos being created, to the billion-plus tagged photos on Flickr, to the billions of dollars of value being generated by customer-designed cities in Second Life, to the hundreds of thousands of developers who are happily contributing to open source—to realize that mash ups are part of this same outpouring of customer self expression.

Mash Ups Enable Customers to Creatively Consume Your Brand Experience I began daydreaming about different kinds of mash ups I could use. As I did so, I realized that there are lots of opportunities for businesses to create and expose the kinds of end-user consumable data services, monitoring services, marketing services, and event-triggered services that would enable customers to interact with their brands. By early 2006, most of the providers of services that were being consumed and built into mash ups are Web services companies, like Yahoo!, Google, and Amazon; service providers whose Web services have been in use for some time, like FedEx and UPS; or publicly-funded organizations (NOAA, NASA, BBC) and others that feel that it’s part of their mission to make their information easy to consume. But what about your company? Are you publishing consumable services that customers could use to roll their own applications? Many of us do publish RSS subscriptions of information and blogs. That’s the first step. The next step is to publish your application interfaces and provide a couple of sample mash ups to give people ideas about what services you offer and how they could fit into their lives and work. Customer-created mash ups may consume or use the services you provide, but the mash ups themselves are created on the customer’s desktop/palmtop/mobile phone. You don’t control (or want to control) the complete experience. You do control the experience and the branding of the services you provide. So Starbucks’s store locater service would include Starbucks branding (logo) and parameters (e.g., WiFienabled, seating capacity, food assortment). L.L. Bean’s trailblazing service could include white water rafting conditions, cell phone coverage, first aid stations, and bear sightings by other hikers.

Why “Mash Ups” Matter

Financial (and Other) Services. For example, I could create a mash up that would provide my personal net worth meter, combining the daily value of my real estate holdings (Zillow) with the current value of my financial portfolio (Fidelity), and my artwork (Christie’s). I could create a personal budgeting mash up by extending Quicken, not only to automatically track and categorize my bills as they’re paid through a variety of auto-debit and bill-pay services, and to roll any leftover cash into higher interest accounts, but also to monitor the prices of large screen TVs at Circuit City and Best Buy or of the hottest Mac laptop configurations at different retailers. Travel-Related Services. Or, since I’m planning a trip to Uganda and another one to Italy, I could create my personal trip planning mash up, monitoring the fare prices, itinerary options, and seat availability (Expedia, SABRE, British Airways, Alitalia), combined with the changing meeting event calendars (for the commitments I have in both locations, along with the schedules of my traveling companions and those with whom I hope to connect). I’ll want restaurants, museums, and out-of-the-way finds that other customers have found to populate themselves on my maps (IgoUgo, TripAdvisor), along with bus and train routes and schedules, and I’d like to see pictures that other people have taken (Flickr) to show up on my map so I’ll know what to see and what to avoid. Business Services. If I were an automotive technician, I could create a mash up that shows me the actual progress of the Snap-on dealer’s truck in my area, so that I could easily intersect with him and trade in the tool I no longer use for the spiffy one I now need. If I owned a car repair facility, I could maintain my repair shop’s tool inventory database and merge it with the inventories of the tools my staff of technicians personally own (maintained on their Snap-on personal pages), and subscribe to new tools and diagnostics that will meet the specs of the cars we service. If I were in charge of office supplies, I could use mash ups to let me merge and monitor our supplies replenishment from Staples, HP, and Dell and to automatically track promotions and rebates so that we always get the best deals.

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Consumer Services. I could create a mash up that shows me the current Thomas & Friends inventories for my three grandsons (which they would be happy to maintain) along with the new releases as they’re announced. For my garden, I could have my own garden plan and, in addition to receiving catalogs in the mail (White Flower Farm, Burpee), I get new plants plunked into the correct spot (sun/shade, season, zone) in my garden plan.

If You Build Them, They Will Come OK, you’ve probably heard about these kinds of roll your own applications before—what’s different now? Why have they suddenly moved from fantasy to reality? What’s different now is that your company can turn its information and data into services that customers will value. All you need to do is take much of the data-driven information you already have (inventory, order status, promotions, pricing, diagnostics, branch and plant locations, people and vehicle movements, market data, new products, newsfeeds, etc.) and expose that information as services— both for other applications to use (within and outside your organization) and for lead customers to use in combination with services they select from other companies. The trick in building mash up–ready services is to anticipate the different parameters or attributes that might be useful to end customers to use and to make these accessible in ways that end users can rapidly stitch them together. Also, don’t forget to be ready to consume reciprocal data feeds that customers will send back, such as the bear sightings, the trail hazards, the current snowfall, and the beautiful photos they’ll capture, tag, and share as they’re engaged with your brand.

BBC’s Backstage Working Interactively with Lead Users to Support Customer Innovation

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any commercial publishers have responded to customers’ blogging activities by launching their own blogs and by syndicating newsfeeds for bloggers and others to subscribe to for free. Many broadcasters have also been making their audio and TV programs available via podcasts and video feeds—some for free, and others in a pay-per-download model. The British Broadcasting Corporation (BBC) has been among the early pioneers in syndicating its content. The BBC publishes in print, in audio, and in video formats around the world. As an organization supported by government funding and user fees, the BBC is particularly interested in “giving back” to the community.

Soliciting Ideas for Content-Based Applications from Customers BBC’s New Media group began soliciting ideas from lead users about the kinds of applications they’d like to be able to create in an online discussion forum and ideas contest in early 2005. For example, one of the first ideas, from Andrew Bowden, was a “My Commute” service:

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personalized travel news for your commute to work, including feeds from “jamcams” (video cameras set up in Britain at key intersections to monitor traffic jams), news from communities along your train route, etc. Another idea was a “digital knot in a piece of digital string. You heard something on the radio, you hit the button and it creates a timestamp. Get home, upload these timestamps to your computer and view the playlists for the stations you regularly listen too. You could then find the track you wanted. If I heard an interesting point being made, or an interesting idea I could tag it, get home in the evening and pull down the programmes that were playing at that time and jump to the spot I wanted (or maybe into a transcript?). Then I could easily stretch out the time window I was interested in, maybe do more research etc.”1 Ideas began coming in at a rate of about ten good ideas per month.

Empowering Customers to Roll Their Own Content-Based Applications In May 2005, BBC launched a Web services toolkit, Backstage BBC. Matt Locke, the head of innovation for BBC New Media, explained why: “The main driver for launching Backstage was the recognition that users were hacking their own services using our content anyway, and that we should embrace this and provide the tools to make it easier, rather than try and stop it.”2 The Backstage BBC Web site provides access to feeds of BBC radio programs—news, sports, travel, weather, entertainment, and BBC Community—as well as a week’s worth of TV listings. Each of these feeds includes descriptive data, tagged in XML, that allows semi-technical users to create mash ups or to selectively extract the information they’re most interested in. By early 2006, Backstage BBC added TV channel feeds (documentaries, films, programs, interviews, and music). Matt Locke elaborated: Backstage provides RSS feeds of BBC news, weather and other content, and encourages lead-users to “build your stuff with our stuff.” The resulting ideas and prototypes are hosted

BBC’s Backstage

on users’ sites, but linked to from the Backstage site. We’ve seen a huge number of prototypes generated by this community, and we’re starting to go out to the developers and commission some of the prototypes into full services. We’re also experimenting with design challenges on the site (e.g., a recent competition to “hack the tv schedule”). Backstage BBC will provide data, resources and support for users who wish to build prototypes and proofs of concepts using BBC material. We will encourage people both inside and outside the BBC to share knowledge, ideas and prototypes with each other.3 Some of the first prototypes were implementations of the ideas that users had already been posted on the Ideas blog. For example, one user created a “Fetch M4” application that extracts any reported traffic problems on the M4 motorway and sends them to his mobile phone. A TV map application shows what locations will be on TV soon—“Interested in all programs about Abu Dhabi? No problem, it’ll e-mail you about them. Want to know if there’s anything about Canada on today? Sure, not a problem.” Mood news is an application that sorts news into good news and bad news and lets you listen only to good news.4

Leading Lead-User Co-Design Workshops In addition to hosting a Web site to support customers’ creative efforts, the BBC New Media group also sponsors hands on Innovation Labs. For example, in March 2006, the New Media group held three week-long rapid prototyping sessions with teams of developers from new media companies—interactive advertising agencies, Web design firms—in three cities. In each week-long workshop, teams of lead customers and BBC staffers co-designed new media applications based on BBC content. They began by identifying a customer audience and creating personas to represent those customers, placing them in context, and describing their desired outcomes. Then each team brainstormed the application that would address these hypothetical customers’ scenarios. They presented their ideas to members of the other teams,

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who in turn presented to the group at large—a good way to make sure that your ideas stick. They developed prototypes of their applications as well as press releases announcing them to the world. By the end of the week, they presented their ideas to BBC commissioners who were the audience. This has proved to be a great way for the BBC to reach out and engage many of its most creative lead users. Matt Locke commented, “These Innovation Labs are one way for us to encourage and support those who have provided most of the innovation on the Internet—the passionate, highly-skilled and public-spirited developers and designers many of whom volunteer their time and effort.”

TAKE-AWAYS FROM BBC BACKSTAGE AND BBC INNOVATION LABS Instead of protecting its intellectual property and making it hard for customers to create derivative works, the BBC is reaching out to lead users—Internet developers, hobbyists, and enthusiasts—as well as to professionals in the advertising and new media business. In addition to syndicating its radio, TV, and news, weather, music and traffic content for customers to enjoy, the BBC team is actively working with these lead users to identify all the different ways in which people might want to mix and match their content to create new derivative works—combining snippets with other applications like maps and calendars. This co-design activity lets the BBC see what kinds of tags or parameters need to be added to its content streams to make it easy for customers to identify what they care about, to take actions on those content objects, and to recombine them in ways that suit their own needs. Far from diluting BBC’s brand, this activity is actually amplifying it.

How Does Customer-Created Content Apply to My Business?

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n the examples in this chapter, we’ve looked at ways that customers have created and shared content, photographs, and designs, and ways that they have created products for themselves and products for others. In each case, a company has built a viable business model around customer creations. In many of these examples, customers needed and valued community—a community of their peers to validate and appreciate their creations.

Business Models to Think About Challenge yourself to think about different business models that you could leverage for part or all of your business. Customers can create your content. Customers can share their creations with others through your auspices. Customers can help other customers solve problems. Customers can build classification schemes. Customers can offer guidance. Customers can and will share their experiences with one another.

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Some of these business models may be applicable. Others won’t. But before you discard any of them, step back for a moment and ask yourself the questions below.

TAKE-AWAYS: IMPORTANT QUESTIONS TO ASK YOURSELF ABOUT CUSTOMER-CREATED CONTENT AND INTELLECTUAL PROPERTY

• What content/designs/intellectual property would our cus• • • • • • • • • •

tomers be delighted to create? How can we enable our customers to strut their stuff? How can we help our customers gain recognition? How can we help our customers share their knowledge/know-how/creations with others? How can we help others find our customers’ creations? What tools can we provide to streamline our customers’ creative processes? How should we protect our customers’ intellectual property? How can we create a market for our customers’ creations? How can we gain revenues from our customers’ creations? How should we share revenues with our customers? How can we create and sustain community around customers’ creations?

E V I F R E T P A CH Promote and Leverage Open Source Development Attracting and Sustaining Collaborative Communities of Peer Producers

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he open source software development phenomenon has important lessons to offer to anyone interested in harnessing the power of user-led innovation. There are some people who feel that open source software development is not an example of customer innovation. After all, they argue, software developers aren’t customers, per se. They aren’t the end users of the final software product. They are co-producers. I don’t believe such hair splitting is useful. Software developers are the consumers/users of the software they help develop. They aren’t the only end users of the software, but they’re the people who develop and evolve software for their personal or business use. They both produce and consume the software they’re co-developing.

The Open Source Model Is a Creation-by-Customer-Community Model Although the open source model can be said to have its roots with the hacker community and the “free software” movement, it is really

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more about co-creation by a group of people who care about creating an outcome that will benefit them and others, than it is about who profits from the collaborative design and development efforts. Unfortunately, the two concepts—open as in open to inspect and extend, and free as in cost-free to read, redistribute, modify, and use—tend to overshadow the more profound breakthrough represented by the open source model: complex products that are co-created and evolved by a community of practitioners. There are many people in many industries who are attempting to replicate the “success” of the open source software movement, and/or to prevent a similar phenomenon from taking effect in their industries. The open source model is now spilling out into industries in which the final products are not digital in nature, yet the instructions or programs that describe the intellectual property are in digital form. For examples, we’ve found open source car design projects, open source biotechnology projects, open source industrial design projects, and there are bound to be many more. Life sciences is one field in particular in which the open source software model is hotly debated. The substance of many of those debates centers around intellectual property ownership, and around who has the power to profit from the commercialization and distribution of new innovations. There are useful lessons to be learned by watching the practices from the open source development communities. Notice how these communities are structured, organized, and sustained in order to create and maintain complex toolsets and products. Notice that these communities become ecosystems of participating players. Notice that the toolsets and products that are created by each community tend to be used, in turn, to create additional products or specialized solutions. There is no question that value is generated by these co-production communities. How that value is monetized is a fascinating and complex topic, and the answers are likely to vary by industry.

Commons-Based Peer Production Yochai Benkler helped to clarify much of the fear, uncertainty, and doubt around the open source model, in a now famous paper published

Promote and Leverage Open Source Development

in 2002 called Coase’s Penguin or Linux and the Nature of the Firm. The abstract for this paper provides the best overview and summary of the term Benkler coined—peer production: In the past three or four years, public attention has focused on a fifteen-year-old social-economic phenomenon in the software development world. This phenomenon, called free software or open source software, involves thousands or even tens of thousands of programmers contributing to large and small scale projects, where the central organizing principle is that the software remains free of most constraints on copying and use common to proprietary materials. No one “owns” the software in the traditional sense of being able to command how it is used or developed, or to control its disposition. The result is the emergence of a vibrant, innovative and productive collaboration, whose participants are not organized in firms and do not choose their projects in response to price signals. In this paper I explain that while free software is highly visible, it is in fact only one example of a much broader social-economic phenomenon. I suggest that what we are seeing is the broad and deep emergence of a new, third mode of production in the digitally networked environment. I call this mode “commons-based peer-production,” to distinguish it from the property- and contract-based models of firms and markets. Its central characteristic is that groups of individuals successfully collaborate on large-scale projects following a diverse cluster of motivational drives and social signals, rather than either market prices or managerial commands.1

Why Do People Contribute to “Open Source” Projects? I believe that there are three main reasons why software developers participate in open source software projects by contributing their time, talent, expertise, and creativity. First, they usually plan to use

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the resulting product and they want to be sure that it meets their needs. Second, they enjoy the fun of co-creating and of contributing to a group of peers. Third, they enhance their reputations by becoming valued contributors and respected community members.

What’s the Relationship between Commons-Based Peer Production and Innovation?

Commons-Based Peer Production is an Innovation in Business Models. How we think about structuring our businesses is likely to be profoundly changed by the emergence of these communities that are comprised of peers who often work in competing businesses, but who will throw their hats in the ring (often with the explicit backing of their employers) in order to contribute to the community. The Software Industry has been Profoundly and Permanently Altered by the Open Source Software Movement. Open source software is both accelerating the commoditization of software and, at the same time, spawning thousands of new businesses that are able to create valuable, highly-specialized solutions and services for niche markets that would, in the past, have been too small to prove economically viable. The Availability of Open Source Software, and the Surrounding Vibrant and Knowledgeable Communities, Truly Level the Global Playing Field. Without the Internet, these peer communities wouldn’t exist. The global, distributed nature of the self-forming teams that emerge to co-create based on mutually desired outcomes provides both a cross-cultural and a cross-disciplinary melting pot—ideal for spawning true innovation.

Fundamental Design Principles for Open Source Projects In the examples you’re about to read—Mozilla, Digium/Asterisk, CohesiveFT, and Wikipedia, there are a number of repeating themes and principles that have arisen in the open source software world. Many

Promote and Leverage Open Source Development

of these principles may hold true as commons-based peer production models hit additional industries. Essentially, any product category that can be digitally designed—which includes most manufactured products and many bio-engineered products—is a candidate for open source. 1. End users usually participate in open source projects because they intend to use the resulting product; sometimes they do it for fun! 2. Contributors believe in symmetry: they benefit and they contribute. 3. Clear governance (who makes the decisions?) and structure (what processes do we follow?) are critical for success. 4. Meritocracy prevails: those who produce the best work gain the most status and clout. 5. Visibility—of the source code, of the work in process, into the decision-making process—is critical to success. 6. Few people actually design and build; many people improve, debug, and test; many more provide support, offer suggestions, and promote. 7. Intellectual property “belongs” to the community, with various licensing and business models available for creating open or closed derivative works. 8. Open software does not have to be free to procure. It does have to be visible to examine and extend. It needs to be able to be redistributed to others. 9. Successful open source projects generate surrounding ecosystems. They are magnets for continuing innovation.

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A Personal Introduction to Open Source Software Open Source Is, Above All, Customer-Led Development Communities

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ustralian Peter Horne is a well-respected business/technology executive in the financial services industry. Peter is also a member of our distinguished group of lead customers that I fondly refer to as “Patty’s Pioneers.” This group of people has been meeting twice a year for over a decade. Originally they were early adopters of a particular form of software design—known as object-oriented software, and, more specifically, they were all pioneering lead users in the field of distributed object computing which was the precursor to the World Wide Web, and to the highly internetworked world in which we all now live and work. Over the years, as the members of this group have matured and advanced in their careers, they’ve moved from being “geeks” to being business architects as well as savvy technologists, often crossing over to the main business and becoming business leaders. Peter volunteered to offer his personal perspective on the intersection of the open source software model with the evolution of corporate

A Personal Introduction to Open Source Software

software (often referred to as “Enterprise IT”). Here is Peter Horne’s story about his personal experiences with open source software:

Early Exposure to the Helpfulness of the Hacker Community, Contributed by Peter Horne In the early ’90s, before the Internet was everywhere and was still largely in the domain of academia, I was a research assistant and tutor working for a professor in the psychology department at the University of New South Wales. One of the programs I was working on was research into the development of aircraft landing systems controlled by artificial intelligence (AI). As part of the development of the system we needed to be able to capture real data from novice pilots learning to fly on a flight simulator so we could compare how the AI system learned with how real people learned. Back then, it was difficult to gain access to a high end computer workstation with enough computing power to run these kinds of compute-intensive artificial intelligence programs and simulations. (Our computer lab used to rent out time on the Silicon Graphics Unix systems that we used to run the AI simulator to television companies who needed to produce graphics.) So we needed to develop our flight simulator on a cost-effective microcomputer, such as an Apple Macintosh. The World Wide Web was yet to reach widespread use and the major tool that was used to share information amongst academic communities was through Internet News discussion groups. So I asked in a few relevant discussion groups if anyone could help with the tools required to solve this problem. In short order, and exceeding even my high expectations, I soon had the software code for the Mac that would let me do the 3D drawings required to simulate a simple landing strip, the code to work around the control of the Mac mouse and keyboard constraints (suffice it to say that even the visionaries at Apple had not done the user interface research into the best way to standardize the Mac keyboard and mouse in order to control a landing simulator), and suggestions from those in aviation research on some simple algorithms I could implement to simulate the pitch and yaw of a landing aircraft. Within

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a few weeks of gluing these components together, I had a simple wireframe landing simulator that amply met the research requirements. While these components were all free from the academic community, I also made payment in kind. While developing my project, I made some meaningful contributions back to the community, including the debugging of the 3D drawing code. I also helped others with their projects by passing on the ideas and expertise that had been passed on to me. So as I continued in my role as researcher, I was an ardent fan of the concept of “free software.” I could see that the benefits of sharing intellectual property were far greater than the benefits of owning it. I also liked the symmetry of the approach—I was able to be led by the community of experts, and at the (rare) time when I was the expert, I was also able to lead.

Richard Stallman’s Contributions to Preserve the Hacker Ethic What I had experienced were the values of the early “hacker” culture that had existed in the university computer science community from the early ’70s. These values are very passionately held by many, and Richard Stallman was one who devoted himself to “the good” of the hacker community. Stallman started to see hackers move into the commercial world, and in the process lock up, for commercial advantage, software developed at universities. In 1985, determined to recreate the community of co-operating hackers he experienced in the ’70s, Stallman took action and created the GNU General Public License (GPL) as a license for use by hackers that would protect the freedom (free as in liberated so that the user could change, use, share, improve, etc. the product without constraint) of software published under the GPL. While not the first or only free software license, it is arguably the most influential.1

Business Developers Needed Software They Could Build Upon Then I moved over to the commercial world of software development in the finance industry. Not surprisingly, the concept of sharing

A Personal Introduction to Open Source Software

intellectual property was anathema in this world. Serendipity was with me as I had moved into the commercial world at the time when the Internet, a child of the academic hacker culture, was rapidly taking hold in the commercial world. So it was no surprise to me to see that the software development practices and culture of this hacker world were also inevitably carried into, and adopted by, the commercial world. Commercial software developers (whether business and IT managers like it or not) are always more interested in what’s cool than in what is approved. These developers also needed to get their jobs done at a time when early commercial products were often lagging in features and quality. Applications such as the Apache Web server, Perl, and Sendmail were high quality and reliable applications available under various free software licenses that enabled corporate developers to develop early commercial Internet applications. And so corporate developers quickly adopted these tools and also inevitably contributed back to these projects in the symmetric model of free software.

Netscape: Contributed Mozilla and Promoted Open Source All this was happening in the IT backroom; Netscape brought it out in the open in 1998. Most people know of Netscape as the company that invented and popularized the browser. However, perhaps of equal importance, Netscape is also credited as being the first major commercial firm to release a commercial product into the domain of free software. Why did they do it? Netscape was under huge competitive pressure from Microsoft and was worried that Microsoft would “embrace and extend” the open protocols of the Internet away from the open standards to proprietary protocols. Netscape saw the open source model as a way of ensuring that their browser became the platform for standards-based development.2 Eric Raymond, a leading free software protagonist and wellknown author of the paper “The Cathedral and the Bazaar”3 that made the case for why free software projects created a better product than commercial projects, was one of several advisers invited

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by Netscape to help plan the release of the Netscape source code. Seizing on the opportunity presented by Netscape to legitimize the free software movement in the commercial world, Raymond and like-minded colleagues created the Open Source Initiative to champion the benefits of the free software development process. The term “open source” was chosen rather than “free software” to separate their evangelism from the business-unfriendly “confrontational attitude” perceptions associated with the free software movement.4

Open Source Is “Free Software” in a Suit And so “open source” was born. In reality it was mostly a marketing exercise—“free software” in a suit as it were, launched on the coattails of Netscape’s releasing the code of their flagship browser product under a more commercially-friendly (and hence, some may argue, lesser) derivative of the GPL. The marketing exercise worked and open source created a revolution in how the commercial world related to the free software model. History showed that while Netscape helped changed the world for a second time with the release of its browser’s code into the realm of “open source,” Netscape clearly didn’t make any money out of it. And not many others have, either. However, several defining initiatives were born trying. Arguably the largest and most influential open source development platform, SourceForge.net, was conceived by VA Software as an Application Service Provider (ASP) business for open source projects.5 SourceForge.net provides a collaboration and management environment for developers on open source projects. The SourceForge service was made available for free and by early 2006, had attracted more than 100,000 open source projects and over 1.2 million registered users. Many business models have been established around the open source model but open source still belongs to the hacker community. The flagship infrastructure products such as Apache and Linux are

A Personal Introduction to Open Source Software

all directed fairly and squarely by the developer communities that work on them for free for their many and varied reasons. Customers of these products hitch themselves to where the hacker community takes them and as the infrastructure space rapidly converges to standards, they are normally taken to a good place.

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Mozilla Firefox Supporting Innovation and Choice by Moving Software to Open Source

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his is the story of how a commercial software product became an open source software product. It’s a story about what’s required to run a successful open source project, how to spin an open source project out of a commercial software project, and how to harness the power of customers as contributors, guides, and promoters. This is also the story of how to design a well-governed open source community—one that is highly productive and produces high quality software. And, it’s the story of how to harness an open source marketing community. The community of developers that took stewardship over Netscape’s browser software eventually succeeded in their mission: to produce a state-of-the art Web browser that could compete head-to-head with Microsoft’s.

Transitioning Commercial Software to Open Source Software Netscape handed over its then-popular Netscape Communicator to the open source community in January 1998. You may recall that by

Mozilla Firefox

that time, Netscape offered its Communicator (browser and e-mail client) for free on the desktop and sold complementary server-side software to businesses. But Microsoft had engaged and was already winning the browser wars, essentially driving Netscape out of business, by requiring that every PC that was sold with Microsoft Windows include Microsoft’s browser—Internet Explorer. Since both products were “free”—e.g., made available at no cost to the end user—the real battle was over who had control of the customers’ experiences as they surfed the Web. As a way to gain more traction, Netscape offered a version of the source code for Netscape Communicator, including the Navigator browser, to the open source community, ceding control of the software to the community of developers who cared about keeping it alive. “Netscape’s goal was to seed a broad-based development effort within the software development community to produce future browser products as a shared resource,”1 explained Mitchell Baker, who has been the “Chief Lizard Wrangler” of the Mozilla project from its inception. Netscape helped the group set up Mozilla.org, which eventually became the Mozilla Foundation. Throughout the Mozilla project, Netscape provided support, as did AOL when Netscape was acquired by AOL in 1999. The core development team was originally made up of Netscape employees who remained on Netscape’s (and then AOL’s) payroll, although today the Mozilla.org staff does not have any Netscape/AOL employees.

Shifting to an Open Source Development Process According to Mitchell Baker, one of the biggest shifts for the Netscape/ AOL developers who were involved with Mozilla.org was to make all of their communications about the software and its direction open and public. Since many of the original Netscape folks still worked together, it was often easier for them to discuss a technical problem at the water cooler than it was to post their thoughts to the public discussion forums. The other habit they had to learn was to post all of their work in process in a shared code repository so that outsiders

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could see it, comment on it, and if they were permitted, make changes to it.2

Providing a Structured Process for Open Contributions The Mozilla project is one of the largest and longest-running open source development projects. Most of its innovations in governance, policy setting, and organizational structure were big departures from the commercial software development processes that Netscape (and most other commercial software development firms) had used. The Mozilla.org open development process had a few notable characteristics, many of which are now common practice for open source development. Open source development is not, as many might think, a chaotic, frenzied activity. It’s a unique combination of highly structured development processes, visibility, and the ability to harness the goodwill of hundreds of contributors to identify bugs, test code, and offer improvements. As it moved from commercial to open source development, the former Netscape team put a number of important processes into practice.

Public Bug and Issue-Tracking System. The Mozilla.org team built an open source bug tracking system (Bugzilla). This became the heart of the open community process. All bugs and issues are reported publicly (except for security-related bugs which are held close to the vest, so as not to alert malicious hackers). Anyone can both monitor progress and jump in to work on an issue or bug to which they have a solution or a better idea. Automated Build and Cross-Platform Testing. The team also developed an automated and highly visible build and testing process “. . . that builds and rebuilds the software continuously and tests it on multiple platforms to see if and when a new piece of code causes the software not to build,” Mitchell Baker explained.3 Two Levels of Code Review. The Mozilla.org “staff ” decided from the beginning that even though you were an employee of Netscape or

Mozilla Firefox

an expert coder, you wouldn’t be able to submit code unless it had gone through a formal code review. In fact, as the programs became more complex, the team added a second layer of review, or “superreview,” designed to catch architectural or design issues that would impact the overall quality of the final integrated product. Both reviewers and super-reviewers of the code were the most respected developers and the most knowledgeable people in their subject matter.

Earning the Right to “Touch the Tree.” In a company in which developers are employed to write code, they are often permitted to “write” or commit their code to the final build simply because they are the employees. In an open source project, such as Mozilla, you earn the right to commit code based on the acknowledged value of your contributions. Quality Assurance. One of the critical issues in software quality is the thoroughness of the testing process. Starting in 1999, Christine Beagle led the effort to encourage community members to volunteer for testing and QA, to take more authority over the QA process, and to make it a more organized activity. One of the stars who emerged from that volunteer QA community was Asa Dotzler, who was then hired to lead Mozilla’s QA efforts. “With Asa’s coordination we began to see a set of people doing more organized testing of our products. This provided enormous value,”4 Mitchell Baker explained.

Setting up an Independent Entity For the first five years, Mozilla.org was still closely tied to its “parent,” Netscape/AOL. AOL still needed to be able to count on and roll out updated versions of its browser that were based on the open source product. After Netscape 6.0 was released, Mozilla.org gained full control over the timing and functionality of each release. By the time Mozilla 1.0 was released in June 2002, the “full-time” developers in the Mozilla.org community began seriously thinking about life as a completely separate entity from AOL. By 2003 the stars had aligned, and the independent Mozilla Foundation was launched on July 14, 2003.

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The original team included 10 paid employees and a large and growing group of dedicated volunteers—by then, numbering in the tens of thousands.

Rewrote Most of the Code from Scratch; Focused on Browser and E-Mail Between 1998 and 2004, members of the Mozilla.org community completely rewrote the original Netscape Communicator product, redesigning its core architecture and dividing the application functionality up into separate modules: browser, e-mail, calendar, etc. By the time the Mozilla Foundation was formed, the team had made the decision to focus its energy on rewriting, yet again, the two most important cornerstones of the Mozilla integrated suite of applications: the browser (soon to be called Firefox) and the e-mail (Thunderbird).5 The Mozilla Foundation hired the lead volunteer developers for each of the two projects: Ben Goodger for Firefox and Scott McGregor for Thunderbird.

The Charter and Governance for Firefox Development Blake Ross, Asa Dotzler, and Ben Goodger set the charter to create a new browser that would be much more consumer-friendly—a browser that “their moms” could use. They wanted to have fun and accelerate the development process by not worrying about backward compatibility, design-by-committee, unnecessary features, marketing requirements, and so on. They also had some design principles6 they wanted to demonstrate to the rest of the Mozilla community—in particular, how to modularize the code.

Typical Tightly-Controlled Open Source Development Project. The three lead developers made it clear that they would drive the Firefox development process and decisions. They would invite others into the development team as needed, “based on reputation and meritorious hacks.”7 Like so many open source software projects, the process was driven by a small team of developers who maintained authority over the design and implementation of the code. Thousands of volunteers

Mozilla Firefox

monitored the progress, and offered contributions and suggestions, but the evolution of the code was carefully controlled by the team of three. By early 2004, when Firefox was in its 0.6 release, a buzz began to build in the Mozilla developer community. “There were still millions of contented users of the Mozilla Application Suite, but the momentum had clearly begun shifting to Firefox,” Mitchell Baker reported. “We saw significant adoption of Firefox 0.9 through the summer and fall of 2004—almost eight million people came to get a product that hadn’t reached its 1.0 status yet,”8 Baker recalled.

Marketing of Firefox by Customer Community I switched to the Mozilla Firefox browser in late 2004. What made me switch? Two things. First, colleagues were telling me how much better Firefox was than Microsoft’s Internet Explorer. Second, I had concerns about all the viruses and hacks that were making their way into PCs through Microsoft’s security-breach-prone browsers and applications. (I had already switched my company off of Microsoft e-mail for the same reason.) What I didn’t realize at the time was that my decision to switch to an open source created browser—a decision I have never regretted, by the way—was orchestrated by a well-organized community of lead customer volunteers. As Firefox was taking shape during 2004, leading to the 1.0 release on November 1, 2005, it became clear that this new version of the Mozilla browser had the capability of becoming a “Microsoftkiller.” The Mozilla community—now 63,000 volunteers strong— began to galvanize into a self-organizing marketing machine. They had a marketing goal: capture 10 percent of browser marketshare from Microsoft, despite the fact that Microsoft’s Internet Explorer came preinstalled on every Windows PC, and people would need to find and download Firefox.

Volunteer Marketing Community Sprang into Action “One of the main features of the Firefox marketing campaign was that the community organized many distinct Web sites,” Sandeep

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Krishnamurthy, associate professor of e-commerce and marketing at the University of Washington, explained in a paper that chronicled the community-led marketing effort. “All domain names and hosting services were donated.”9

Marketing Coordination Web Site. Much of the marketing coordination took place on a site called SpreadFirefox.com. The promoter community sorted itself into a variety of self-organizing discussion/ volunteer groups including the following, among others: • The visual identity team worked on the Firefox and Thunderbird logos, and other core visual identity. • A Mozilla design team designed the Web sites, marketing collateral design, banner ads, buttons, and so forth. • A “for the record” team monitored the media and responded to press inquiries. • A college reps team organized student representatives at university campuses around the world. • An ad donations team contacted publications and Web sites, and got them to run ads promoting Firefox. • A CD deals team contacted computer publications to get them to distribute Firefox on CDs inserted into their magazines. • A Web apps team developed necessary programs to support the marketing activities.

Download Site. A second group of sites was set up to be the destination sites from which anyone could come and download the new Firefox browser. These are managed by a technical team of volunteers that ensures that the sites can handle the level of traffic and download activity the marketing buzz produces. Incompatible Site List. An important condition of satisfaction for users switching to the Mozilla Firefox browser is for the new browser

Mozilla Firefox

to work well with all the Web sites they normally visit and any they might want to visit. So a group of volunteers set up a Web site called “defendthefox.com” to help volunteers exert peer pressure on Web sites that weren’t yet compatible with the Firefox browser.

Launch Advertising. Rob Davis, a marketing professional with experience in political campaigns, contacted the SpreadFirefox team after his computer had been infected by a virus and volunteered to run the campaign. Rob decided that the official launch of Firefox should be heralded to the business community in the same way that Microsoft would launch a next-generation product. He knew from his experience with political campaigns that he could rely on the strong volunteer community to donate the advertising funds. Sure enough, 11,366 members of the Mozilla community donated an average of $22 each to fund a full-page ad in the New York Times. The one-time ad resulted in two million downloads. By December 12, 2004, Firefox hit the goal of 10 million downloads. By January 24, 2005, they had exceeded 20 million downloads. And one year later, by mid-March of 2006, Firefox had topped 155 million users.

The Firefox Community Executed One of the Most Successful Product Marketing Campaigns The launch support of Firefox is a great example of community-led marketing. Volunteers focused on all of the different dimensions of successful product launch and adoption. In particular, they focused on the critical Customer Scenario they needed to enable—make it easy for customers to switch browsers.

Mozilla Makes Money in Spite of Itself The purpose of this story is not to focus on “how to make money” in the open source model, but rather to use Mozilla as a good example of how to harness the power of customers as contributors, guides,

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and promoters. But an odd thing happened as Firefox gained in popularity and market share. Mozilla, which as you’ll recall had been established as a not-for-profit foundation, found itself making more money than it needed to support its operations. The not-for-profit status also hindered some of the commercial relationships that some of Mozilla’s sponsors wanted to support, such as sponsoring certain development efforts. So on August 3, 2005, Mozilla Foundation set up a for-profit entity, Mozilla Corporation. By the end of 2005, the two entities, the Mozilla Foundation and the Mozilla Corporation, had a combined total of forty employees. As of this writing in mid-2006, there is no official confirmation of the amount of money that Mozilla generated in 2005; rumors put the amount at $72 million. Some of the money may have come from corporate sponsors like IBM and others, who are eager to leverage the fruits of Mozilla’s development in their campaign to unseat Microsoft’s hegemony. But much of the income resulted from ad revenues generated through the use of the search bar on Firefox. Mitchell Baker is CEO of the Mozilla Corporation and still leads the overall “Mozilla Project” (Mozilla.org and Mozilla.com). She plans to use the project’s growing cashflow to pay for infrastructure, and to hire both developers and managers. By the end of 2006, the plan is to grow the organization to about 150 people—both lead developers and managers who can help herd the growing volunteer community in the most productive directions. She would also like to figure out some way to give some of that money back to the community of developers who are generating value. The Mozilla Project, as its members refer to it, is alive and well, and serving its mission of providing choice and innovation on the Internet. TAKE-AWAYS FROM MOZILLA What are the lessons learned from converting an internal commercial software development operation into a hugely successful open source customer-driven community? How might you apply these lessons to other software projects? Could these same

Mozilla Firefox

lessons apply to other kinds of product development and marketing activities? • When you move product development from an in-houseonly project to a customer co-design project, you need to make all of your discussions, work-in-process, and decisionmaking criteria and constraints visible to the customer community who will be participating. This information doesn’t need to be wide open to the general public, but it does need to be visible to your customer co-developers. There may be company-specific discussions that can’t be shared (as was the case with the AOL-specific version of the browser), but these should be the exception, not the norm. What the Mozilla team did was to make it the path of least resistance for all contributions and discussions to be shared with the customer co-developers by ensuring that the e-mail lists and shared development tools they used were open to their customer co-developers. If Netscape/AOL developers had company-specific information to discuss, they had to explicitly use a different e-mail distribution list and protocol.

• When you open up product development to a customer community, it doesn’t mean you have to cede control or authority over the evolution of the product, or over what features get added and what features don’t get added. Your team should maintain the authority over the product and be acknowledged and respected as the domain experts.

• Put a very structured process in place for customer contributions. Encourage customers to add and extend features and functionality, but at the same time, establish and communicate architectural principles. Provide tools for customers to use that will maintain high quality and ensure compliance with architectural principles. Use double review processes before customers’ contributions are accepted: one review for basic quality and one review for compliance to product architecture and integration.

• Harness customers’ efforts and contributions not only in product development, but in early testing of every phase of the product in actual use. Tens of thousands of customers can provide very cost-effective testing and debugging of new

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products. Thousands of customers will find bugs and issues much faster than your in-house testing and quality team ever can!

• Enlist customers in your product positioning, branding, and marketing efforts. Who knows better what the value proposition is for your offerings than the customers who are already fans? Notice that the kinds of people who will naturally become promoters will be different from the customers who helped co-design the product. They have a different set of skills and interests. In particular, they can help you identify the hurdles to adoption and help you develop work-arounds.

Asterisk and Digium Shaking Up the Telecom Industry by Harnessing Customers’ Creativity

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hen you ask software developers which open source software projects are attracting the most buzz, they mention Asterisk. I found this a bit bizarre because Asterisk isn’t the kind of software application most corporate developers typically care about. It’s not a database program. It’s not a customer relationship management application or a business intelligence tool. It’s a telephone system, for Pete’s sake. You buy a telephone system from a telecommunications supplier, who installs it. Your in-house telecommunications manager administers it, adding users, moving users, changing voicemail prompts, and so on. That’s the point. Asterisk has broken the mold. Instead of purchasing a PBX system—a combination of telecommunications hardware and proprietary software—you can now purchase, or download for free, the software to run your own phone system. Then you can buy the telephony hardware from any of a variety of companies, including Digium, the company behind the Asterisk open source software phenomenon. Your costs are likely to be 30 to 50 percent lower than the expense of purchasing a standard PBX system. What’s more,

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you can customize and extend the software to meet your company’s specific needs. And that’s what many Asterisk customers are doing. By early 2006, close to four hundred software developers around the world had customized the software and contributed their own customizations and extensions back to Asterisk’s functionality. At the same time, about a dozen dedicated collaborators were busily extending the core software platform. We estimate that there were 400,000 Asterisk-powered phone systems installed around the world by the first quarter of 2006. Some of these phone systems are in small businesses, and others are supporting large enterprise networks. Many had been purchased from any of the hundreds of system integrators and resellers who have sprung up to provide installation, service, and support for these rollyour-own phone systems. A number of voice over IP (VoIP) service providers, including Vonage, had incorporated software modules from the Asterisk suite into their offerings. The customer-led Asterisk insurgency is the sort of disruptive innovation that traditional suppliers hate. “The big incumbent vendors [like Lucent, Nortel, Cisco, and Alcatel] are all trying to figure out what their Asterisk play is going to be,” Mark Spencer, Asterisk’s creator, explained in early 2006.1 “The broad telecom space was ripe for open source,” said Mark. “The customer base consists of a very technical audience. There’s a huge cost differentiation between proprietary solutions and what you can do if you roll it yourself. Telecom solutions demand extreme customization. All of these are the factors that make the telecom space a good market for open source products.”

PBX Software Created to Solve a “Lead User” Problem Mark created the initial code for Asterisk in 1999, as a matter of necessity. At the time, he was a computer engineering student at Auburn University in Alabama, running a software consulting firm, Linux Support Services, from his dorm room. It was a smart business model, run by smart volunteers. At a time when Linux knowledge

Asterisk and Digium

and support services were hard to come by, Mark was able to recruit other Linux techies to provide support for his growing list of clients. He was successfully harnessing the cooperative spirit of the burgeoning Linux community. As the business grew, Mark needed more than his dorm room phone to put a professional face on the business. In an interview with Howard Wren, Mark described the origins of Asterisk, “ ‘I had about $4,000 to start it out with, and I wasn’t about to buy a phone system, so I figured I’d just make one.’ ” Howard Wren wrote, He created Asterisk, a software platform PBX system, and open-sourced the code in 1999. Asterisk was not particularly useful to others outside of Spencer’s own needs for his company, until a few years later when community contributions added support for more industry-standard telephony hardware, and modern Internet voice communications technologies, like voice over IP (VoIP), to succeeding versions. As the user base of Asterisk grew, Mark Spencer founded Digium, Inc. to capitalize on providing support for the software and to ensure development of it at a professional level. Written in C, Asterisk remains free to use and open-sourced.2

What’s the Business Model for Open Source PBX Software? As he looked at the telecom market, all Mark could see was opportunity. “There are two steps to deciding whether an open source model makes sense for your business,” Mark explained. “The first step is to decide whether open source is going to hit your industry, whether you’re involved or not.” As mentioned earlier, the conditions were certainly ripe for the telecom industry. “The second step is to decide what business models exist that allow you to make money if open source is going to hit your industry,” he explained. As a lead user who had already developed his own telecom solution, Mark saw several opportunities: 1) He could develop and sell hardware components that were optimized to work with the Asterisk software. 2) He could sell Asterisk support services to customers, just

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as he was currently doing with Linux support. 3) He could develop, test, and certify a commercial quality version of the software and license it to companies and resellers who didn’t want the bother of having to evolve and maintain their own software. So he set up a business—Digium—to do all three things. By the end of 2005, Digium had grown to 50 people. It has been profitable since its second month, according to Mark, with much of its revenue coming from hardware sales. Digium sells Wildcard telephony interface cards and adapters to connect traditional analog phone systems as well as newer digital voice over IP (VoIP) systems to servers running the Asterisk software. Mark expects the hardware component of his business to decline over time, as companies move away from older analog telephony to newer Internet-based telephony. So in 2005, Digium introduced its own packaged version of Asterisk, called Asterisk Business Edition, which is thoroughly tested, documented, and includes technical support. Digium also licenses Asterisk to vendors who want to resell it and for whom the noncommercial terms of the open source GPL license aren’t appropriate.

Built an Open Source Community When he realized that there was quite a bit of interest in his open source PBX code, Mark put his considerable promotional skills to work to grow the developer community (lead customers) and the solution provider community (suppliers) in order to build an ecosystem around Asterisk. For Digium and Asterisk to be successful, Mark and his small team needed to attract developers, corporate customers with a stake in the game, other hardware providers, telephony system integrators, and other companies that could build businesses around Asterisk. “We couldn’t be the only player in the ecosystem,” Mark explained. That’s what made the PC successful. “Because of its open architecture, hundreds of companies sprang up around it, selling everything from video cards and sound cards to application software.” Mark and his team created a separate Asterisk.org Web site to host the developer and user community. By 2003, there was already a small community of avid developers who were modifying and extending the

Asterisk and Digium

code to add the functionality they needed. The first production version of Asterisk, Version 1.0, was released in September 2004.3 Mark and his team try to support their 400 or so active contributors by acknowledging their contributions and offering them perks. “Being a developer is a very thankless job,” Mark explained. “Most people only come to you when they have problems. So we try to bring some of these developers to different trade shows that Digium participates in. It’s a great way for them to see the fruits of their labor. They can see how excited customers really are about what they’ve helped to create.”

Governance Structure. Each new version of the Asterisk software is quality-controlled and tested by Mark Spencer’s team at Digium before it is released. Mark Spencer and his co-maintainer, Kevin Fleming, make the final decisions about which code gets into each build. There is no confusion about who gets to determine what’s in and what’s out. Intellectual Property. In order for open source software to be a viable alternative to proprietary software, the code must be free and clear of intellectual property violations. “We go to great lengths to keep clear title to the IP we need.” Mark explained. “Each contributor signs a disclaimer document that we have the capability of distributing Asterisk.” Supporting the Community Process. To participate as a developer, a technical user of the software, and/or a reseller of products and services wrapped around Asterisk, you are encouraged to join one or more of the mailing lists that Digium maintains for the purpose of soliciting input, notifying community members about updates, and helping community members solve problems. As of early 2006, more than 9,000 people around the world were active members of one or more of these lists.

Examples of User-Led Innovation and Improvements Asterisk and its vibrant ecosystem of software suppliers, system integrators, and consulting firms probably wouldn’t exist if these lead

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customers hadn’t helped to extend the functionality of the software and contributed those extensions back to the community. By 2005, with the help of the telecom developer community and the business partner ecosystem that had evolved to surround it, the Asterisk software had evolved so that it’s now a complete modular software PBX system. The functionality includes voice mail services with directory, call conferencing, interactive voice response, and call queuing. It supports three-way dialing, caller ID services, and a host of other phone services. It’s in use around the world and runs on Linux, BSD, and Mac OS X. There’s even a version on Microsoft XP you can use for prototyping. While most widely used for small business applications, there are a number of enterprises that are using Asterisk to run some or all of their telephony applications.

Challenges in Running an Open Source Software Project According to Mark, there are things that a developer community does really well, such as adding functions and interfaces. The more fundamental architectural changes can’t be left to the community, although their suggestions certainly provide direction. The most time-consuming efforts involve code reviews—going through each submission for quality control—and duplicating issues that people have reported. “This really takes a lot of time,” Mark said. “You want to have good quality code, so the level of staffing we have to devote to Asterisk is significant. We have to staff enough people just to handle the level of contributions we’re getting.” Mark Spencer describes the typical challenge faced by most open source software projects: how quickly and how often to “rev” the code: One of the biggest challenges is to balance between how quickly we can integrate changes into the system and trying to maintain a stable base of code. And there’s a real tension there because people that contribute tend to want their contributions to go in very quickly. You want to keep them happy, because the community is really the lifeblood of the project. On the other hand, you also feel a responsibility to

Asterisk and Digium

try to keep the codebase fairly clean and manageable over the long haul.4

Building a “Coopetive” Ecosystem By the fall of 2005, the commercial community that had grown up around Asterisk—the number of companies who were making money leveraging the open source platform—was quite dynamic. Judging from the size and prominence of the Asterisk booth at one of the large industry trade shows in the fall of 2005, Asterisk had clearly come of age. In addition to Digium, there were 13 companies exhibiting products and services that had been built on top of Asterisk. Although Digium competes with a few of the players in its ecosystem, Mark Spencer is proud of the fact that Asterisk has spawned a partner ecosystem. “We’ve built up a reseller and distributor channel . . . that is able to help people that don’t have (Linux configuration skills). And what we’ve found is that Asterisk has enabled a lot of VARs (value-added resellers) to be able to get into the voice market where there can be a lot (higher profit) margins for the reseller.”5

TAKE-AWAYS FROM ASTERISK AND DIGIUM: BUILDING A BUSINESS AROUND OPEN SOURCE Digium provides a good example of one way (and not the only one) to build a viable for-profit business leveraging the open source model while fostering customer-led innovation. There are several things that Mark Spencer has done well in building his business and spawning an ecosystem. • Separate the For-Profit Brand Entity from the Open Source Brand Entity. Notice that there are two different entities here: Digium.com, which is a for-profit company, and Asterisk.org which is an open source community. Although both are hosted, sponsored, and managed by Digium, they are separate entities. Having different names is also a good idea. That way, developers who are contributing to the .org entity don’t feel that you’re building brand equity around their contributions.

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• Maintain Control of the Authority and Governance. The lead developers—the people who decide what software becomes part of each build of the software—work for Digium. The fact that they are very clear about who makes the final decisions and that they were the originators of the project gives them the authority to maintain control over the software. Since they maintain the governance, they can better control how the value of Asterisk is monetized (at least for their purposes).

• Promote and Support Other Businesses in the Ecosystem. Making money off of open source software is a classic case of “a rising tide raises all boats.” The more players can profit from customizing, extending, and using the software platform to provide custom solutions to their customers and markets, the more viable the ecosystem becomes. For Digium, that means promoting and supporting system integrators as well as hardware suppliers with competing products.

• Build a Multipronged Business Model. Plan to generate revenues in three or four different ways. Digium has four different types of revenue streams. Digium makes money by charging for software support and maintenance. (Even when software is distributed free of charge, most businesses want support and maintenance, and are willing to pay for it.) Digium makes money by selling hardware appliances that are optimized to work with Asterisk. Digium makes money by selling Asterisk licenses to companies that do not wish to abide by a General Public License (GPL), usually because they do not want any extensions or modifications they create to go back into the open source community. Digium provides professional services—consulting, design, integration, and development—for a fee.

What Business Models Work in an Open Source World? Cohesive Financial Technologies: How a Software Start-Up Thinks Through Its Options

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ne of the most persistent questions people ask about the impact of open source on the software industry is “How do you make money?” It’s important to answer this question, not only for the software industry but also to provide some clues for the many open source initiatives that are springing up in other industries. We’re now in a world in which customers are demanding access to the source code (or its equivalent in other industries) so that they can inspect and extend the intellectual property, and contribute their own modifications and extensions back to the community. Given that reality, how do you charge for the intellectual property that is open for all to inspect? It’s not that people won’t pay for open software. It’s simply that they won’t pay a premium for it. So as Mark Spencer, CEO of Digium, explained, use the open source approach when you know that your customers are going to want to roll up their sleeves to customize your

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products for their own needs and when you can tell that a specific industry or industry segment is ripe for commoditization—e.g., there are currently too many high-priced, closed, specialty solutions, and not enough value being derived from them.

Designing a Business to Thrive in the World of Open Source Despite the commoditization and consolidation in the software business, software start-ups abound. Many of them are now leveraging open source. To understand why and how, I decided to pick the brain of a long-time lead customer of mine, Patrick Kerpan, another one of Patty’s Pioneers who is currently embarking on a new “software as services” venture in the financial services industry which is called CohesiveFT (Cohesive Financial Technologies).

Four Open Source Business Model Options to Mix and Match As the “open source effect” commoditizes the layers of software required to run any business, Pat Kerpan feels there is still money to be made in at least these four distinct areas:

1. Industry-Specific Solutions Every industry has different software requirements. Retailers have different needs than manufacturers. Financial services companies have different needs than media companies. And specialties within each industry have different needs. Retail merchandisers’ needs differ from those of supply chain managers. Stock brokers’ requirements differ from those of merger and acquisition specialists. There’s money to be made by building industry-specific stacks which integrate the key proprietary industry software components with open source software. Most companies don’t want their IT staffs spending time finding all the necessary pieces, stitching them together, and maintaining them. Pat Kerpan’s first target markets are the capital markets and global banking sectors.

What Business Models Work in an Open Source World?

2. Support Services Open source solutions have a relatively short shelf life for maintenance. The volunteer developer community is much more interested in working on the next version of the software than it is in maintaining the previous versions. Open source software releases are much more frequent than those in the commercial software business. So there’s money to be made if you are willing to maintain the versions of open source software that clients are running in production and to certify that they will continue to operate in their environments. 3. Custom Development Pat Kerpan calls this the “smartest guys in the room” business model. You can make money doing custom software development on top of open source software to fill the needs of clients who don’t have the time or resources to do this custom development themselves. What Pat doesn’t like about the “smartest guys in the room” model is that it doesn’t scale. “You’ll never be the smartest guys in the room forever,” he maintains. “There’s always going to be someone younger and smarter to knock you out of your seat. Therefore, Pat and I agree, the trick is to make sure that “the smartest guys in the room” are your lead customers. It’s your job to empower them to do their own custom development. 4. Software as a Service Instead of selling software, you sell the services that software performs. Customers don’t pay software licenses. They don’t have to install the software. They simply pay for the services performed, typically by the transaction. “The mobile phone industry has helped people understand this business model,” Pat explains. “You can pay by the minute/call, or you can buy a service plan that covers up to a certain amount of calls, SMS messages, etc. If you exceed that threshold, you are charged by the transaction unless you want to upgrade to the next service level.” Software as a service is, in fact, the business model

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Four ways to make money in the open source world: 1) Pull together a stack of commodity open source software (the open source effect) and add components required for a specific vertical market; 2) Provide support services to keep open source products running well; 3) Do custom software development and assume that you can keep being the “smartest guys in the room;” 4) Sell a software service that is paid for as it is used, rather than before it is used. We added the alternative to the “smartest guys in the room” strategy, e.g., leverage the contributions from your smartest customers.

that has the most upside. Nobody really cares how you fulfill the service—whether you do it with people or with open source or with some combination—as long as you can guarantee the service levels for quality, performance, and reliability that clients require.

Designing the Right Mix of Open Source Business Models

Identify a Market That Is Ready for Open Source Solutions. Just as Digium’s Mark Spencer was able to spot an industry that was ripe for an open source solution in telecommunications, Pat Kerpan feels

What Business Models Work in an Open Source World?

that the financial trading industry is ready. “In the financial trading market, we have enough capacity,” Pat Kerpan explains. “In fact we have overcapacity in new product introduction. What’s happening now is margin pressure. What technology executives in financial trading firms care about now is achieving global scale and rapidly shifting more of their costs to a variable cost base.” So CohesiveFT plans to replace internally-developed specialty software with open source, commodity software that is tailored specifically to the needs of the financial trading market. The way Pat Kerpan’s small team at CohesiveFT has thought about designing its business can be a recipe that might make sense for other software start-ups: • Commercialize the open source solutions that lead customers have already put together through their own trial and error improvisations. • Add value by identifying market-specific requirements, building or buying the software that will meet those requirements, and making it open source so it can be evolved and maintained by the customer community—these lead customers become your “smartest guys in the room.” • Identify one or more customer-critical scenarios that are not currently being met—address those scenarios by delivering software services to the customer community.

Certify an Open Source Solution for a Specialized Market. In the financial trading industry, most companies are already using open source software, according to Pat Kerpan. They’ve built their own inhouse applications on top of many of the same open source platforms. They’ve rolled their own software in areas in which they couldn’t match their needs with off-the-shelf software and/or open source options. They’ve tailored their open source and home-grown offerings to meet the needs of the real-time global trading environment in which they operate. So the first step in Pat’s business model is to package up and support all the open source software that these different companies

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around the world have already gravitated toward. Pat’s team, working with lead customers, has identified the layers of open source software that are robust, trusted, and already working in many of these companies. The value that CohesiveFT can add is to maintain, test, and certify it for these companies, taking them out of the roll-theirown business for all the layers of software infrastructure that are not differentiators.

Add Value by Purchasing or Developing Specialty Software. To support global trading, there are a number of specific needs these customers (the IT architects in global trading firms) have. They need middleware to execute trades instantaneously, and they need middleware to keep track of complex, very long-lived transactions. Pat Kerpan knows that there is now an opportunity for open source software that is good enough to meet both these needs. “Where there are gaps, there are boutique software companies that have filled those gaps. We’ll buy the boutique firms whose solutions we need and open source their products, adding them to our stack.” Pat Kerpan feels that his clients won’t trust this software unless they can inspect the code. More importantly, the CohesiveFT group believes that the open source sales model more appropriately aligns with customer value. Clients will want to be sure that the software evolves appropriately over time; the open source approach gives them visibility into the governance of the project and an ability to influence it if needed. “They’ve had experience with open source community-based development and they trust it,” Pat explained. Identify a Customer-Critical Scenario and Offer It as a Software Service. As with any entrepreneurial venture, you have to find a customer-critical need to fill. In the financial trading industry, the need that Pat Kerpan’s team spotted is the direct result of regulation. Based on end-customer demand, “there is now regulatory pressure to ensure that end customers receive the best trade execution across multiple sources of liquidity,” Pat Kerpan explains. That means that any firm executing a customer trade (stocks, derivatives, etc.) must be able to show that the execution price was the best price available at that particular time. This is no small feat, given the fact that there are

What Business Models Work in an Open Source World?

multiple sources of both public and private liquidity for popular financial instruments. The CohesiveFT team believes that the combination of the “best execution price” mandate and the transition to a peer-to-peer exchange structure is forcing companies to revamp their trading systems. So the CohesiveFT team is developing a software service that will presumably be able to monitor execution prices across all public and private exchanges globally. The advantage of using a “software as a service” model to deliver the most customer-critical functionality is that customers are generally happy to pay for software on a “pay as we consume it,” as opposed to a “pay up front for functionality that we may or may not use” business model.

Control Your Ability to Monetize Value. As he thought through the ideal way to mix and match potential services and revenue streams for his new business venture, Pat Kerpan also gave some thought as to how to deal with the dangers of operating in an open source world. His clients—technology executives in the world’s largest financial trading firms—will want to have access to the source code for any software they use (whether or not they choose to modify or extend the software). If their in-house developers extend the software for their own purposes, they will keep those extensions proprietary (which they can do under the terms of most commercially-friendly open source licenses that allow derivative works without providing changes back to the original project). If the enhancements don’t provide a competitive differentiator, but do need to be maintained, the customer developers can contribute those enhancements back to the community. Pat explains what happens next. “CohesiveFT will spinwash their code. We’ll do all possible due diligence to make sure that it isn’t violating anyone’s license, and to clean it up and make it part of the standard build.”

Different Dimensions to Consider in Building an Open Source Business Pat Kerpan believes that one of the reasons the open source model is so confusing to most people is that they neglect to identify the different

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The four important dimensions to the open source business model, according to Pat Kerpan: Invisible vs. visible source code, commercially-friendly software licenses vs. GPL, closed vs. open governance, use of the same or different brand names for the commercial entity (dot-com) vs. the developer community (dot-org).

business model dimensions that are really in play. He believes that there are at least four such dimensions: 1. Invisible versus Visible Source Code Is the source code closed (invisible), e.g., nobody can see it, visible to a few (software partners only), visible to certain types of entities (e.g., academic institutions, government organizations), or visible to all? In the open software realm, the ability to inspect the source code is critical for building trust in your software. In order to play in the software game today, you will need to give customers (and competitors) visibility into much of your source code for any software that is running in their environment. “That probably dilutes the value of what you can charge by 20 percent, but probably no more than that,” Pat explains. “Enterprise customers are perfectly willing to pay for the convenience of having you provide them with code that actually works, rather than something they have to worry about.”

What Business Models Work in an Open Source World?

2. Commercially-Friendly License versus Copyleft License Is your software licensed for use under easy-to-enforce contracts that are “commercially friendly”? Or is your software available under the “copyleft” provisions of the GNU General Public License (GPL), which means that any changes you make to the software have to be offered back into the GPL version? Microsoft sits on the commercial end of this spectrum, while open source organizations like Eclipse and Apache sit in the middle—people contribute back to the source, but they don’t have to make all extensions available to all comers, nor does their software automatically come under the aegis of the license. You can use and extend Eclipse and Apache for your own projects by using licenses1 that allow you to leverage the open source code without giving all of your ideas back to the community. 3. Closed Governance versus Open Governance Governance is the means by which the open source product’s roadmap evolves and how the determination is made as to which of the source code submitted to the project is actually put into the product. Traditional commercial products have had “closed” governance. Companies such as Microsoft and Oracle determine all facets of what goes into their products, presumably through product management and product marketing functions. Completely “open” governance would imply that anyone, anywhere, any time could add to the source code. This would result in anarchy. Most open source projects, such as Eclipse, tend to fall somewhere in between. Open source does not necessarily mean open governance, Pat Kerpan points out. The well-known Linux operating system is closely controlled by Linus Torvalds and a group of associates that he has accepted to be involved in the governance of Linux. In fact, in many ways, the Linux governance model is closer to the Microsoft governance model than it is to the Eclipse governance model, according to Pat Kerpan. The group that has the greatest influence in the governance has the first option on monetization. The governance dimension is the most important one, according to Pat. “Unless you control the governance, you can’t control the monetization of the software,”

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he explains. “You can control the governance as Linus Torvalds does, and abdicate the primary monetization function, but unless you control the governance and have the authority to determine the course of the development, you have no way to control the rest of the business model.”

4. Same Brand or Distinct Brands for Dot-Com versus Dot-Org? In the case where the name of the governance organization is identical to the name given to the volunteer software community, the two share the same branding. But increasingly, companies are choosing to create entities with distinct brands—like the Digium.com for the forprofit business and Asterisk.org for the software community site. When the commercial entity and the developer community share the same brand name, it becomes confusing for all involved. In cases of “confused” branding, the commercial entity is risking that the community of users, partners, and developers will take issue with having one organization essentially co-opt all of the brand value of the community. When a commercial entity attempts to co-opt the goodwill that a volunteer developer community has created, there is serious risk of the community “taking the ball and going home.” The way developers rebel in the open source world is that they create a new variant of the software (“forking” the project) and give it a new community name. This leaves the commercial entity alone with its copy of the code, few partners, few developers, and ultimately fewer customers. Pat Kerpan believes that volunteers are willing to write code that they can use and that will help the software get better. But they aren’t willing to have their labor used to enhance your brand value. That’s why it’s important to have two different brands: one for the commercial company and the other for the software community.

Harnessing Customer Development in the Open Source World CohesiveFT is still in its formative stages. The company may or may not make it. Convincing the world’s largest financial institutions to

What Business Models Work in an Open Source World?

subscribe to a trading service from an upstart to monitor the execution prices of their trades may be a long shot. These firms may prefer to continue to build their own systems to give regulators and end clients visibility into the execution prices of their trades. Or these large financial institutions might band together to create their own open source solution to this common problem. What motivated me to “unpack” the thinking behind CohesiveFT’s burgeoning business was the thoughtful analysis that Pat Kerpan and his team have given to the different dimensions to be considered in charting a course in an open source landscape. Pat Kerpan and his team are attempting to go with the flow rather than against it. They believe that customers, even corporate developers, are going to keep writing and contributing software to open source. Customers want to be creative. They’ll seek ways to exercise their creativity. Pat believes that the success of the first generation of open source software (Linux, Apache, Mozilla, Eclipse) is the result of the alienation that software developers feel in their corporate jobs. Pat believes that a reasonably large number of talented software developers are asking themselves: “What is the biggest obstacle to my creating high-quality, innovative software?” The answer: the company they work for. These developers have moved outside the corporate boundary and have begun creating their own products on their own time to meet their desires, needs, and aesthetics as opposed to the typical “design by committee” approach of large enterprises. So the best way to build a successful business in this environment is to package up the open source components that customers have already adopted, to find the rest of the software they need for their particular industry-specific applications. Offer that vertical software in an open source model, so that customers can see and extend the code, yet have it professionally maintained, for which they’ll pay a reasonable price, but not a lot. Then, find the most customer-critical services that they all need and let them pay as they consume those

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services, assuming that they’ll also want to extend and modify those services over time as well. Pat Kerpan calls this the “meta-source” business model.

TAKE-AWAYS FROM COHESIVEFT If you’re in the software business, or are in a business that is moving toward an “open source” business model in which customers co-create intellectual property (IP) and want to continue to see into, contribute to, and to extend that IP, there are a number of dimensions to consider in crafting a successful business model. • Go with the flow. Don’t try to buck the customer tide. If customers are already adopting open source solutions, don’t try to compete with proprietary offerings.

• Commercialize and standardize the solutions that customers have hacked together. Notice which open source components lead customers have adopted and package those up into maintainable bundles. Offer to maintain and support their de facto self-configured open source solutions.

• Find the missing pieces that customers in a specific vertical market need in order to be successful. Develop and/or buy those missing components. Then add them to the open source solution you offer and maintain. Let customers inspect and extend those vertical market–specific solutions. Give customers the option to either contribute their extensions back to the customer community or keep their extensions private.

• Maintain control of the governance of the offerings that are extended by the customer community. Make sure that your top experts are the ones who are respected by the customer community and who get to make the final decisions about which customer contributions become part of the next-generation offering.

• Separate the brand name of the community-developed IP project from the brand name of your commercial firm, so you don’t alienate the customers who are freely contributing to the community.

What Business Models Work in an Open Source World?

• Identify the most customer-critical scenarios that your customers need and consider supporting those scenarios with “pay as you use them” services, rather than “pay up front” solutions. Make sure that the services you provide are open and extensible by your customers.

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Open Source Biotechnology Enabling Peer-Production Communities to Share and Build upon Each Others’ Intellectual Property

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he industry that is most likely to benefit by taking the best practices from open source software communities is the life sciences community. In fact, many influential scientists in the life sciences, including Nobel Laureates Sir John Sulston and Joshua Lederberg, and renowned genomics and bioinformatics scientist Michael Eisen and the charismatic Dr. Richard Jefferson, have been advocating the use of an open source model of co-development in order to accelerate scientific research and commercialization of solutions to many of the world’s most pressing problems, including intractable diseases and food shortages. Despite the fact that much biological research is carried out in “wet labs,” there are important similarities between biotechnology and software. In December 2004, three professors in bioinformatics described the similarities well: “In the same way that programmers find bugs and write patches, biologists look for proteins (“targets”) and select chemicals (“drug candidates”) that bind to them and affect their behavior in desirable ways. In both cases, research consists of finding and fixing tiny problems hidden in an ocean of code.”1

Open Source Biotechnology

The Patent Thicket in Biotechnology Presents a Barrier to Collaboration In other areas of scientific research, breakthroughs are published, scientific experiments are tested by scientists in other labs, and scientists are able to build upon each others’ discoveries. However, in the global biotech industry, there are more barriers to collaborative innovation, including the need for cross-licensing of patents bilaterally among scores of organizations. Research materials are developed in multiple environments: university laboratories, startup companies, biotechnology companies, hospitals, non-profit research clinics. Some of the materials are patented; many are not. These tools are frequently licensed out to other institutions through material transfer agreements (MTAs). Thousands of MTAs are signed each year in the biological sciences, covering such diverse materials as genes, proteins, chemicals, tissues, model animals, software, databases, “know-how” and reagents.2 There are two obstacles: the difficulty that researchers have in finding and accessing relevant research materials that they can build on, and the length of time it takes to gain access to these source materials given the complicated cross-licensing agreements that have to be negotiated and navigated. Although the greatest tension in the life sciences industry is between the nonprofit sector and the biotech industry players, the academic community also has a great deal to lose from opening up. Kenneth Neil Cukier explains how much academia has at stake: Studies show that commercial ties often delay university research and make sharing material more difficult. . . . In 2004, U.S. universities filed over 10,500 new patent applications and earned around $1.4 billion from IP licensing.3

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Needed: Open Source Tools for Biotech Development Much biotech and genetic research is enabled by digital tools. Getting good tools into the public domain makes it easier for more scientists to participate, including researchers in developing countries. As Alex Steffen writes in WorldChanging: Scientists in the developing world will be able to participate more fully in global research using open source biology. And it’s quite possible that key breakthroughs in the fight against emerging diseases can come from small research groups using open biotech tools. The importance of these sorts of tools is something to which Jim Kent can attest. Kent, a scientist at UC Santa Cruz, helped the public Human Genome Project tie its corporate rival Celera in the race to decipher the human genome, which, in turn, may have helped keep the human genome itself in the public domain. He did it by writing an open-source DNA assembler from existing pieces of free software and his own innovations. This is precisely the kind of tool which BiOS will be helping to innovate and spread freely.4 Let’s take a closer look at the BiOS initiative to which Alex Steffen referred.

Promising Enablers: BiOS Initiative and Science Commons Richard Jefferson is an Australian molecular geneticist. Concerned that developing countries were missing out on advances in molecular technology, he founded a not-for-profit organization called CAMBIA in Canberra in 1991. In a 1993 press release, Richard Jefferson explained his mission: CAMBIA and the Rockefeller Foundation are working together to create an “open access” biological technology movement—just as the computing community has created Linux and other great Open Source innovations. Our tools

Open Source Biotechnology

will be free to all and are crafted to unleash the creativity of researchers and farmers. Companies will have much greater opportunities to create wealth from new crops and products, winning much-needed public trust in the process. . . . Biotechnology is being stifled by the complexity, expense and misuse of patenting. So we are taking a different approach with our toolkit to ensure it’s available for all to use.5

The BiOS Initiative: Providing Open Toolkits for Innovation Cambia launched the Biological Innovation for Open Society (BiOS) Initiative, modeled on the principles of open source software, to develop toolkits and licenses that would enable open collaboration in the life sciences. Although focused primarily on agricultural biotechnology, BiOS works proactively with researchers in other fields of biotech. The BiOS initiative has contributed to promoting collaborative community-based innovation in three ways:

1. Developed New BiOS Licenses These Biological Open Source licenses are inspired by the open source software movement but adapted for patented technologies in the life sciences. “They create a ‘protected technology commons’ in which an invention can be improved by the ideas of many, without exclusive capture by any one entity. . . . what is provided with wide access is not necessarily the product solution, but the enabling technology that allows products to be developed by innovative people. All those who agree to the terms of sharing have protected access to the capacity to use the enabling technology, and can make and commercialize products without the need to renegotiate a commercial license.”6

2. Developed Open Toolkits and Processes A good way to foster open innovation is to invest in toolkits that innovators can all use. One of the first such tools is Patent Lens. It is a set of search tools and a patent database with 5.5 million patents and

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patent applications from all over the world. The ability to search across all the world’s biotech patent databases in a single location dramatically speeds the discovery process. Through the use of the patent search and their own R&D, researchers at Cambia were able to develop an open source alternative to a Monsanto-patented process for transferring new genes to plants, using Agrobacterium. TransBacter, the new open source alternative, uses “bacterial species outside the genus Agrobacterium. TransBacter is designed to be a work-around to the many patents covering Agrobacterium transformation and thus aims to overcome the current IP restrictions to the commercialization of products created using bacteria-mediated gene transformation in plants.”7 Cambia also developed and licensed Diversity Arrays Technology (DArT). This toolkit lets researchers analyze plant and animal genomes—with no prior DNA sequence knowledge of the organism(s) being investigated—and spot their “genetic fingerprints” (genotypes).

3. Created an Open Source Commons An important component of Richard Jefferson’s BiOS license idea is that there should be a safe and easy way for like-minded researchers to be able to leverage each others’ work and build upon it. The idea was that BiOS licensed works can be viewable on a shared protected commons by those who agree to the terms of the license. “Instead of royalties, BiOS licensees must agree to legally binding conditions in order to obtain a license and access to the protected commons. These conditions are that improvements are shared, and that licensees cannot appropriate the fundamental ‘kernel’ of the technology and improvements exclusively for themselves. The base technology remains the property of whatever entity developed it, but all licensees obtain access to improvements, and other information, such as regulatory and biosafety data, shared by other licensees.”8 Instead of building his own technology platform for collaborative development, Richard Jefferson contacted Brian Behlendorf, a software developer active in the Apache open source community. He was also the developer of the software used to power SourceForge—the

Open Source Biotechnology

largest online open source development community. Brian Behlendorf agreed to make a clone of SourceForge, called BioForge, available to BiOS for the biotech community to use.

Results and Uptake. For more than a decade, Richard Jefferson’s Cambia and BiOS initiatives have been gathering momentum and attracting attention in the biotech community. The first open source toolkit, the TransBacter gene transfer process, was publicly revealed in a ground-breaking article in Nature on February 10, 2005. On December 7, 2005, Cambia and the International Rice Research Institute (IRRI) announced a joint venture to advance the BiOS initiative in the field of rice production. In announcing the joint venture, IRRI’s director general Robert Zeigler said: “Half the world depends on rice as a staple food, but this also means that half the world’s potential innovators could be brought to bear on the challenges of rice production, given the right toolkits—and the rights to use them.”9

Science Commons Since the patents and other intellectual property issues are the thorniest obstacles to progress in “opening” cooperative development in the life sciences, it is reassuring to know that Lawrence Lessig is also on the case. Lawrence Lessig, professor of law at Stanford University, is the creator of the Creative Commons licensing models that have made it easier for authors, musicians, and other creators and inventors to control how and whether they make their intellectual property available for others to use (with attribution), distribute, and/or make into derivative works for commercial and/or non-commercial purposes. Science Commons10 was created in early 2005 as a subsidiary of Creative Commons to address intellectual property issues that are specific to science.

Open Source Biotechnology in Action: the Virtual Pharma Approach In addition to the aggressive work that Richard Jefferson’s team is doing in opening up agricultural biotechnology, the other kinds of

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initiatives that are expected to be the earliest beneficiaries of the move toward open source approaches in the life sciences are initiatives such as the Drugs for Neglected Diseases Initiative (DNDi) and the Tropical Disease Initiative (TDI). These initiatives are often referred to as “Virtual Pharma” initiatives. “In the ‘Virtual Pharma’ approach, governments and philanthropies fund organizations that support the most promising private and academic research.”11 The DNDi’s “mission is to research and develop new, improved, effective, affordable, and field-relevant drugs for neglected diseases, such as leishmaniasis, sleeping sickness, and Chagas disease.”12 DNDi currently has twenty drugs in its pipeline. The first to be ready in early 2006 is a simplified dosage regime for malaria. The Synaptic Leap, an open source biomedical research online community site, grew out of the Tropical Disease Initiative project. As of early 2006, there were two pilot research projects: the malaria project out of the University of California in San Francisco and the schistosomiasis project out of the University of Sydney.

Momentum Is Building for Open Source Approaches to Biotechnology From this brief survey of some of the initiatives that were underway as of early 2006, it is clear that there is a growing community of biologists, chemists, and other experts in the life sciences who are eager to collaborate on meaningful projects. Diseases that are plaguing people in developing countries are easy targets for collaborative research since there’s little money to be made in healing the world’s poorest people. Similarly, efforts to increase the reliability of food production in developing countries are also great catalysts for collaboration. I am hopeful that scientists and researchers in academia, industry, and notfor-profits can, in fact, find ways to collaborate openly in drug discovery, testing, development, and deployment of biotechnology-led advances for these kinds of humanitarian projects. As in the case of open source software development, in which thousands of developers test and debug the code, the greatest value from collaboration in the biotech industry is likely to come from having a

Open Source Biotechnology

large number of “testers.” “Genetically-modified organisms have a bad reputation,” writes Jamais Cascio, in large part due to the behavior of the large biotech companies which own many of the patents. Lack of transparency, monopolist bullying and poor testing are just some of what has resulted from the dominance of proprietary bioscience. Genetic modification is not intrinsically problematic, and can have positive results. Detailed evaluation before distribution, broad transparency of process, and better accountability would go a long way towards ensuring that biotechnology is used wisely. Open source biotech is one step in that direction.13 As the biotech industry opens up, there’s certainly room for customers—farmers and food consumers, as well as prescribing physicians and their patients—to become more actively involved in more open trials and testing processes.

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Wikipedia Applying Open Source Principles to the Development of a Community-Created Encyclopedia: How Much Structure Is Enough?

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n 1999, Jimmy Wales had the idea of launching an “open source” encyclopedia-creation project. As a kid, Jimmy used to pour over the World Book Encyclopedia,1 so he realized how important it was for kids all over the world to have access to this kind of resource. The World Wide Web was gaining momentum. Open software development was becoming popular. Why not harness the goodwill of interested people all over the world to co-create an online encyclopedia that would be freely available to all and that would evolve over time to include new topics as they emerge?

Nupedia: Failed Forerunner of Wikipedia In 2000, Jimmy Wales partnered with Tim Shell and Michael Davis to launch a collaborative online encyclopedia development project. They called it Nupedia. In February 2000, Jimmy Wales hired his first full-time editor, Larry Sanger. Larry was a doctoral candidate in philosophy, who

Wikipedia

had been successful in creating a vibrant online community in his field.

Fundamental Premise: Neutrality. “One of the first policies that Jimmy and I agreed upon,” explained Larry Sanger, “was a ‘nonbias’ or neutrality policy. . . . Neutrality, we agreed, required that articles should not represent any one point of view on controversial subjects, but instead, fairly represent all sides.”2 Advisory Board of Expert Volunteers. Larry took his editorial responsibilities seriously and, after consultation with Jimmy Wales, proceeded to recruit a community of subject matter experts who, as members of Nupedia’s volunteer advisory board, would be willing to contribute entries in their respective fields of expertise and to review others’ entries. Overly-Structured Review Process. A seven-step article submission and review process was proposed by Larry Sanger and debated among the advisory board members, who tweaked it and then signed off on this review policy. “Our policy overlooked a fundamental problem,” Larry Sanger wrote. “We should not have assumed that such a complex system could be navigated patiently by many volunteers.” During the fall of 2000, the Nupedia Web site was readied for launch—complete with the seven-step review process. In parallel, the community members, comprised of 2,000 people by the fall of 2000, were submitting and reviewing articles using e-mail. The Nupedia Web site that had been developed that fall was overly complex. So there were two problems dogging the Nupedia project: the online environment was daunting for people to use and the only people who were really contributing were a handful of professors. By the end of 2000, Nupedia only had 24 articles published, although many more were in various stages of development. At this rate, it would take too long for Nupedia to become a useful tool. Larry Sanger remembers the conversations he had with Jimmy Wales during this period.

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In the fall of 2000, Jimmy and I were in agreement that Nupedia’s slow productivity was probably going to be an ongoing problem and that there needed to be a way, moreover, in which ordinary, uncredentialed people could participate more easily. We had a huge pool of talent, motivated to work on an encyclopedia but not motivated enough to work on Nupedia, going to waste.3

Nupedia Collapsed and Wikipedia Was Born Larry Sanger remembers when he first learned about Wikis. Over a dinner in the late fall of 2000, a friend described to him the “WikiWikiWeb” software platform for collaborative development that had been created by Ward Cunningham, and the collaborative Wiki culture that had begun to spring up around Wikis. He realized that this software platform would lend itself to supporting the kind of community co-development that Jimmy Wales had in mind. Jimmy came to the same conclusion. Larry came up with the tongue-in-cheek name of Wikipedia. They launched the new platform on January 15, 2001. Originally, Larry Sanger’s intent was to use Wikipedia as a platform to solicit contributions from a broad community of volunteers and then to have those submissions flow into the more structured Nupedia review process led by the subject matter experts. What happened in fact was that the expert advisors refused to go along with the idea of reviewing submissions from anonymous donors. At the same time, Jimmy Wales liked the “bottoms up” community that immediately flocked to Wikipedia. The result was that Nupedia’s highly-structured, expert-driven approach withered away and Wikipedia’s “open to all” culture took over.

WHAT’S A WIKI? A wiki is an online Web-based collaborative workspace. You can think of it as a kind of collaborative blog. Wiki software was originally developed by Ward Cunningham for collaborative software development projects. Wikis are designed to encourage large

Wikipedia

numbers of people to contribute to a common project. Wikis may be open communities or private (by invitation only) communities. The name was shortened from wiki wiki, which means quick or fast in Hawaiian. Here’s an excerpt from the Wikipedia definition of wiki (as of March 26, 2006): “A wiki is a type of website that allows anyone visiting the site to add, remove, or otherwise edit all content, quickly and easily, often without the need for registration. This ease of interaction and operation makes an effective tool for collaborative writing. The term wiki can also refer to the collaborative software itself (wiki engine) that facilitates the operation of such a website. . . . In essence, a wiki is nothing more than a simplified system of creating HTML web pages, combined with a system which records and catalogues all revisions, so that at any time, an entry can be reverted to a previous state. A wiki system may also include various tools, designed to provide users with an easy way to monitor the constantly changing state of the wiki as well as a place to discuss and resolve the many inevitable issues, namely, the inherent disagreement over wiki content. Wiki content can also be misleading, as users are bound to add incorrect information to the wiki page.”4

Wikipedia’s Grassroots Governance Model The grassroots approach to Wikipedia took off. Absent any really formal structure and authority, the community became very tolerant of dissent. Everyone’s opinion was weighted equally. Subject matter experts weren’t accorded any particular deference. Contributors could (and did) post anonymously. The purpose of allowing anonymous contributions was to encourage people who might otherwise be loathe to contribute for fear of repercussions. This laissez-faire governance model seems to have worked, at least in terms of building community and creating a body of work quickly. From the original 24 articles from the Nupedia base, within two weeks Wikipedia had 600 articles. By March 2001, there were 1,300, 2,300 in April and 3,900 in May. As of August 2006, there

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were more than 4.7 million published Wikipedia articles in 229 languages—over one million articles in English, more than 100,000 articles each in nine other languages, over 10,000 articles in each of 35 other languages, and 1.5 million additional articles “under development.” Anyone Can Contribute; Articles Are Promoted by Consensus Anyone can author or edit content to contribute to Wikipedia. And thousands do. For example, 28,258 people contributed at least five times each (Active Wikipedians) in October 2005. In the same month, there were 4,573 “Very Active” Wikipedians (people who contributed at least 100 times that month). There’s a close-knit cadre of about 1,000 volunteer authors and editors who monitor the newly submitted edits and articles. Articles are categorized by the community as Good or Featured articles. In order to qualify as Featured articles, they need to be nominated, meet specific criteria, and gain approval by a consensus of reviewers. The world is definitely a better place post-Wikipedia. No matter what topic you need to know about, “Google it” and you’ll probably get a Wikipedia entry with a great definition and overview, and a good starting point for locating other resources. What’s really great about Wikipedia is that it’s free to all. It’s available around the globe in many languages. It’s more current than any printed source. Most importantly, it closes the knowledge gap. HOW A WIKIPEDIA ARTICLE EVOLVES Jeff Watts, who is search and syndication manager for National Instruments, offers this snapshot of how the Wikipedia posting for National Instruments’ LabVIEW software has evolved over time. The important take-away, according to Jeff, is that it’s important to respect Wikipedia’s policy of neutrality. The community will reject any attempts to create or edit encyclopedia articles that are selfserving in nature. The upside, Jeff points out, is that Wikipedia articles tend to rank high on Google searches, thereby improving the visibility of your products, if they merit a mention in Wikipedia.

Wikipedia

© 2006 National Instruments

© 2006 National Instruments

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The evolution of a Wikipedia article about National Instruments’ LabVIEW software product.

Dealing with Unintended Consequences of Customer Communities You Can’t Put the Feathers Back in the Pillow In his editorial in USA Today on November 29, 2005, John Seigenthaler, Sr. told this story:5 “When I was a child, my mother lectured me on the evils of ‘gossip.’ She held a feather pillow and said, ‘If I tear this open, the feathers will fly to the four winds, and I could never get them back in the pillow. That’s how it is when you spread mean things about people.’ ” John went on to say, “For me, that pillow is a metaphor for Wikipedia.” John was libeled by someone who maliciously edited his Wikipedia biography, falsely accusing him of being a suspect in heinous crimes. The libelous material remained on Wikipedia for four months, during which time it was syndicated by other heavily trafficked information sources, including Reference.com and Answers.com. Once he was alerted to the libel, John and his lawyer spent four months trying to locate the

Wikipedia

libeler and to seek redress. Wikipedia couldn’t identify the culprit. All of his postings were anonymous. Wikipedia could (and did) remove the offending material, but couldn’t pinpoint its source. Because Wikipedia is classified as an information service, not as a publisher, it’s exempt, under U.S. laws, from being liable for the damaging misinformation that was propagated from its site. Another interesting part of the Seigenthaler saga is that the culprit did confess and apologize, but only after he was tracked down by Daniel Brandt.6 Daniel Brandt has been very vocal in his criticism of the Wikipedia Foundation on his Wikipedia-watch.org Web site, and has been labeled as a kook by members of the Wikipedia community. Daniel asserts that Wikipedia has been structured so that it actually encourages slander, pranks, and misinformation, and promotes libel. Brandt wrote a prescient editorial calling attention to many of the issues with which the Wikipedia community has since had to contend: There is a problem with the structure of Wikipedia. The basic problem is that no one, neither the Trustees of Wikipedia Foundation, nor the volunteers who are connected with Wikipedia, consider themselves responsible for the content. If you don’t believe me, then carefully read Wikipedia’s disclaimer. There are two unique characteristics of Wikipedia that can be very damaging to a person, corporation, or group. The first is that anyone can edit an article, and there is no guarantee that any article you read has not been edited maliciously, and remains uncorrected in that state, at the precise time that you access that article. The second unique characteristic is that Wikipedia articles, and in some cases even the free-for-all “talk” discussions behind the articles, rank very highly in the major search engines. This means that Wikipedia’s potential for inflicting damage is amplified by several orders of magnitude.7

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In another high-profile example, in December 2005, MTV star Adam Curry admitted to having edited the entry on podcasting to give himself more credit than others for inventing the popular genre.

How Is Wikipedia Dealing with These “Unintended” Consequences? The Wikipedia core community of volunteers, dedicated contributors, and editors has been operating under the assumption that their communally-created and refined knowledgebase will be self-correcting. Errors will get caught and reported by the general public who reference the material. Misapprehensions or misstatements of fact will be challenged and addressed. What the founders and the community apparently didn’t think (enough) about is the possibility of slander, character assassination, and pranks with unintended consequences.

How Wikipedia Is Changing Its Modus Operandi

Experiment: Article Authors are No Longer Anonymous. In response to the Seigenthaler flap, Wikipedia has entered an “experimental” period of disallowing anonymous people to create articles on the English version of Wikipedia. Only registered (and presumably traceable) users will now apparently be allowed to create and post articles. In its press release of December 5, 2005, the Wikipedia Foundation wrote: “Founder Jimmy Wales . . . experimentally removed the ability of unregistered users to create new articles in Wikipedia. Unregistered users will still be able to fix spelling mistakes and add to existing articles but are required to register a user account before creating new pages. Wales said: ‘This will reduce the work load on the volunteer editors controlling contributions to the project.’ ”8 This is a good first step, but it clearly doesn’t prevent the kind of libel to which John Seigenthaler fell victim, since an anonymous editor made changes to an existing page. A better approach would be to require all contributors—both article creators and editors—to

Wikipedia

be registered and traceable users. I suspect that the Wikipedia community will eventually decide that anonymity for editors as a public good is outweighed by the need for accountability and redress.

Semi-Protection Policy Approved. There is another type of vandalism that has plagued Wikipedia: a pattern of rapidly recurring changes to a particular article. The most notable of these is the incessant vandalism of the Wikipedia article on George W. Bush. To deal with this kind of “piling on,” the Wikipedia board has approved a change (which as of this writing has not yet been implemented in software), to wit: “Semi-protection of a page prevents the newest X% of registered users and all unregistered users from editing that page.”9 If a page is being repeatedly vandalized, it can be protected by request. As the policy explains, this is not a pre-emptive measure against vandalism, but it’s a response to vandalism. Published Version Is Reviewed. The Wikipedia Foundation debated the merits of having two versions of the site: a stable, published version, and an editable version. The articles that appear in the published version would have been through a community review process (not necessarily an expert peer review process). Essentially, the author of any “featured article” submission can request “creative feedback” (also labeled peer review) from the community. The purpose of the stable site is to improve the quality of and trust in Wikipedia information. Presumably if you are reading an article on the stable site, you’ll be seeing neutral information that has been checked (at least by members of the community) for obvious vandalism, editorial slant, and proper citations.

Dealing with Vandalism and Slander Is Different from Improving Information Accuracy and Authority The Wikipedia Foundation appears to have taken the first baby steps in confronting the biggest problem with Wikipedia: vandalism and slander. Now it will be interesting to see how well the community

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deals with the second challenge: improving the accuracy and authoritativeness of its articles.

Should Wikipedia Be the Last Word or the First Word? Wikipedians want their collaborative brain child to be viewed as a free alternative to the Encyclopaedia Britannica and other published works that many people in the world may not be able to afford. That means that its information needs to be trustworthy. The “we’re as accurate as the other guys” argument seems to have been bolstered by the special report published in the journal Nature, comparing the accuracy of scientific articles published in the Encyclopaedia Britannica and those in Wikipedia, and essentially declaring a tie. “Only eight serious errors, such as misinterpretations of important concepts, were detected in the pairs of articles reviewed, four from each encyclopedia. But reviewers also found many factual errors, omissions or misleading statements: 162 and 123 in Wikipedia and Britannica, respectively.”10 At the same time, Wikipedians appear to be contemptuous of people who actually rely on it as if it were an authoritative source. They are critical of reporters who take them to task for not being trustworthy, suggesting that reporters, in particular, should know a thing or two about source checking. In the summary of its “Researching with Wikipedia” article, the Wikipedia Press Kit suggests “In some cases, it’s better to use Wikipedia as the first step in the research process, rather than the last step.” In fact, the BBC’s Bill Thompson was praised by one Wikipedian for this quote: “I use the Wikipedia a lot. It is a good starting point for serious research, but I would never accept something that I read there without checking.”11 The Most Current Word and the First Word. Over time, as the Wikipedia Foundation tightens up its quality control and peer review processes, the published/standard versions will become a more trusted source. But my prediction is that Wikipedia will never become the most trusted source of information—the last word—on anything. What it will do is fill a hugely important gap in every field of endeavor. For many of us, Wikipedia has become the first place we go to find out the latest information on a topic.

Wikipedia

TAKE-AWAYS FROM WIKIPEDIA If you want to harness the contributions of a group of customer volunteers, you need to be very careful about how you structure the governance of your community. Think carefully about the following dimensions before you begin: • Establish and maintain the authority to set policies, processes, and to enforce compliance.

• Consider carefully the consequences of permitting anonymous posts and comments.

• Determine how subject matter experts and referees will be selected. A meritocracy is one way to do it; appointing people is another way; taking turns is another. Voting or consensus may not yield quality results.

• Establish the tone and charter of your community to be clear and respectful.

• Enable work-in-process to be visible but clearly distinguished from “accepted” or “published” work.

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X I S R E T P A CH Enabling Customer Co-Design Using Customer Co-Design Tools and Innovation Toolkits

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here are a number of different kinds of customer co-design tools that you may find of value in working with lead users (advanced users who aren’t yet customers) and lead customers. The purpose of offering co-design tools is to make it easy for customers to design their own ideal solutions, leveraging your domain knowledge, learning what’s possible as they do so. By giving customers design tools, you shortcut the laborious and time-consuming handoffs between the customer and the producer. You know the usual drill: Customers try to convey their requirements. You propose a solution based on your understanding of their requirements. They discover more about what is possible and about what they want and need in the process. You go back and forth until you both run out of time and resources and settle for the best that can be done under the circumstances. Maybe they didn’t really know what they wanted, after all. It’s hard to envision a solution that doesn’t yet exist.

Enabling Customer Co-Design

Co-Design Tools Correctly Separate the Customer’s Domain Knowledge from the Supplier’s Domain Knowledge By empowering your customers to create their own solutions, through the use of co-design tools, you transfer to your customers the hard part of the problem—specifying exactly what it is that they want and need. Design tools allow customers to iterate many times before they hand their design to you to produce for them (often with the click of a button). In the case of an electronic or digital solution, the final assembly and delivery may be virtually instantaneous. If the product is a physical one, the lag time from design to production typically varies from hours to days or weeks. The co-design tools you offer your customers provide a mechanism to “open up” your proprietary expertise without exposing your intellectual property or compromising the deep domain knowledge on which your business is based. The way I picture it is this: it’s as if you’ve opened up your business and given your customers a way to roll up their sleeves, stick their hands into your domain expertise, and roll their own highly customized solution. Yet, because you provide the tools—essentially the interface—to leverage your company’s proprietary know-how, you’re offering customers the ability to create a complete tailored solution—which is something that many of today’s self-service customers have come to expect and appreciate. Of course, your own employees can also use these same tools to help customers design customized solutions, or to design solutions for them. There’s a wide range of end-user toolkits—software tools, manual tools, and tools for the mind—and they all have one purpose: to empower the end user or customer to envision and create their own ideal solution. Some of these tools are fairly constrained. They empower the customer to customize or configure a solution to meet their needs. Others are more open-ended—they provide a springboard for true creativity and innovation.

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A Continuum of Customer Co-Design Tools Customization, Configuration, and Build-to-Order Tools There’s a set of tools that enable customers to configure or customize their own solutions. They include:

1. Configurators Configurators are usually interactive software programs that enable the user to custom design a solution that can be built to order or executed. The customization options are based on a set of constraints or rules. Configurators are used to customize software, travel itineraries, print runs, computer systems, shoes, backpacks, clothing, cars, etc. The number of options you have to choose from at any step in the customization process is limited. Each set of choices narrows the options available for the next set of customization choices. The customer can try out different combinations and permutations until they find the optimal solution based on the constraints.

2. DIY Construction Kits You can provide customers with a set of parts and steps they can use for do-it-yourself projects in order to design their own customized solutions. One type of do-it-yourself toolkit is a kit of physical parts that you send to customers, consisting of components that let them build their own solution. For example, Elite Vintners lets you select or configure the wine blend you want online and then sends you the ingredients that allow you to produce that special blend in your own home. Or a chef can turn a favorite recipe into a commercially manufacturable food by using ingredient kits provided by firms like International Flavors and Fragrances.1 Or a home designer can enable customers to select the options they’d like for their home, and ship the plans and the premanufactured components to the building site to be constructed and modified by a local builder. Customers’ options are constrained based on the components/ ingredients they have selected and/or that the supplier provides. Either

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the customer performs both the customization and production of the final solution (wine, home). Or the customer uses the kit to produce a prototype or mock up that is then sent back for actual testing and production (commercial recipe). But a DIY kit doesn’t have to be a collection of physical ingredients. And it may also include customer-created components. When our kids created a calendar featuring pictures of our grandkids, using the “design your own calendar” tools at Snapfish, they were configuring a new product from photos they had taken. The customization process was entirely electronic. Snapfish arranges for the printing and shipping of the final calendar.

3. DIY Workshops There are businesses built to support the do-it-yourself urge that people of all ages have. Build-A-Bear is a great example of a retailer that built a healthy business providing DIY workshops. Customers come to the stores to custom build their own stuffed animals. Mattel has just opened up a kiosk-based application that is available in a corner of the FAO Schwarz toy store in Manhattan. Kids design their Hot Wheels cars on screen and receive a customized Hot Wheels car, which is assembled to order by an employee while you wait. Or, you can create even more open-ended designs at “Paint Your Own Pottery” studios—starting with a plate, bowl, mug, or vase that you paint and decorate yourself.

Customer Co-Design Tools and Enablers What if you want customers to do more than configure or customize a product? What if you want customers’ help in co-designing tailored offerings that will better meet their needs—not only products, but services, information, experiences, and the supporting processes required to deliver the desired experience? And what if customers can’t quite articulate what it is they really want and need? Maybe they don’t know what they want. Maybe they haven’t thought about it enough. Maybe they have trouble visualizing what’s possible and/or

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making trade-offs. There is a set of customer co-design tools that you can use to empower customers to articulate, envision and co-create their desired outcomes and scenarios. 1. Customer Visioning and Co-Design Tools In this chapter, we’ll describe two kinds of customer co-design enablers: SEI Wealth’s board game for engaging customers in strategic co-design conversations and our customer co-design technique, Customer Scenario® Mapping. Unlike ideation sessions or visioning workshops, these two approaches share two characteristics: 1) They enable customers to create and envision their own ideal outcomes; 2) They create a lasting structure for empowering customers and codesigners to achieve the customers’ vision—by maintaining the structural tension between customers’ ideal experience and outcomes and the current reality. Innovation Toolkits and Environments 1. Solution-Specific Design Environments Many companies are now offering knowledge-based platforms for designing specific kinds of solutions. For example, National Semiconductor’s WEBENCH environment lets customers design and test analog circuits; GE Plastics’ ColorXpress online design environment lets customers create new colors of resins. These solution-specific environments are much more open-ended than a configurator, yet like a configurator, they embody a good deal of domain expertise, including detailed business rules about what works together, databases of ingredients or components, and algorithms, simulations, or tests that customers can run to validate their designs. 2. Open-Ended Co-Design Environments There are also open-ended design environments that let customers codesign virtually any solution. For example, a customer can use National Instruments’ LabView software to design their own application

Enabling Customer Co-Design

to sense, monitor, analyze, report, and respond to just about any stimulus. Or a customer can use Autodesk’s AutoCad software to design a part they want to have manufactured, or a building they want you to build. Or customers can use Lego Digital Designer to design a structure that can be built using Lego blocks and components. These customer co-design environments become innovation enablers for your business if you watch the patterns of what customers are creating with these tools and how they’re pushing the envelope, and use those customer patterns to continually improve the tools as well as to anticipate and enable the customers’ next set of design tasks.

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Customized, Built-to-Order Products Solutions That Are Configured by Me and Built for Me

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discussion of mass customization belongs in any book about customer-led innovation. When you give customers tools to configure their own customized products, and set up your production processes to quickly produce those products at a cost that is near the cost of mass-produced products, we call that practice mass customization.1

Designing Products to be Customer-Configurable and Built-to-Order When you enable mass customization, you’re designing all of your product development and manufacturing processes from the customers’ point of view—from the outside in. In order to be able to deliver customized or personalized products cost effectively, you must first ensure that you have a manufacturing or production facility that can cost-effectively produce products that are custom-designed for each individual.

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Producing customized digitally-produced products—software, information, music—appears simpler than the process of providing customized physical products, like cars, computers, or apparel. Yet there are challenges in both situations. In the case of digital goods, you need to ensure that you have the rights to produce the creator’s work in customizable ways—e.g., chapters, sections or pages of books, tracks of music, designs, blueprints, etc. You also need to be sure that you have the rights to distribute those works in the territories in which the customer chooses to consume them, the rights to translate those works, and the rights for the works to be used (e.g., performed, read out loud, broadcast, turned into a screenplay, create derivative works) in the ways in which customers intend to use them (commercial, non-commercial, with or without restrictions). In the case of physical goods, you’ll need to set up, or contract with, a lean manufacturer whose production processes are optimized to make it easy to assemble or to build-to-order one-off goods. That means that you also need to design your products to be easy-toconfigure and assemble. The “make products easy to configure” part of the equation will usually require major changes in the way you think about and design your solutions. All of a sudden you begin to think about products in the ways your customers view them. You only need to enable customization for those attributes that matter most to customers.

Providing Configuration Toolkits The constraints within which customers can select options and configure their own customized products are typically built into the tool used to capture the customer’s customized design. These tools are usually, but not always, software-based configurators that are presented to the customer on a Web site, an in-store kiosk or computer, or on a hand-held device. Often, the customer may choose to configure and customize his/her solution in partnership with one of your sales associates, dealers, or knowledgeable customer service representatives. Increasingly, we’re seeing customization become a group effort.

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Customers often need to be able to save their configurations, discuss them with others, share them with others, and let other people provide input or changes, before they finalize their designs. Sometimes you’re configuring a solution that has to meet the needs of a variety of people—like a shared travel itinerary for a group of people traveling together but coming from different cities. Customers also change their minds or think of new criteria or context after they’ve committed their designs. It’s good practice to enable customers to rework their configurations, without penalty, even after they’ve placed their configured orders. Cisco discovered that 95 percent of the change orders it received occurred within the first 24 hours after a configured order was placed. By enabling customers to make changes after the order was placed but before the actual assembly process began, Cisco dramatically reduced customers’ aggravation, increased customer satisfaction, and reduced its own overhead and return-handling costs.

How Innovative Are Custom-Configured Products? There is definitely a trial-and-error, learn-by-doing behavior involved when customers download their own games and ring tones, create their own travel itineraries, specify the dimensions and details for their clothing, select the colors and textures for their backpacks, select the characteristics of the shoes that will meet their needs best, customconfigure their cars or motorcycles, or put together a custom playlist or podcast. Sometimes customization is a “nice-to-have” feature of a product— as when kids can select the colors for their backpacks and add monograms and logos, or when users customize their own portals, configure their blogs, and design their avatars for a computer game. In other situations, customization is a “must have” characteristic in order for the products to meet the customers’ desired outcomes. For example, Getty Images’ advertising customers must specify whether the professional photos they are licensing will be used in all of Europe or only in France, whether that image will appear on billboards, subways, and park benches as well as on TV, and for what period of

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time they want to have exclusive use of that particular image. An athlete often must have shoes that are custom fit and optimized to maximize her performance. The constraints within which customers can design their own products are set by the brand owner and/or copyright holder who offers the customizable products. Clearly, customers are not inventing new products or solutions when they configure a product based on a set of predetermined constraints. They aren’t even improvising. Yet by enabling customer-configuration for those products and solutions that customers want and need to be able to configure, you are becoming a more innovative company. You’re enabling your customers to control the things that matter most to them. You’re opening up your own design and production processes from the outside in. It’s an important step.

Making a New Genre of Products Customer-Configurable Is a Process Innovation If yours is the first company in your industry to respond to customers’ desire for mass-customized products, and you make it possible for your customers to customize or configure a product or service that has previously not been customer-configurable, you are engaging in process innovation. When you give customers control over the selection of the attributes that matter most to them, you are opening up your company’s internal, heretofore closed (and often proprietary) product and solution development activities. This makes you a leader in innovation. But don’t stop there. If you are successful in meeting customers’ needs for custom-designed products, you can expect your competitors to be fast followers.

Advice for Fast Followers in Customization What if you aren’t the process innovator? Once one player in your industry has launched a popular “build-your-own” or “custom-designyour-own” capability, you may need to follow in order to keep the most creative of your customers engaged and loyal. If you do

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customization and build-to-order well, you will increase your margins on those products, so it’s usually worth the investment even if you aren’t the first.

Where to Learn More about Mass Customization There are now dozens of customer-customizable solutions emerging in many industries. We offer just a few examples in these pages. If you’re interested in delving deeper into mass customization and buildyour-own solutions, I recommend Professor Frank Piller’s blog and Web site.2 Frank has been following the trends in mass customization since 1997, has researched and written many papers on the subject, and offers a clearinghouse of up-to-date information on mass customization and open innovation.

Customer-Configured Computer Systems In the computer business, customers expect to be able to customconfigure many of their own solutions to meet their precise needs. Customer-configurable systems don’t fall into the “nice to have” category. Today’s customers expect to be able to order the particular configurations they want and need. They don’t expect to pay a premium for the privilege to do so. Yet, in practice, customers who selfconfigure their own products tend to spend 20 to 30 percent more than customers who purchase off-the-shelf solutions.

Cisco Systems Cisco is just one example of the many computer systems and software suppliers that enable customers to configure their products using an online configurator on their Web site. This capability has been a core part of Cisco’s offering since 1999. Both customers and Cisco’s distribution partners use Cisco’s online configuration tools to configure the hardware and software options for which they want price quotes and/or to place an order.

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Managing Configuration and Assembly for Channel Partners. In the computer systems industry, value-added resellers (VAR) and system integrators were expected to earn the discounts they received from brand owners, like Cisco, by custom-configuring and assembling software and systems for business end customers. However, when Cisco discovered that customer satisfaction scores were often lower for orders placed through its channel partners, Cisco decided to take control of the quality of the configuration and assembly process by enabling end customers to configure their own systems, have Cisco validate and assemble the system (build-to-order), then ship the assembled system to the partner or direct to the customer. The VAR or system integrator still receives credit (and his discount/ commission) for the order and still performs the installation, integration, and further customization work at the customer’s site. The “value-added” is no longer the configuration and assembly process. Cisco’s Configurator Has Become a Reusable Configuration Software Service. Cisco’s customer-facing e-business organization was among the first of our clients to realize that its Web-based configurator could be delivered as a software service to Cisco’s large partners and corporate clients. So instead of coming to Cisco’s Web site and logging on, large customers like AT&T could access the Cisco configurator from within their own company’s internal procurement system and online catalog. Every time the configuration software was updated on Cisco’s Web site, the configuration services used by Cisco’s clients and partners were automatically updated as well. The benefits to Cisco’s customers: They always have the latest version. The benefits to Cisco: The software developers only need to maintain and update a single version of the configuration service. Product and system configuration is big business for Cisco. A large proportion of the company’s $25 billion in revenues comes from products that are configured by the customer or the partner and built-to-order.

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Dell Computers Of course, Dell is the best known of the computer suppliers, enabling customers to configure their own computers. What has differentiated Dell from its competitors has been the Dell Direct model: the fact that every computer is built to order as the order is placed. Customers configure their Dell systems online, with or without the help of a sales associate on the phone. Consumers can also visit any of the 145 Dell Direct kiosk locations (in shopping malls, airports, etc.) where they can see and touch the products in addition to being able to configure their own systems at the kiosk, with assistance from a knowledgeable representative. Business customers typically select from configurations that were preconfigured for them by their IT departments. One of the secrets to Dell’s success is that the company’s customers finance the company’s inventory by paying up front for components that are then purchased in real time as they’re built into customer-configured products.

Customers Up-Sell Themselves. Another pillar of Dell’s profitability is the fact that customers who “roll-their-own” systems typically add in functions or features that add to the price (and profit margin) of the final configured product. Laptop customers often purchase a carrying case, extra batteries, and an extra power supply, as well as additional memory when they configure their own systems. But when they place their orders by phone, customers often resist those suggestions. For example, when Dell began offering its most lucrative service contracts as an easy-to-add online option for each system sold to small business customers, 70 percent of online buyers added the service contracts to their purchases, increasing Dell’s margins. Offer Recommended Configurations that Customers Can Modify. Over the many years we’ve been following Dell, the company has evolved the way it handles online configuration. For several years, the customers who use Dell’s Web site to select and purchase computers and servers made it clear that configuring every system was tedious at best. They were quite vocal in asking Dell to propose the correct configurations for different uses and then let them extend or modify

Customized, Built-to-Order Products

the suggested configuration. So Dell began to offer more recommended configurations that were optimized for different uses. Customers can purchase those preconfigured systems or modify them. For example, in early 2006, popular laptop configurations for small business users in the United States included a “road warrior solution,” a desktop replacement solution, a basic computing solution, and the top-selling solution. You can either accept any of those configurations (with optional add-ons like extra batteries, power cords, carrying case, and a bundle of software applications), or you can start with the suggested configuration and examine the options available for each of the components. As you do so, Dell offers a “help me choose” tutorial that walks you through the rationale for why you might prefer certain options, such as a faster processor or more memory. Dell’s revenues for its 2006 fiscal year were $56 billion—the majority of that revenue is derived from customer-configured, built-to-order products.

Customized Apparel and Bags Timbuk2 Back in 2001, when we first wrote about Timbuk2 Designs, the scrappy little San Francisco-based firm was the first lean manufacturer of “sewn goods” in the United States. This small company was able to produce each built-to-order, customized messenger bag in 48 hours and sell them for the same price customers would pay for a comparable mass-produced bag. In 2002, Timbuk2 Designs was purchased by a group of private investors, led by CEO Mark Dwight. Over the ensuing five years, Timbuk2 Designs expanded its operations by keeping its build-to-order operation in San Francisco and adding many additional massproduced products manufactured in China. The designs of the massproduced messenger bags are derived from the most popular customer-configured bags in its build-to-order operation. By 2005, the privately-held company had quadrupled in revenues, become more profitable and had a second management buyout, bringing in a new group of private equity investors. The forty

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hard-working employees in the San Francisco lean manufacturing facility were able to split a $1 million bonus. Timbuk2 bags are sold through large retail chains, such as REI, Eastern Mountain Sports, and Apple stores, as well as smaller bicycle, luggage, and specialty shops both in the United States and in many other countries. What Timbuk2 has found the most challenging has been to enable retailers to offer the customization option in their stores. Some bicycle shops and other retailers found ways to let customers design their own bags right in the store, by offering them a laptop or kiosk with the configurator on it. But by and large, retailers have preferred to stock off-the-shelf models of Timbuk2 bags.

Lands’ End Lands’ End (now part of Sears/KMart) has been offering customtailored clothing since October 2001. Lands’ End Custom clothing began with men’s and women’s blue jeans and chinos. The order volume and customer acceptance of these made-to-order pants exceeded the team’s expectations. Bill Bass, director of e-commerce for Lands’ End at the time, expected that custom-configured pants would amount to about 10 percent of orders. Instead, the percentage of customers ordering custom-tailored pants quickly rose to 40 percent of online sales for each of the pants categories for which custom ordering was an option. Many customers ordered more than two pairs of identical custom-tailored pants (often one in each color). Bill Bass remembers that the process of training customer service reps to be prepared for the issues that would arise when a custom product didn’t fit well was one of the most challenging hurdles. “Our customer service reps prided themselves on high customer satisfaction and low return rates,” he explained. “When we told them that this product line would yield unhappy customers and a larger percentage of returns, they were appalled. So we had to convince them that in the end, our Lands’ End Custom customers would be very happy and immensely loyal. Luckily for me, that prediction turned out to be true!” Bill explained that his team had gone to great lengths to solicit feedback from Custom customers and to convince those customers

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who were unhappy with the fit of their pants to try again. “We sent e-mails to everyone who ordered custom-tailored clothing and asked them to give us very specific feedback about the fit. For those who said that the fit was only fair or worse, we asked them to return the item for a full refund and offered a discount on the second try. That worked really well. It helped us tune our fitting algorithms, and most customers were delighted with the fit the second time around.” A year after launching Lands’ End Custom pants, the Sears subsidiary unveiled its custom shirt offering in October 2002. Men’s custom shirts succeeded in bringing more men to Lands’ End as repeat customers, particularly those with neck, arm, and chest sizes that don’t fit the standard sizing stereotypes.

Custom-Designed Shoes Customization is hitting the shoe industry in a big wave. For a number of years, customized sports shoes were a definite niche market. But in 2005, thanks in part to celebrities like 50 Cent, Jay-Z, and Pharrell, it became cool to design your own footwear. Now Adidas, Converse, Nike, Reebok, and Puma all offer custom-designed sports shoes. All of the sports shoe manufacturers outsource their manufacturing anyway, so outsourcing the small build-to-order portion of their business has been an easy way to experiment with customer codesigned sports shoes. As with backpacks and apparel, when you custom-configure your shoes, you’re either deciding what colors and fabrics to use for each section of the shoes, and/or you’re enabling customers to gain a better fit. Adjusting to different sizes and dimensions of feet is either handled by letting customers pick a different size for each foot, or by scanning and measuring the foot to create a digital profile of the foot.

Nike and Converse Nike has been offering the ability for customers to customize their own running shoes from the Nike iD Web site since 1999. In late 2005, Nike’s sister company, Converse, introduced its own online

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custom-design-your-own shoes capability, leveraging the same configuration tool, but with a very different look and feel. The customization tools offered on the two brands’ Web sites let customers assemble shoes from standard sizes and styles, but play around with color combinations. You select your own colors for each part of the shoe, including the laces, trim, and each panel. And you can add your own name or team’s name. The custom-configured styles cost about the same as the list price for their mass-produced counterparts. But you can easily walk yourself up in price with customizable options.

Promoting NikeiD Is Paying Off. Nike has been promoting its custom configuration option in innovative ad campaigns and in its NikeTown retail outlets. For example, Nike ran an attention-getting ad campaign in Times Square in New York, in which mobile phone users with interactive Web access could custom-configure a shoe on their phones’ color displays and then see their creations broadcast on the large electronic billboard in Times Square. Nike also invited music and sports celebrities into a private customization salon at its NikeTown store in Manhattan. People who didn’t receive the coveted invitation flocked to the NikeiD Web site to design their own custom shoes, so they too, could be part of the in crowd. The NikeiD “design your own shoes/shirts/soccer ball” etc. strategy is paying off for the company. It’s a profitable service, a brandbuilder and a customer magnet.

Adidas Adidas AG began to experiment with “made-to-order” custom manufacturing in test markets in 2001. Adidas began its test marketing by piloting the program in selected retail stores and at specific sporting events, such as soccer games. True to its brand, Adidas focuses on performance and fit more than on colors and style. Christoph Berger, the director of mass customization at Adidas, explains: “The company provides a service that, until now, was only available to top athletes. . . . Customers’ feet are scanned using a foot scanning system, in order to determine the exact length, width and pressure distribution

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of each foot.”3 This information is entered into a software program at a sales kiosk to determine the best-fitting shoe. The customer is then given prototype shoes in the right fit and style to try on. “Once satisfied with fit, the customer designs the color elements and selects material preferences. All of these steps are performed with the help of a sales kiosk leading the customer through the co-design process, supported by a sales clerk.”4 The shoes arrive within three weeks. Adidas is able to price its custom shoes 30 to 50 percent above its standard shoes. But the company has discovered that it is difficult to train and incent sales associates in third-party retail outlets to take the time and trouble to help customers through the customization process. Therefore, Adidas is now offering this service at Adidas-brand retail outlets, where it can control the end-to-end customer experience and offer the customization capabilities in the stores. Once customers have a custom shoe they like, it’s easy for them to place repeat orders by phone. Reebok I met Brennan Mulligan at Timbuk2. He was the young leanmanufacturing expert and enthusiast who transformed Timbuk2 Designs from a small boutique operation producing a few thousand messenger bags based on the original founder’s designs, to a showcase for build-to-order and lean manufacturing in the “sewn goods” industry. Brennan sold Timbuk2. He then started a new business through which he set up a custom bag manufacturing operation for NikeiD, and then was lured away by Reebok to set up Reebok’s own build-toorder shoe business. This time, Brennan headed for China. He knew that all of the sports shoe manufacturing for the major United States and European brands takes place in the Far East. So he worked out a deal with China’s largest shoe manufacturer to set up a small lean-manufacturing shop right on premises. This way Reebok gets the benefits of both the Chinese labor differential and the efficiencies of a true kaizen flexible manufacturing line. “The Chinese manufacturers say they do ‘lean manufacturing’ but they really don’t,” Brennan reports. “They just throw people at the problem.” Brennan’s operation is the first to

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design a true “single-piece flow” process, in which each team of sewers produces complete custom shoes, and each sewer gets to perform a different step in the process throughout the day. One of the things that has decreased dramatically, Brennan reports, is the cost of air freight from China. The freight cost for twoday delivery from China is now quite close to what most customers are willing to pay. That means that it’s now possible for his team to build custom shoes to order within 48 hours, ship the shoes the next day and have them on the customer’s feet within five to seven days (rather than three weeks, which has been the norm). Reebok is the first company that has been able to combine quick fulfillment with a completely customizable shoe from a manufacturing standpoint. After talking to Brennan on a Friday afternoon, I configured my custom Reeboks the next day. They arrived the next Friday morning. I happily spent $90 plus $10 shipping and handling. And I definitely gained cachet among my colleagues, friends, and family to whom I proudly showed off my custom-designed shoes with my name on the back of each one. The margins are great as well, Brennan Mulligan reports. Reebok began its custom design effort with an older shoe style which is heavily discounted in retail outlets in the United States. “The suggested retail price for this model shoe is $60, but consumers rarely pay that. The street price is closer to $50. The margins in the shoe business are typically 40%. By contrast, the same model shoe that a customer designs on the Reebok custom Web site typically sells for $85. Our manufacturing costs are slightly higher, but not a lot. So the custom shoe business generates significantly higher profits for Reebok. Buildto-order is still a low volume business, but it’s ramping up quickly in the athletic footwear business.” Designing your own shoes is clearly the fashionable (and profitable) thing to do.

Custom-Designed, Built-to-Order Cars I wrote about General Motors’s United Kingdom Vauxhall division in The Customer Revolution in 2001. Back then, Vauxhall was one of

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the first (and only) firms to enable customers to purchase their cars direct on the Internet. Customization options were limited to the kinds of assembly that could be handled on the dealer’s lot, but Vauxhall did pioneer the direct-to-consumer via the Internet-with-dealerinvolvement (rather than bypassed) sales model.

Configure Online, Locate the Closest Fit. Today, every car brand has an online configurator. But few of these configurations go from the customer’s screen to the factory. Instead, the final configuration typically takes place in the dealer’s showroom, often on a different configuration and ordering system. Customers bring in their printouts of their custom-configured car and the salesperson either locates a car that comes closest to the configuration, or he can configure a car that meets the customers’ specs, and check for timing and availability in his order management system. In the United States, customers rarely receive a custom-configured, built-to-order car. The dealers would much prefer to sell a car out of their inventory or from another dealer’s inventory. Configure Online, Check at the Dealer, and Build to Order. At BMW’s and Volvo’s European Web sites, customers who configure their cars online are encouraged to park their configured car in their virtual garages on the Internet. When the customer then arrives at the dealership, the salesperson can call up their configuration, convert it to a preorder, check to see how long it will take to build, and whether there is anything close in stock. We’ve heard from both BMW and Volvo dealers that the cars that customers configure online tend to be 30 percent more expensive (and more profitable) than the ones that are co-configured at the dealership with the sales person. This is the same pattern that Dell saw with computers. As customers, we’re more likely to up-sell ourselves when we are on our own than when we are sitting with a sales rep. Of all the European car manufacturers, BMW appears to have the most agile build-to-order manufacturing system.5 All BMW cars (and Mini Coopers) are, in fact, built-to-order. However, in some cases, the orders are placed by car dealers in anticipation of customers’ needs. In

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Sweden, for example, about 25 percent of the BMWs sold “come from dealers’ stock,” according to Marta Walker and Lara Rivera, who researched European manufacturing systems in 2004. “A (BMW) car is assembled from interchangeable components. These components can be used in different models and they are being massproduced. BMW factories use modularization. Request for changes can be taken into account up to eight days before the commencement of final assembly.” In most parts of the world outside of the United States, the majority of cars are now built-to-order with relatively short (weeks, not months) lead times. In Europe, for example, at least 50 percent of cars are built-to-order. The remaining cars are sold to businesses in fleets and/or preordered by dealers, with the ability to change the order close to the actual manufacturing date. The United States lags in its adoption of custom-configured, built-to-order cars. Car dealers are a very strong lobby in the United States and dealers are concerned that manufacturers will either sell direct and/or will direct the customer to a different dealer. So in this country, customers can configure online to their hearts’ content, but the customer’s configuration is used (by the customer) to specify and price his or her car and used (by the dealer) to locate a car that comes close to the customer’s specification. Yet as an industry practice, preordering cars by guessing at what customers might want doesn’t make sense at all, since it means that both the dealerships and the manufacturers wind up with a lot of inventory to finance and shuffle around in order to meet customers’ needs. I believe that the car industry is in the process of moving from a build-to-stock model to an assemble-to-order model. In fact, the Japanese, European, and South American car industries are already there. Today, much of the assembly takes place in the car factories. Soon, more of that assembly will take place in the dealerships, as cars become more and more modular. At that point, customers will be able to configure online and have the car assembled at the dealership and delivered to their homes—in the way that Vauxhall pioneered in 2001.

Customized, Built-to-Order Products

Custom-Design Your Own Toys: LEGO In August 2005, Lego opened a mass customization Web site called Legofactory.com. Using a downloadable software toolkit, Lego Digital Designer, kids and hobbyists can design their own free-form creations using the CAD software to generate 3D models. You can order a customized kit, comprised of micro bricks. The Factory models are micro scale—smaller (roughly 1:50 life size) than the traditional Lego bricks and figures found at retail. Once you’ve created your electronic design, you can share it with others, you can submit it in a design contest, and/or you can order a kit with all the pieces required to build it. This latter capability is the mass-customization part. Lego describes the customized building sets this way: The custom-designed LEGO Factory sets arrive in custom packaging that shows a child’s model and name, and include all of the LEGO elements needed to build the virtual design in physical form. Every customized LEGO Factory creation will have a unique price dictated by the size of the model and elements used. Custom models will take from 48 hours to a week to arrive, depending on which shipment method consumers choose.6

Unintended Consequences. Remember the Adult Fans of Lego (AFOLs) who hacked the original Lego Mindstorms software and firmware? As you can imagine, as soon as Lego Design Factory came out, they came in droves. What the adult hobbyists discovered was that the customized Lego Factory kits were very expensive— typically running $300 to $500. The high price was due, at least in part, to the fact that the Lego assembly center uses prepackaged palettes of bags of bricks and matches each user’s design with the number of bags of bricks required to build the design. According to a blog post by Professor Frank Piller,7 and an article in Cnet,8 within 15 days, members of the adult Lego community had “hacked” the Lego Factory Web site. They figured out how many of

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which kinds of bricks were in each bag and modified the Lego software. Dan Malec (a software engineer from Stow, Massachusetts) explained that he and a few others were able to modify the actual digital files that list the palettes users would see in Lego Digital Designer so that they were broken down bag by bag rather than being listed by palette. “Thus,” he said, “users can now see and work with the smaller bags in Lego Digital Designer and cut down on the cost of their models.” The reaction of the Lego executives in charge of the Design Factory was positive. They applauded the modification. By May 2006, Lego had incorporated the “user-hack” into Lego Factory. Now customers can order custom bricks individually, rather than having to order by the bag.

DIY Toolkits: Elite Vintners Elite Vintners is a Canadian firm participating at the high end of that country’s home-crafted wine business. According to Tim Vandergrift of competitor Winexpert, Ltd., The consumer-produced wine industry represents 20% of all wine consumed in Canada, both domestic and imported, and represents in excess of $300 million (Canadian) at retail. Two provinces, British Columbia and Ontario, allow “Wine On Premise,” essentially personal wineries where customers may purchase a wine “kit” (unfermented must, the raw material for wine) and contract for the production of small batches (typically 23 liters or roughly 30 bottles). The rest of the country has consumers purchasing the product and removing it to their homes for fermenting and processing.9 What Elite Vintners offers is a Web-based configurator that allows customers to select their desired alcohol level, to design a custom blend of varietals (e.g., shiraz/muscat, zinfandel/shiraz, cabernet/ merlot, muscat/riesling, etc.), select the appropriate yeast and oak additives. All of the ingredients are packaged up and shipped to

Customized, Built-to-Order Products

you. You do the actual fermentation, bottling, and aging in your home.

DIY Workshops: Build-A-Bear Workshops Maxine Clark, a seasoned retail executive, came up with the idea for a “build your own” stuffed animal store in 1997. But she wouldn’t have gone ahead with the idea if she hadn’t gotten a green light (and lots of help) from her own two kids—13-year-old Katie and 10-yearold Jack—and an advisory group of twenty children, aged six to fourteen, who helped co-design virtually every aspect of her first store in St. Louis. By 2005, Build-A-Bear Workshop®, Inc. had 200 stores in North America with average revenues of $615 per square foot (the U.S. retail average was $300 to $420). Revenues in 2005 were $362 million and net income was $27 million as the company continues to expand internationally. Build-A-Bear Workshops are interactive retail outlets, stores to which tweens (mostly girls) flock after school to craft their own personalized stuffed animals for themselves and their friends. Many adults have the Build-A-Bear habit too. They make their own stuffed animals, dress them, give them to their friends and relatives, and collect them. You can build a bear (or dog, or elephant, etc.) in the store—by first selecting your animal skin from a bin, then a heart, and a recordable or pre-recorded voice. Then go to the “stuff me” station to stand on a pedal that blows the stuffing into your bear (complete with hugs, love, kindness, friendship), then watch it be stitched up. Next you can select an outfit, register your animal, and get a birth certificate and carrying case. Birthday parties and other special occasion parties are a big hit at Build-A-Bear Workshops. Each child gets to make their own custom-built toy, and the whole group of kids enjoys the party experience. Each party group has its own Master Bear Builder (typically teenagers who are avid customers as well as employees) to walk kids through the process and help them stay within the parents’ budget.

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When Do Customized, Build-to-Order Products Provide the Most Payback? When All Products are Built-to-Order As we have all learned from watching Dell, if you can design your entire business around build-to-order, with just-in-time inventory management, you may have a huge edge over competitors. You no longer have to stock a lot of finished goods as inventory. You can adapt quickly to marketplace changes and to shifts in customers’ contexts and needs. Build-A-Bear is another good example of a company that is entirely based on design-it-myself and build-to-order. BMW is, too. If yours is a business in which your entire product line could be custom-designed and built-to-order, it’s definitely time to think about whether that makes more sense than following the massproduction model.

When You Sell Direct or Control the Distribution Channel Unless you own the retail channel—the way that Build-A-Bear does— it’s still difficult to successfully offer “customize your own” and build-to-order in the retail channel. There are two issues to doing so successfully. First, you have to train and incent retail associates to spend the extra time to walk the customer through the customization process. This is difficult (especially when the customer could use the tool at home). Second, there’s the instant gratification factor. Many customers would prefer to select an off-the-shelf item that’s available now over waiting for a week or more for a custom-designed product. That’s why the Build-A-Bear model works so well. Customers customdesign their product in the store, build it as they go, and walk out of the store with their customized fuzzy pal. Of course, in BuildA-Bear’s case, the customization experience is what you’re buying. You can go to the Web site and order a stuffed animal and an outfit, but it’s not the same thing at all as the experience of building your own bear.

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When You Want to Build a Direct Relationship with Lead Customers Mass-customization is less compelling as a business model when you only do it for a small portion of your products. Yet, it’s a great way for brand owners to reach out and touch a group of customers who would otherwise be anonymous and out of reach. Engaging customers in the design of their own customized products helps build a relationship as well as a healthy repeat business, as Nike and Lands’ End have discovered. When You Want to Cost-Effectively Serve Customers with Special Needs Adidas and Lands’ End are just two examples of the many companies that have chosen to offer made-to-measure shoes and clothing for customers who have the need or desire for a better fit and/or better performance.

“Configured by Me and Built for Me” Summary and Patterns If your competitors are already offering customizable, build-to-order solutions and your customers begin asking for them or defecting because you don’t offer customizable options, consider leap-frogging the competition. Here are several suggestions: 1. Let customers share their customizations with one another and make their own variations on top of other users’ customizations. 2. Instead of simply enabling customers to select among predefined colors and components, empower customers to create truly oneoff designs, by submitting their own artwork and designs. 3. Include an online discussion forum and encourage customerdesigners to suggest additional customizable attributes they’d like to see. 4. Run contests soliciting customers’ designs, letting them vote on each others’, and commercializing the best ones.

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Capture the Patterns and Use Them to Offer Recommended or Popular Solutions I’ve been dismayed to discover that many of the companies that offer custom-configurable products are not taking advantage of the obvious design patterns that emerge from watching the choices that customers make over and over again and commercializing those common configurations into standard customer-designed offerings. For example, an online travel agent might notice that a group of customers consistently creates travel itineraries in which they allow 90 minutes for each plane change, rather than the standard 45-minute minimum. They could conclude that there is a group of travelers who prefers to buffer their gate changes to allow ample time for restroom stops, snack provisioning, getting from one end of an airport to another, and unforeseen delays. They might also notice that the same group of travelers tends to select only certain airports as the hubs at which they’re willing to change planes—that they always eschew New York’s Kennedy Airport, LAX, and O’Hare, for example. They could then prepackage itineraries following these customer patterns and dub them the “low-hassle” itineraries. Many of the best online configuration tools now allow customers to start with a preconfigured solution and make their own tweaks to it. This is usually much faster and more satisfying for the customer than doing a complete configure-fromscratch activity. Empower Customers to Extend and Improvise Consider combining your constraint-based configurators with tools that enable customers to create their own ad hoc designs or improvisations in a more open-ended fashion. Configuring solutions from a set of predefined options and constraints is one form of customer codesign. Enabling customers to roll their own solutions, either by designing from scratch or by starting with a preconfigured option and making changes to it, is a good way of empowering customers to design their own solutions. These completely customized offerings may not be as cheap and easy to produce, but often customers will be

Customized, Built-to-Order Products

Creating a customizable solution is often a good way to spawn customer codesign. As customers configure their own solutions, you can detect the common patterns and use those to package up recommended solutions that can also be customized, extended, or hacked by customers. Ideally, make it easy for customers to extend or hack your solutions. That’s an easy way to enable customer innovation and spawn new product ideas from your customer and partner community.

willing to trade higher cost and longer time for something that precisely meets their needs. If several customers want the same kinds of flexibility, you now have the benefit of knowing what options you need to build into your mass-customization processes. Mass Customization Is Part of the Customer Innovation Continuum Mass customization and build-to-order are at one end of an ongoing spectrum of customer co-designed solutions. By empowering customers to roll their own solutions, you’re beginning to open up your business to customer innovation. But if all you do is provide a simple configurator, you’re not taking advantage of the real leverage you could be gaining from the use of customers’ desire to roll their own. In the accompanying illustration, you can see that once you create customizable solutions and allow customers to configure those

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solutions, you can detect patterns (from customers’ own configurations and from their usage) and package those patterns into recommended solutions or configurations. But then you should ideally enable customers to go further—to extend those configured solutions to meet their needs. If you don’t make it easy for customers to extend your solutions, the chances are great that if they need something different from what you offer, they’ll “hack” your wares or improvise in order to get closer to what they need. If you can detect the patterns of extensions and improvisations, you now have more ingredients from which you can commercialize new offerings. If you support a community of customers who are engaged in customization and co-design activity, and make it easy for them to share their results with one another, then you’ll gain the opportunity to leverage the improvisations of a larger customer (and partner) community.

TAKE-AWAYS FROM CUSTOMIZED, BUILT-TO-ORDER PRODUCTS Customers increasingly want customized products for two reasons: They provide a better fit for the customer’s situation, and they empower customers to be creative. In considering whether or not your firm should go down the path of providing customized, built-to-order products, you’ll need to decide whether to be the innovator/leader or to be a fast follower. • In what ways do your products/services lend themselves to being customer-configurable? • Are customers asking for these kinds of customizations? Can you pilot an example to see if customers would value customized products? • How would you redesign your products/services to be easy to build-to-order? • Can you develop or locate a build-to-order competency? • What margins would you be able to gain on customconfigured products? Would they be greater than your current margins? For how long? • What tools do you need to offer customers to make it easy for them to custom-configure their own solutions?

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• What configurations can you offer that customers could use •

• •

•

as starting points for further customizations? Can you make your customizable solutions extensible, so that customers could change aspects of the design and/or add their own features? Can you capture the patterns of customers’ customizations and extensions? Can you surround your customers and partners with a community of other customers with whom they can share their customized solutions and extensions? Can you benefit from the creations and innovations this customer and partner community co-creates by growing your business and commercializing more customer co-designed products?

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GE ColorXpress® Services Helping Customers Design Differentiated Products

I

’m on a really tight timeline,” the product manager lamented. “We need to start manufacturing these phones in China next week, and my European brand manager just vetoed the color our designer selected. It’s too similar to a competitive model. Can you help? Please!” That’s the kind of call that’s music to the ears of Dennis Yon, manager of services fulfillment at GE’s ColorXpress Services’ Customer Innovation Center in Selkirk, New York. “The client flew in on Friday with his industrial designer, and we worked with them Friday and Saturday to design new color combinations,” Dennis explained. Sure enough, by Saturday, working together, the client team and the GE ColorXpress Service specialists had created four completely original colors with different special effects: a translucent blue, a metallic green, a warm mocha with streaks of white, and an iridescent pearl. The client was sure that at least one of these unique colors would pass muster. He jumped on the plane Saturday night clutching his customproduced plastic chips and samples, secure in the knowledge that the ColorXpress Service technicians had already FedExed batches of the newly formulated resins to his manufacturer in China. On Monday,

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the product manager met with his launch team to show them the sample color chips that he and his designer had created over the weekend. No contest: Everyone loved the mocha. But how would it really look on the mobile phone casing? Would the contrast work with the keypad? Would the European brand manager agree with their selection? A week later, the European brand manager arrived to bless the final designs. Just as the pros and cons of the four color choices were being debated, an express package arrived from China, containing samples of the actual phones in all four color styles. The decision was unanimous: The mocha worked! The delighted product manager called Dennis back and told him that he had just placed the order with his GE rep for $90,000 worth of resin to be delivered direct to his manufacturer by the end of the week.

GE Plastics: Moving from Commodity to Specialty GE Plastics is a $7 billion global business that employs over 11,000 people and operates some sixty manufacturing and technology facilities in twenty countries worldwide. The company manufactures thousands of different types of plastic resins, sheets, and blends of polymers. These GE engineering thermoplastics are used in aerospace, appliances, automotive, building and construction, data storage and optical media, medical, electrical and electronics devices, telecommunications, computers and peripheral devices, outdoor vehicles and devices, and packaging. Many products use several different types and colors of plastic—perhaps a clear display panel, with colored light housings, along with several complementary colors for casings, buttons, and trim.

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GE PLASTICS EXECUTIVE SUMMARY

GE Plastics/ Manufacturing Services GE Plastics is a $7 billion global business which manufactures thousands of different types of plastic resins, sheets, and blends of polymers used in dozens of industries, including aerospace, appliances, automotive, telecommunications, and packaging. Many products use several different types and colors of plastic.

Case Study Focus 1. How to redesign end-to-end color services to meet customers’ needs. 2. How to work with customers in a co-designing team, creating unique color palettes with which customers can differentiate their products.

Target Customers

Customers’ Issues

GE Plastics ColorXpress is designed to meet the needs of product designers and managers who are responsible for designing differentiated products and getting them to market on time and on budget. GE Plastics is also designed to meet the needs of brand managers, manufacturing managers, and color palette managers to ensure the consistency of color throughout the product lifecycle.

Industrial designers and managers face constraints such as finished product cost, time-to-market, distance/logistics, product and brand differentiation, quality, regulatory compliance and environmental issues. Customers want GE Plastics to take responsibility for matching color across different kinds of plastics used in the customers’ products.

Key Customer Scenarios®

GE ColorXpress® Services

Customers’ Results

Business Results

Designers and managers working with the team of experts at the GE ColorXpress Customer Innovation Lab were able to describe and create unique colors for products within one day. Colored resins for product samples arrive at manufacturing plants within a few days, significantly reducing time-to-approval and ultimately time-to-market.

By the end of 2004, GE Advanced Materials’ revenues had increased 17% to $8.3 billion, with profits of $720 million, up 15% from the previous year. In 2005, GE Plastics delivered over 10% profits and $6.6 billion in revenues. Sales in China grew 31% to over $1 billion in 2005. Average daily order rates were up 5% in the U.S. and up 11% in Asia overall. The colorant cost savings for years after 1996 are conservatively estimated at an average of $2.4 million per year.

GE Plastics has been operating in a tough global competitive environment for the past few years. GE Plastics had a particularly bad year in 2003, seeing a drop in profits by 50 percent to $422 million on flat sales of $5.2 billion. Since 2000, engineering thermoplastics manufacturers have faced the dual challenges of increases in raw materials costs and manufacturing overcapacity. “There are no easy answers,” GE CEO Jeffrey Immelt pointed out. But he believed that for the future, “the business is focusing on higher margin specialty applications and products. It leads in China, the world’s fastest-growing plastics market. I’m not sure when plastics will get back to 2000 profit levels, but our commitment is to get there ahead of the industry.”1 Expanding GE Plastic’s position in China was a strong priority for the next few years. John Krenicki, then head of the advanced materials business unit which included GE Plastics, had a turnaround plan—helping customers design differentiated products. “We cannot count on the economy to turn this business around. We want to make money in any environment. The way to do this is to have unique products. . . .”2 Focusing on the China market, Krenicki reported in 2004, “Plastics

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sales in China totaled $640 million in 2003. . . . We are already the largest GE business in China.” But Krenicki acknowledged that in order to grow that market, “Chinese customers also want to be differentiated. That’s what we hear from them: ‘Give me something new. Help me decommoditize my business.’ ”3 And GE Plastics is continuing with its efforts to meet customer needs in China and elsewhere in what remains a very tough competitive environment. One solution to the profitability puzzle is convincing customers to pay for precolored resins and for resins that are premixed to produce special effects. When manufacturers add colorants to the resin during the production process, it may be harder to insure color consistency, especially when the same parts are being manufactured in different facilities around the world. Special effects—such as sparkle, marbling, streaking, and luminescence—are very difficult to add during the molding process. The solution is to custom-manufacture the plastic resin with the right color and special effects from the outset. Of course, a custom colored plastic is slightly more expensive than natural resin. But if the finish of a product successfully differentiates that product in the marketplace, it can make the difference between a flop and a blockbuster success. Sure enough, differentiation is working. Per the annual report, GE Plastics revenue in 2005 was $6.606 billion and profit was $867 million.

Key Customer Scenarios® Surrounding Color and Finish for Product Design/Manufacturing We recently interviewed a number of ColorXpress Services customers to better understand their context and needs. Whether GE’s customers are designing and producing a car, a computer, a cellphone, or a shower stall, the concerns surrounding choosing the color for the manufacturing of the product are the same. The top issues include: • Finished product cost • Time-to-market • Coordinating with geographically dispersed suppliers

GE ColorXpress® Services

• Product and brand differentiation • Quality • Consistency • Regulatory compliance • Environmental issues There are two critical Customer Scenarios®4 that customers care about when it comes to color and finish: 1. Select the Right Materials/Color/Texture for this New Product The customer’s conditions of satisfaction include meeting his timeline, price threshold, and regulatory requirements. The desired outcome is a design that customers will love, value, and will want to show off to their friends or colleagues. The moments of truth will vary based on the context, but typically they’ll be things like: “Meets our budget requirements,” “meets regulatory and environmental standards,” “available in our timeframe,” “easy to get approval for the color/look,” “sells well.” 2. Ensure that the Manufactured Quality of the Final Product is Consistent Each batch of manufactured products needs to have identical quality levels for color and finish, no matter where in the world the products are manufactured, nor how many different plants are involved. In many cases, the final product will be made up of a variety of different materials, with colors that need to match and/or blend correctly. The customer’s desired outcome is a completely consistent color and finish that match the specs precisely, no matter how many different production locations and/or batches are involved.

Scenario: Matching Colors and Meeting Time-to-Market Let’s see how GE Plastics addresses a key customer scenario. Brigitte Mailloux is the product manager for American Recreation Products.

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She’s responsible for products that are used for camping, outdoor recreation, tailgating, and picnicking. American Recreation Products produces custom products under different brand names for a number of retailers in the outdoors/camping/recreation category. In late 2004, Brigitte was working on an important product launch for one of her major clients. The product was a picnic hamper equipped with colorful wine glasses and matching dishes and cutlery made from Lexan® resin. It was to be featured in a promotion in the stores in early 2005. She said: The client gave us the color chip we needed to match. It was a deep burgundy and it needed to be manufactured in one of the two grades of Lexan resin that are FDA-approved for food containers. I sent the chip to our manufacturer in China. They used clear Lexan resin and added their own coloring to it. We went through several trials and the color still wasn’t right. I was about to miss my manufacturing window. So I contacted GE’s ColorXpress Services team. I sent them the color chip and entered the Lexan resin specs I needed on the ColorXpress Services Web site (www.gecolorxpress.com). They were able to scan the color chip and come up with a recipe for the color I needed. The next day I had a color chip as well as 25 lbs. of resin that had been custom-formulated that I could use to produce samples. As soon as my client approved the samples, GE ColorXpress Services sent the resin recipe to their satellite office in China and I was able to meet my production timeline. Without the ColorXpress service, I would have lost four weeks in production and missed my window.5 Ideally, however, the look and feel decisions for a new product design should come early in the product development cycle, explains David Reis, business leader of ColorXpress Services. That way, the decisions about which thermoplastic materials to use, what texture or other special effects are needed, and what colors to use in which versions of the product can all be made early in the product development

GE ColorXpress® Services

cycle, before the final molds for the injection-molded plastic parts are designed. “You’ll get the best cost-efficiencies and shortest time-tomarket if you select your material and color at the front end of the design cycle,” David elaborated. “But we can help clients select, match, or design the material and color combination at just about any stage of product development.” The next time she had a tricky color-matching problem, it was a no-brainer! Right from the get-go, Brigitte knew that GE Plastics needed to be involved from the start. She decided to visit GE’s ColorXpress Services Customer Innovation Center in Selkirk, New York. Brigitte enjoyed the hands-on experience of working with the ColorXpress Services team to pour over and select from the array of thousands of beautiful color chips displayed in their color-matching room. She found colors that were close to what she wanted, but which needed to be altered both to meet her client’s color palette and to work well together under different lighting conditions—both indoors in the store and outdoors where they would be used. The ColorXpress Services experts helped her select jewel-like tones of purple, green, blue, and ruby for a set of water bottles that were in her product pipeline. “These darker hues are much harder to get right than pastel colors,” Brigitte explained. The ColorXpress Services team produced samples of each new color so she could examine them under different lighting conditions in the lab. By that afternoon, she had the colors she needed. Brigitte appreciated the fact that she was able to avoid the lengthy delays of going back and forth with her client and her manufacturer in China.6

Redesigning GE Plastics Color Services to Speed Customers’ Time-to-Market and Increase Product Differentiation Commited to Redesign End-to-End Color Services to Meet Customers’ Needs Let’s take a look at how GE Plastics evolved the customer co-design tools and streamlined underlying business processes that Brigitte

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Mailloux and many other customers now rely on to do their jobs— designing differentiated products and getting them to market on time and on budget. In 1997, Dennis Yon was part of a small team of GE Plastics subject matter experts who decided that it was time to reinvent how GE Plastics customers selected color and special effects. This was one of the first customer-needs-driven Six Sigma business process re-design projects at GE Plastics. GE’s ColorXpress Services was the result of this business process redesign project.

Customers’ Issues. In interviewing customers who had used GE’s color services in various manufacturing facilities, the GE team found that those customers’ “critical-to-quality” issues (CTQs) included: • We don’t know (and your sales reps don’t always know) exactly whom to approach to get color matching and color management services. • You can’t always meet our timelines for a color request. • There appear to be fragmented hand-offs across your different labs and plants. We have to do the coordinating. • Total time-to-market is taking too long from the time we give you a color to match to the time we need to go into production. • Matching color across different kinds of plastics is our job. We want it to be your job.

GE Plastics’s Goals and Issues. The team identified the following goals for the project: • Enable customers to do their own color matching online. • Make it easy for customers to do business with us in multiple manufacturing locations around the world. • Make it simpler to match colors across different types of materials.

GE ColorXpress® Services

• Offer customers one-stop shopping from color request/matching to manufacture. Bring the customers’ entire end-to-end process under one roof. • Measure our success on our ability to gain customer design wins and to close business. • Shorten customers’ time-to-market and GE’s time-to-cash.

Designed a Software Tool and Knowledge Base to Speed the Color Matching Process GE Plastics had actually already made a great leap forward in addressing three of the key customer issues that emerged: meeting time lines for a color request, shortening total time-to-market, and making color matching across different plastics GE’s job. William Cheetham, a research scientist at GE’s Corporate Research & Development Center in Schenectady, New York, took the color chips that were stored in file cabinets at one of GE’s plants, and he and his team created a database of the colors that had been produced to date along with a case-based reasoning software application to match new colors to old. They called this color-matching and formula creation application “FormTool.” Here’s how it worked. When a customer sent in a swatch of a new color they needed, that color sample was loaded into a color spectrophotometer connected to a PC, the color was “read” and matched to the closest preexisting formula. If the color wasn’t an exact match, the color matching technician could adapt the formula, testing various adaptations until they found the right one. Over time, the software program became more and more sophisticated, able to propose alternatives, including formulations that would select cheaper pigments. The use of FormTool to match colors for customers reduced the average number of test chips needed to produce a color match from 4.2 to 2.7, saving GE 22,500 hours per year.7 The savings in time-to-decision were even greater for customers; they didn’t have to wait for successive deliveries of samples, evaluations, and retrials.

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Gave Customers Self-Service Tools to Do Their Own Color Selections via the Web By 1996, according to Dennis Yon, “each manufacturing location had a lab that did color matching. But we still didn’t make it really easy for our clients to avail themselves of these services. And there was no way to handle color management across different types of plastics produced at different plants.” According to Dennis, customers had to first find the right person at GE Plastics to discuss materials and color—these were often different specialists. Then, they had to go back and forth sending color swatches to the lab at the plant and waiting for samples. Once they agreed on a color and finish, then they had to get that resin manufactured, first in small sample lots, then in large production lots. “It was a complicated and timeconsuming process for our customers,” Dennis recalled. The first phase of streamlining customers’ color matching and color selection processes was the creation of a Web-based self-service tool called ColorXpress Select in 1999 that leveraged the database and color selection algorithms that were codified in FormTool. “Since we had already created the case-base and selection algorithms so that they were easy to use, why not allow our customers to select their own colors from our case-base?” William Cheetham pointed out.8

Designed a Single Facility for End-to-End Color Matching and Production Access to the color selection tool via the Web was a time-saver for customers who wanted to select a preexisting color from GE’s color samples. But the members of the ColorXpress Services design team knew that they had to do much more than simply offer clients Webbased access to their color selection tool. To be successful in delivering customers a streamlined design experience from color selection to mass production, the GE team knew that they needed to pull together all of the supporting processes in one physical location, so that a cross-functional team of specialists in materials, color, special effects, and manufacturing could support customers throughout their color

GE ColorXpress® Services

selection, prototyping, production, and quality control processes. This streamlining was necessary to address customers’ concerns about whom to approach about color matching and eliminating the hand-offs that delayed the process. In early 1998, GE Plastics opened the new $10 million GE ColorXpress Services Customer Innovation Lab designed to help designers and marketers quickly create custom colors and special effects for plastics. “The 60,000 square foot center in Selkirk, New York, brought together all of the resources needed to select and develop custom colors and produce color chips, pellet samples, and prototype parts in a single day.”9

Customers’ Custom Colors Expand the Database. The color sample library housed at the Customer Innovation Center in Selkirk keeps growing as customers all over the world create new colors. By early 2006, there were over 30,000 color samples. Hundreds of new colors are added each month.

Opened the ColorXpress Services Customer Innovation Center to Customers Once the ColorXpress Innovation Center had the complete range of services under one roof—from the color library to the color matching expertise and software, to the resin formulation to parts manufacturing from sample molds—it was time to turn the lab into a customer co-design center. The ColorXpress Services team worked with a design firm to transform one end of the former warehouse into a lightfilled, colorful, relaxed setting. The Customer Innovation Center10 has an airy atrium with brightly colored walls, comfortable seating areas, and lots of beautiful product samples and toys to help customers get and stay in a creative, brainstorming mood. Clients typically arrive with a team of two or three people: an industrial designer, a brand or product manager, perhaps the materials manager who is responsible for quality control and materials selection. Prior to the visit, the client will have worked over the phone and e-mail with one of the color experts, like technical specialist Lisa

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Ashton. They’ll send drawings of the product, discuss materials options, and describe the color and texture choices they’re considering ahead of time, perhaps even sending color samples. By the time the client team arrives on site, the GE ColorXpress Services team has researched options and may have even produced some color samples to get the ball rolling. The initial design discussion takes place on the comfortable couches in the high-ceilinged atrium, or if the weather is nice, at a picnic table outdoors. They discuss the product requirements and the context in which it will be used, and make sure they understand all of the variables that might impact the trade-offs among materials/ color/texture, cost, manufacturability, and time-to-market. Then the client and the GE team moves into the color selection lab. This is a white room with thousands of beautiful color chips arranged in a spectrum on shelves around the four walls. There are also lots of samples of special effects and textures. The lighting in the room and over the design table can be adjusted to match the spectrum in which the product will be used—indoors or outdoors, fluorescent or incandescent lighting, and so on. “This red is close, but it needs to be more intense,” a client might say. Lisa might respond with “Do you mean ‘red delicious apple’ red or ‘candy apple’ red?” Or the brand manager will say, “I want this light green to glow.” Lisa might ask, “Do you want a shimmery glow or a muted glow?” “As we discuss color hues and intensities, we begin to establish a vocabulary we can use to communicate about color and texture. This is usually unique for each set of clients.” Lisa explained. In fact, the ColorXpress Services team captures the phrases and terms each group of clients use to describe colors and effects, along with the lighting settings they need and the context in which the products will be used: indoor versus outdoor, does it need to be exposed to the weather? What other parts and colors need to be combined? Dennis Yon elaborates: “We keep each of these client ‘standard operating procedures’ on file so that each time we interact, we can pick up where we left off. That makes our interactions more and more efficient and precise over time.” Once a color has been selected or matched for the customer, and

GE ColorXpress® Services

a small batch of resin delivered to the customer’s molder for the production of prototypes, the next step in the production process is to deliver sufficient quantities of the manufactured formula to the right factories around the world. Each formula is given a unique ID and the formula itself can now be transmitted electronically to the appropriate GE manufacturing facilities in minutes, not days.

Visiting the Customer Innovation Center: “Match My Headset to My Shoes!” Andy Richardson, industrial designer at Plantronics, recalled his first visit to the Customer Innovation Center. “I came with our product manager, Elizabeth (Libby) Walikis. We were under the gun to design more fashion-conscious headsets. People are beginning to wear these like accessories. So they need to match current tastes in fashions,” Andy explained. “Libby and I had researched fashion trends, and we came with a palette of colors that were currently hot. Beige, always a classic color in fashion year to year, was being used in retro palettes and patterns.” Lisa recalled, “Libby had the design she wanted on her laptop, in the shade of beige she was looking to match. There wasn’t an easy way to get the color from the design on her screen into our color spectrophotometer so we could match it. I asked her where she came up with the color. She said that she was trying to match the shade of a particular pair of shoes. ‘Do you have those shoes with you,’ I asked? It turns out she was wearing them. So we borrowed her shoe, put it in the spectrophotometer and matched the color exactly.” By the end of the design session, Andy and Libby had selected three complementary colors for the two different types of plastics that would be used in the final headset, they had samples, and enough custom-mixed resin to produce the prototypes they could show to their customers. Later that same year, Plantronics won the contract to produce a wireless headset to complement Microsoft’s launch of the Halo 2 game for its Xbox Live game console. “We had eighty-six days from the time Microsoft said ‘go’ to the time that headset had to be in retail

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stores all around the world,” Andy recalled. Thomas Jechart was the product manager for the GameCom headset. David Reis remembers the call. “Thomas called to find out whether we knew what color green Microsoft was using for the Xbox logo. We did know, since we had co-designed it with them. So we called our contact at Microsoft to see if it was OK to give that color to Plantronics. It was.” As soon as they got the color ID, Plantronics quickly got the resin they needed from ColorXpress Services for the launch. The headset parts were manufactured in China, shipped to Plantronics’ assembly plant in Mexico, and made it into the stores in time for the October launch.11

Managing Clients’ Global Color Consistency Needs There’s a lot more to producing a product or a set of products than selecting the right color. Remember that a key customer scenario was “ensure that the manufactured quality of the final product is consistent.” One-time color selection isn’t enough. Customers need to know that each time the product is manufactured, the color will be the same. And customers want help in maintaining their color standards. Tony Laidlaw, strategic program manager, Corporate Color Program, Hewlett-Packard has been in charge of HP’s color palette for all products world-wide for the past six years. “We produce thousands of new products a year,” Tony explained. “I’m responsible for approving the color of every HP product. I provide guidance and strategy to HP’s industrial designers in their application of color.” Tony relies on GE’s ColorXpress Services to meet his needs and those of his clients—the brand managers and product managers worldwide. Tony has worked with GE over the years to select, refine, and modify HP’s color palette. “We have our own color lab at HP,” Tony explains. “We paint models to see how colors look, we iterate, and then when we have a color we like, we send it to GE for a color match. As soon as we’re satisfied that we have an exact match, GE gives us a unique HP color ID and adds that color to the catalog of GE-

GE ColorXpress® Services

approved colors on our secure, company-specific intranet site.” Any designer involved in designing new HP products uses this online color lab to select the color combinations for their designs. “The GE folks are really good about policing our standards,” Tony reports. “If a request comes in from an industrial designer anywhere in the world, who is working on an HP product, I get a call from the GE ColorXpress Services team to alert me, since I’m the ‘color gatekeeper’ for the company. I tell them not to issue a custom color, unless it has already been pre-approved.”

ROI to Customers and to GE from the Use of GE ColorXpress Tools and Services While the use of the online ColorXpress Services color selection tools is free, GE qualifies the customers who request color matches to be sure that they are, in fact, prospective customers. (You fill in a registration form online.12) The company will send a reasonable number of color and Visualfx* resin standards for free to bona fide prospects within a couple of weeks turn around time (longer for matches done in Europe). But when clients want faster turnaround, they can use the Xpress Match service. For $2,500, ColorXpress Services will match your color in two days, sending five color plaques and up to twentyfive pounds of resin in the color provided. Visits to the ColorXpress Services Innovation Center follow the same pricing model. Clients are charged based on the number of custom color matches they do and the amount of sample resin they need. GE provides customers with an estimator tool they can use to calculate probable ROI based on factors such as reducing time-to-market, the percentage of early adopting customers they can attract through visual product differentiation, the gross margin premium they expect to be able to charge early adopters, the amount of time they expect that it will take competitors to introduce competing products, thereby lowering their margins, and the savings they can obtain by using GE’s color management, color verification, and consistency audits across their supply chain.

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Working with Customers in a Co-Design Team Helps Customers Differentiate Products and Remain Loyal to GE Plastics GE Plastics understood that it had the expertise, but that the customers had the vision when it came to creating color palettes for new products. By making it easy—and exciting—for customers to become part of the color design team, GE Plastics has created an innovative business that brings customers back time and time again. The GE Plastics team: 1. Recognized customers’ need for product differentiation 2. Understood Customer Scenarios and constraints for matching color and meeting time-to-market 3. Invented a new end-to-end services model based on customer goals 4. Offered a self-service color selection tool online for customers 5. Provided a facility for color matching where customers can codesign colors and textures with GE color experts 6. Removed the burden of maintaining the consistency and integrity of color palettes from customers

Creating New Colors from a Shared Vision GE Plastics knew that the process of creating the right color for a new product was time-consuming and, for customers who aren’t color experts, daunting. Embracing a co-design approach, the company created an innovative color laboratory—the ColorXpress Innovation Center—where customers work in a beautiful and, of course, colorful environment with the experts to quickly create something unique. The GE ColorXpress team has made it their business to create the exact color that the customer envisions by working closely together as a team.

GE ColorXpress® Services

TAKE-AWAYS FROM GE PLASTICS Not every company has the resources to build a state-of-theart innovation environment for co-design teams. But there are a number of important lessons to be learned from what GE Plastics has accomplished: • Understand your customers’ key scenarios, their conditions of satisfaction, and all their related constraints.

• Redesign your business processes to support your customers’ goals.

• Provide innovation toolkits. • Work with customers to deliver their vision; provide the subject expertise they need on a co-design team.

• Ensure customer loyalty by taking mundane maintenance and management responsibilities from them.

• Appeal to the aesthetics of the customer—provide an appealing place for your work together.

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SEI Wealth Network® Engaging Clients in Designing Their Own Life and Wealth Plans

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EI Wealth Network’s financial advisors give their clients— wealthy couples with $3 to $100 million in assets—a game to play. Instead of the typical in-depth, and usually separate, interviews with a husband and wife about their financial goals, their family profile, their risk tolerance, their charitable interests, their cash flow needs, and their concerns about their kids’ inheritance, the advisor gives each member of the couple a game to play together.

SEI WEALTH NETWORK EXECUTIVE SUMMARY

SEI Wealth Network/ Financial Services SEI Wealth Network is a franchise business model and national network of experts that was developed by SEI Investments. It’s an end-to-end service for advisors to offer to high net worth clients, consisting of an end-

Case Study Focus

1. How SEI developed the “toolkit” used by clients to discover their complex needs, priorities, and desired outcomes around life and wealth planning.

2. How the toolkit is used for communicating changed priorities, for

SEI Wealth Network®

to-end offering of life and wealth solutions, as well as a comprehensive business platform for advisors to deliver these solutions.

planning, and for anticipating what the clients will want and need.

Target Customers

Customers’ Issues

High net worth couples and families with assets between $3 and $100 million who want help managing their wealth and optimizing their lifestyles.

Couples and family members may have very different goals and priorities.

Key Customer Scenarios®

Customers’ Results

Business Results

By 2005, 145 client couples were delighted with the improvements in their lifestyles and peace of mind as a result of the end-to-end action plans and execution they had received. SEI helped clients with healthcare issues, special needs’ children, life redirection, eldercare, large purchases, cashflow management, and succession planning.

After piloting the game-based approach to financial planning for two years, SEI launched its SEI Wealth Network Franchise in 2005, signing up banks and financial advisors, including Union National Community Bank.

Experimenting with Experience Marketing Kevin Robins, SVP, has been leading SEI’s Wealth Network’s business unit since its inception in 1999. He credits the evolution of the game

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idea to working with behavioral and family communications experts and experience consultants such as Jim Gilmore, who co-authored The Experience Economy with Joe Pine. SEI’s Wealth Network group began to experiment with experience marketing.

The Play Instead of hosting a wine and cheese reception for potential clients in their offices, the advisors invited prospective clients to an evening of theater, where they experienced a three-act play. In the first act, an affluent couple in their late 40s talked about their lives, their issues, and their aspirations. They didn’t agree on much of anything. In the second act, the financial advisor handed them a deck of cards with goals and concerns written on them, and got them to talk about their issues again and to prioritize them. The audience members got their own cards during the intermission, and were encouraged to play along. In the third act, we find the couple a year later, and see how their lives had changed for the better. What worked best was the way the audience members quickly began sorting through, selecting, and prioritizing their own playing cards. There was quite a buzz as they compared notes with their spouses and friends during the intermission. Many of the audience members signed up for personal consultations. This highly interactive evening entertainment became SEI’s best recruitment tool. The use of the playing cards worked so well that SEI printed them up and trained advisors in how to use them as a client engagement and recruitment tool.

The Card Game Many of the cards have wishes or wants printed on them: “I want to continue helping our kids, but writing checks isn’t the answer; I wish I were doing (something other than my career); I want to stay involved in my business but I don’t want to run it; I want to support a medical cause that has affected my family.” Some cards are questions: “Do we have enough?” Others are statements: “My identity is largely tied to my work.” There are blank cards, so you can write whatever you want.

SEI Wealth Network®

Each member of the couple (or the family, if this is a family meeting) looks through their hand and selects the three cards that best describe their top three priorities or issues. (SEI recommends that couples do this first exercise at home on their own before they meet with their advisor.) Each person winds up talking about their concerns, issues, challenges, and personal goals around their self, their family, and their community. The playing cards are a great way to catalyze conversations about issues that can be pretty important, and often contentious, like “I’m not sure my son/daughter can make it on their own,” or “I wish there was something I could do for my (close relative),” or “I want to MEET the people I’m helping.”

The Board Game The next invention was the game board itself. The original design came out of a brainstorming meeting at headquarters. “We were talking about how we could transform the discovery interviews that are so essential to getting started with a new client or family,” Kerry Kilcullen, marketing manager, recalled. “We just started pasting things up on the wall, as we grappled with a way to elicit the answers to the all-important question: ‘What are you trying to accomplish?’ We discussed the two dimensions: priority (have to, want to) and time (now, later), and we realized that we had just invented a game board. So we began writing down on stickies all the issues and priorities we had heard from clients over the last several years.” That led to the prototype game board. The next step was to try the idea out with clients. So the first ten clients who tried the game became the original co-designers of the game. They wrote down their issues and pasted them on the board. By the time SEI’s lead advisors had played the game with ten clients, they had a complete starter set of game pieces. Soon, the board game became a key part of the client engagement. The advisor whips out “SEI’s Life and Wealth Priorities Game Board” and puts it in front of the couple. The board has four quadrants: “want to now, want to later, have to now, have to later” and a set of game cards to position on the four quadrants. Again, some of

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the cards are blank—you can fill in whatever you want. Now the couple works together, selecting the game cards that are most important to them and their family, and putting them in the appropriate quadrant. This involves lots of debate and discussion—but since there are no “wrong” answers, both spouses’ goals and issues, current and future, wind up on the board. Examples (from the entrepreneur’s version) included things like: “Promote entrepreneurship in family,” “Buy another home,” “Fund weddings,” “Take care of parents,” “Save more,” “Retire,” “Stay involved by doing deals,” “Spend more time with children/grandchildren,” “Scale back on work,” “Ensure giving has an impact,” “Travel.”

Co-Creating a Life and Wealth Plan The result of this “consultation” is a set of aspirations and needs that the couple creates together. It’s a composite picture that accurately describes their current issues and their future vision. It’s a perfect vehicle for catalyzing innovation. The couple has fun doing it. The advisor gains an incredibly rich picture of their lives, their personalities, and the issues they feel most conflicted about. This is an amazingly powerful way for people to arrive at a complex picture of their true situation and aspirations.

Game Board Becomes the Game Plan. The advisor captures the map, as well as the discussion and issues surrounding the creation of the map and gives it back to the couple for review. Once the clients have agreed that the game board represents an accurate representation of their current reality and vision, SEI’s team of cross-disciplinary experts (tax, estate, geriatrics, health, business consulting, credit, estate, philanthropy, etc.) jumps into action, crafting a game plan for the family to review. Each client’s assessment and action game plan is coordinated and carefully monitored by a case strategist at SEI’s headquarters, who supports both the adviser and the clients. The couple’s financial plan (investments, savings, trust funds, asset allocations, healthcare costs) and their life plan (business ventures,

SEI Wealth Network®

travel, lifestyle changes) are built and monitored based on the choices they make each year while playing the game. As the family’s needs, aspirations, and circumstances change, they communicate those changes. At least once a year, they review and modify their game board.

Discovering (and Filling) New Client Needs A benefit of using clients’ game boards as a common discovery tool is that it’s easy to spot new patterns quickly. For example, Kevin Robins reported that one of the issues that began to arise over and over again on clients’ game boards had to do with healthcare—care for elderly parents, concerns about the clients’ own health. As a financial services company, tending to clients’ health was not a service that SEI normally provided. “As soon as we realized what a big issue this was, for our clients,” Kevin reported, “we partnered with a nationwide network of healthcare specialists. Now, when a client needs someone to help their ailing mom on the other side of the country, we can get someone there right away.” Helping clients redirect their lives is another new area that SEI Wealth has now taken on. Many of its clients want to shift their careers or lifestyles, not by retiring, but by changing their lifestyles to be more satisfying. So, SEI’s professionals are now helping clients find careers that let them combine their lifestyle goals and their financial goals. For example, one successful professional couple in their 50s—we’ll call them Jeff and Debra—wanted to retire early to spend more time with their young kids. But in exploring their aspirations, they realized that they didn’t really want to retire. So SEI’s advisor helped them gauge the amount of time they could commit to business, and helped them find a proven franchise that required little management but let them keep their hands in. Another couple, we’ll call them Michael and Pat, were in a situation in which he wanted to retire and spend more time with the family, but she wanted to run a business. They wound up with a bed and breakfast on the seaside which filled both their needs.

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Building a Knowledgebase of Lifestyle Patterns One other discovery that SEI made as it began to compare the wealth and life game boards of clients over time is that there were clear patterns in the ways that clients’ priorities and needs shifted over time. By monitoring these patterns of priorities and issues now and in the future, SEI’s personal business managers and case strategists can better predict the directions their clients’ lives and wishes are likely to take. The ability to predict what clients are likely to need next makes them better, proactive partners. Of course, as SEI has used the game with more clients and with different types of clients (doctors, lawyers, and other highly paid professionals; entrepreneurs; people who have inherited money; etc.), the clients come up with the issues, concerns, and priorities that fit their circumstances. The client issues that recur are added to the various game sets. How SEI Wealth Network Harnesses Customer Innovation SEI Wealth Network has discovered that this innovative “game board” approach to gathering the full picture of a prospective client’s priorities and needs has been fantastically successful. New client recruitment is a breeze. Many of their clients come through referrals. Clients’ retainer fees range between $5,000 and $30,000 per year. Client retention is about 95 percent. Working directly with affluent clients is a start-up business for SEI. The company’s two other mature lines of business are to provide technology solutions to banks’ trust departments and to provide investment solutions to investment advisors. In 1999, the company decided to experiment with a new set of services—complete life and wealth management—to a new clientele, high net worth families. Kevin Robins and the team at SEI led the charge. 1. Provided a Complete Life and Wealth Experience SEI emulates for financial services the same comprehensive model that the Mayo Clinic has pioneered in healthcare. Patients receive

SEI Wealth Network®

coordinated care from a team of experts. In SEI’s case, these may be employees or affiliates, specializing in investments, cash flow, taxes, estate planning, philanthropy, but also in geriatrics, special needs, family communication, and business consulting. Each client family has an SEI case strategist, who assesses their needs and pulls together the experts, as well as an SEI personal business manager, who handles all interactions and executes the client’s wishes (pays bills, handles taxes, etc.). Originally, that personal business manager was an SEI employee. Now, after five years of experience working directly with 150 clients, SEI is building a network of trained and franchised expert advisors who can take on the advisory role, supported by SEI’s personal business managers, SEI’s case strategists, and a large network of experts.

2. Engaged Prospective Clients through Interactive Experiences The marketing team came up with the idea of presenting plays and handing out decks of playing cards for clients to play along. They discovered that clients loved interacting with the cards and with each other as a way of discussing and discovering their life and wealth goals.

3. Brainstormed the Game Board Idea and Tested it with Clients Clients loved it, and added their own game pieces, representing their life issues and priorities.

4. Replaced the Traditional Discovery Interview with a GamePlaying Session SEI found that clients learned more about themselves and their goals, and that the advisor gained much more context and information in a shorter session by using the Life and Wealth Game for discovery.

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5. Made the Game Board the Core of the Assessment and Advice Plan The client’s game board becomes the communication vehicle among the client, the advisor/manager, and the SEI case strategist who is coordinating the advice and action plan.

6. Monitored and Leveraged the Recurring Patterns in Clients’ Game Plans By monitoring the movement on clients’ game boards over time, SEI Wealth is able to detect and predict patterns of behaviors and needs for clients in different contexts and segments.

TAKE-AWAYS FROM SEI WEALTH NETWORKS Do you have a similar situation in which your clients have complex wants and needs that they need help discovering? Don’t assume that an electronic tool is the best way to help clients through the discovery process; consider other approaches. Paper and other tactile toolkits are great as long as you have an easy way to capture the customer’s resulting design and to translate it into solutions you can provide. • Design an interactive toolkit that lets customers juxtapose their current reality and their vision.

• If clients need to co-design their ideal solutions, make the elements of your toolkit the basis for strategic conversations.

• Assume that clients will iterate—that’s how they learn by doing. It’s part of the creative process.

• Ensure that it’s easy for clients to go back to their designs and modify them as circumstances change.

• Look for patterns in clients’ designs. Use those patterns to predict the capabilities you need to be ready to offer.

• Use the clients’ design of their desired outcome as the center of your communication with them.

Customer Scenario® Mapping— A Tool to Enable Customer Innovation Co-Designing Your Business with Your Customers

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or over 15 years, we’ve been helping our clients co-design their customers’ ideal scenarios, desired outcomes, conditions of satisfaction, and metrics. Our Customer Scenario approach is designed to identify what your customers’ ideal scenarios are and to help you engage directly with those customers to co-design new ways that your firm and your partners can support your customers in achieving these goals in the way that works best for them, makes you money, and streamlines your operations. When you’re willing to design or redesign your business around your customers’ ideal scenarios—the outcomes they care about—you discover loads of opportunities for innovation: new business models, new solutions, new services, new products, new partnering opportunities, new tools that customers can use to roll their own and to add value.

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Customer Co-Design Using Customer Scenarios® Typical customer co-design sessions involve up to 24 lead customers who break into four teams and, working together with your employees, map out four ideal scenarios—how they would ideally like to accomplish their goals and all the ways you could support them in doing so. These co-design sessions take a half-day to a day and yield dramatic results. The core design elements of customer scenario design and mapping include: • Design from the end customers’ point of view—from the outside in! • Recruit your lead customers to co-design with you—the customers who care and know the most about their problem domain as it intersects with your subject matter expertise. • Involve multiple stakeholders from your organization to provide subject matter expertise and to build a shared mental model. Include your domain experts and your partners, as well as representatives from sales, support, IT, operations, finance, and marketing and product groups. • Map out the ideal state—the vision! Don’t get bogged down in current reality. Feel free to innovate. • Capture customers’ hot buttons and prioritized requirements for information resources, tools, services, and technology enablers in a single session (all in the context of the things they care about the most). • Identify the metrics that are crucial to your customers—what are their conditions of satisfaction, their moments of truth, and how do they measure them? Identify your business metrics—how will you increase profits, lower costs, reduce steps, shorten time, and build customer retention and organic growth? • Convey the results by telling the story of the map. The power of storytelling will “sell” the customers’ vision to all who hear it.

Customer Scenario® Mapping

A customer scenario identifies how a customer ideally wants to achieve a desired outcome.

What’s a Customer Scenario? A customer scenario is the process that a customer would ideally like to do in order to achieve a desired outcome (not how they do it today!). Let’s look at an example, a product designer’s scenario: I want to design a blockbuster product!

Who Is the Customer? In Customer Scenario Mapping, teams of lead customers define their own representative persona—the customer who represents the “I” in the “I want.” Because the persona is defined by the customers themselves, it includes many of the values and beliefs they hold in common. Customers give their persona a name, a role, and a context. For example: Donna is a busy product designer at a housewares manufacturer who is charged with coming up with a new product line (food storage containers that take minimal storage space) for the spring line. For the past two years, Donna has managed a design team of four who were incrementally updating an existing line of plastic bath storage products. Her team is expected to maintain that product line while coming up with prototypes for the new food storage line. Customers will add relevant context and details that are representative of their collective context, concerns, and situations.

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Desired Outcomes. Beyond designing a blockbuster product for the line, what does Donna really want? How does she want to feel about her product? How does she want to feel about the process of designing the product? Her desired outcome might well be: “I want my product to sell 20 percent more than other products of its type (including Tupperware), for it to win a coveted innovation award, and for me to get a promotion and a big raise!” Conditions of Satisfaction. Surrounding the desired outcome are a number of conditions of satisfaction. For example, Donna’s design must “meet regulatory standards, be able to be manufactured within a set budget and a set timeframe, and be supported by a well-tuned marketing campaign.” Moments of Truth and Metrics. Although there are many tasks that Donna must take to design this blockbuster product, including gathering customer input, competitive research, design approval, and prototype development and testing, there are usually two or three activities that are most critical to her ability and desire to complete the scenario. These “moments of truth” are the show-stoppers. If the customer can’t easily do these few things, he or she will give up and abandon the scenario. Examples of moments of truth would be: “I can’t find what I need,” or “It’s too expensive,” or “It takes too long.” Each moment of truth is quantified whenever possible. For the above moments of truth, metrics can be applied, such as: “There are at least three good plastics options that meet my need. It costs less than $1.50 to manufacture each piece,” and “The prototype is complete within a week of specification.” Supporting the Customers’ Scenarios. Each scenario team is comprised of a group of lead customers and a group of your key stakeholders (cross-functional employees, partners). As the customers map out their ideal scenarios, your stakeholders learn a huge amount about what these customers really care about. Together each team of customers and stakeholders co-designs even better ways for the customer to accomplish his or her goals. Then, after the team is satisfied

Customer Scenario® Mapping

with the customers’ ideal scenario, the combined team brainstorms all the ways that your company and its partners could provide better approaches, solutions, tools, and streamlined processes to help customers like Donna achieve their ideal outcome for this scenario and for others like it.

Business Model and Process Innovations from Customer Scenario® Mapping Customers will always push the envelope. They can easily envision much easier ways of getting to where they want to go. Here are some examples (disguised to protect our clients’ interests) of business model and business process innovations that were created by lead customers in a number of different industries. Elements of each of these scenarios have already been delivered. Other portions are still under development. In each case, there were many insights about how customers’ ideal needs could be met cost-effectively and with great business benefits to the brand-owner.

Software. In scenario after scenario, business users and buyers of commercial software have made it abundantly clear that the current software licensing, activation, maintenance, and support models don’t work at all. The issue isn’t one of pricing. It’s complexity. Customers want software they can trust—that has been certified to work well in their environment and to be risk-free (no unintended consequences or liabilities). They want to pay as they consume the software, based on prenegotiated, not-to-exceed pricing models. They want the software to be self-activating, self-healing, self-reporting, selfauditing. If they have a problem with the software, they do not want to have to provide proof of entitlement for support. Support should be provided quickly to anyone who is having difficulty using the software. This business model and solution set is the one that has now been adopted by a number of firms who offer “software as a service.” Travel Services. Customers planning business and leisure travel have gravitated online to do their travel planning and often their travel

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booking. Yet the travel planning Web sites and services still fall short of meeting customers’ ideal scenarios. Having a professional travel agent do the optimization is often easier, but then customers feel they don’t get as much visibility into the trade-offs and choices as they’d like, and it still takes too long to plan a complicated trip, particularly if there are multiple parties involved. Even with the advances in “do it yourself ” travel planning, customers experience a lot of pain when they need to make the inevitable adjustments before or during their trips. The customers’ ideal travel experience is one that can be easily optimized for the needs and preferences of each of the traveling parties. Optimized itineraries and packages are offered and can be modified by each traveler. Customers also want input, ideas and references from other travelers whose opinions they trust, both before and during their trips. Many of them are happy to post and share their own experiences. As people’s needs and circumstances change before and during the trip, they want everything to be automatically recalculated, rebooked, and the correct parties alerted. There are no penalties for last-minute changes, other than the possibility that a seat or room may no longer be available. And there’s always a person who can help—both by phone and on site. This one is coming soon!

Golf Course Maintenance. Groundskeepers, golf course supervisors, and maintenance managers want equipment that diagnoses mechanical problems and automatically provisions spare parts to the equipment location along with “just-in-time,” easy to understand, step-by-step repair instructions. They want their personnel to be able to self-train and become certified on the use and maintenance of new equipment. They want irrigation components to be able to “phone home” even when not connected (to prevent loss and theft). They want irrigation systems designed and installed on a not-to-exceed price basis to yield “perfect greens” on a schedule determined by when the first condos surrounding the golf course go on sale. Recruitment Services. Hiring managers and human resource professionals have flocked to the Web to avail themselves of job posting services online. Yet many of these services actually create more work, not

Customer Scenario® Mapping

less, for HR professionals. In their co-design sessions, HR professionals described their ideal recruiting service. They want the online recruitment tools tightly integrated into their own in-house applicant tracking systems so they can conform to their firm’s hiring and compliance policies. They want applicants automatically prescreened for company culture fit, certified experience, commuting distance, and references, among other criteria. They want to see only the top three candidates that meet their selection criteria. They want the service to track the number of successful placements, time to place, successful fit, and employee retention. Job seekers only want to post their qualifications once for all recruitment sites, so they don’t have to re-enter the same information over and over again. They do not want to be approached by recruiters posing as hiring companies. These are just a handful of examples. We now have customers’ ideal scenarios for about 50 different industries. And, as you can imagine, there are lots of recurring patterns both by industry and across industries. Customers who are members of our growing community of certified customer scenario mapping consultants are now beginning to share their scenarios and patterns with one another.

What Immediate Results Can You Expect from Customer Co-Design Activities? Every Customer Scenario Mapping session we have led has resulted in immediate, tangible actions that have improved customers’ experience of doing business. Teams always find policies they can quickly change, information they can easily make available, steps they can eliminate, and processes they can quickly fix. There is invariably “low-hanging fruit.” Typically, these immediate results pay for the time, money, and effort you put into running the customer co-design session. For example, one software provider to the retail market discovered that, unless he shaved six weeks off his contract negotiation process, he wouldn’t meet prospective customers’ windows of opportunity to evaluate and buy his software (before the next holiday season). He was able to revamp his legal contracts quickly and shaved a year off the company’s time to close deals.

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A provider of digital TV services to the home market learned that consumers needed more guidance in the selection of HDTV-ready television sets. It was easy for this cable company to expose information to customers quickly (detailed TV comparisons and set top box interoperability specifications) that had previously only been made available to customer support personnel. The company was able to shorten its time to close deals immediately and increase the percentage of deals closed. A manufacturer of heavy equipment uncovered an entirely new business opportunity in providing training and certification to equipment operators. In the same session, they discovered that by moving to fixed price (time and materials) bidding, they could save customers literally millions of dollars in lost opportunity costs by shaving 90 days off the proposal-to-negotiation cycle. These were just the immediate benefits. Each of these companies (and many others like them) proceeded to implement many of the services and processes that customers required in order to improve the customers’ own processes. By linking their success to their customers’ success and focusing on making improvements at precisely the points that made the biggest differences to their customers’ outcomes and ease of execution, they had a foolproof way to prioritize, improve continuously, and monitor the results of their efforts. Organizational Benefits from Customer Scenario® Mapping When done well, Customer Scenario® Mapping with end customers and prospects provides a number of benefits to your organization. (This can be part of your “outside in” change management efforts.) Customer co-design using Customer Scenario Mapping: • Shortens Time to Close Sales and Reduces Costs to Serve. Most Customer Scenarios identify quick-to-implement improvements that will shorten customers’ decision-making and purchasing processes. Customer Scenarios invariably identify quick hits on the customer support and service front as well. There are

Customer Scenario® Mapping

almost always quick steps that will eliminate at least one cause of customer calls. • Reduces Time to Implementation and Keeps You from Working on the “Wrong” Stuff! If you do a thorough and effective job of capturing requirements at the front end of any project or initiative, you’ll save iteration time and eliminate rework. By inviting customers to help in the co-design of your proposed projects, you’ll gather not only their “today state” requirements but also their “future state” requirements. Most clients find they shave about six months off of their project delivery cycles because of the rich, contextual requirements they gathered up front. • Breaks Down Organizational Silos. Employees and stakeholders who participate in Customer Scenario® Mapping build a shared vision and consensus that overcomes organizational boundaries because it’s driven by customer priorities. • Improves Alignment and Cooperation between Channel Partners and the Business. Companies that sell and service customers through channel partners often find it difficult to balance their own needs to improve customer intimacy and their partners’ needs to “own” the relationship with their mutual end customers. When partners participate in Customer Scenario® Mapping sessions, they feel “heard” and supported. When you combine customers and partners in the same co-design sessions, customers and partners invariably agree about how the partner is contributing value, and they all learn when customers prefer to deal directly with the supplier. The result is a shared mental model that builds consensus among all parties. • Avoids Losing Requirements in Translation. Customer Scenario® Maps and the videos and stories that surround them provide a mechanism to quickly communicate customer requirements, customer processes, your processes, and the contributions of all the employees and partners involved in rich context. A single

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well-documented Scenario Map replaces pages of requirements documentation. • Refines and Validates Your Customer Segmentation. Customers who care about the same scenarios and who want to execute those scenarios in much the same way belong in the same customer segment. Customers who care about different types of scenarios, or who would approach those scenarios in very different ways, belong in different segments. You can use your Customer Scenario® Mapping sessions to validate and refine your current customer segmentation. As you learn more about what behaviors and contexts differentiate customers, you’ll become better able to meet the needs of specific groups of customers and/or people in different roles within large customer accounts. • Builds Customer Intimacy. Prospects and customers who participate in Customer Scenario® Mapping have strong ties to your organization. They want to stay involved. They want to see what happened. They love the opportunity to get to design solutions that work for them, while helping your company provide better offerings and solutions.

National Semiconductor Empowering Design Engineers to Reach Their Desired Outcomes with a Comprehensive Toolkit

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ational Semiconductor makes analog devices (semiconductor chips) and subcomponents used in mobile phones, computers, flat-panel display screens, and high-definition television sets; in short, all of today’s best-selling products. People interact with electronic devices through analog technology. The analog components in today’s ubiquitous digital products deliver sound, provide sharp images, and extend battery life. National’s analog and analog-to-digital components provide many of the characteristics that differentiate today’s increasingly popular personal electronic gadgetry. While most of us use a single computer, we typically have, or aspire to have, three or four digital appliances—mobile phones, PDAs, game consoles, TVs, GPS devices, biomedical devices, in-car displays, and so on. That’s why the analog chip business is booming. In addition to the overall industry growth in analog components, National Semiconductor has migrated up market, from selling commodity components to providing the higher end, higher value components that are used to differentiate these popular products. Not only are sales robust, but National’s gross margins are more than 60 percent—an all-time high!

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WEBENCH®: National Semiconductor’s Innovation Toolkit Phil Gibson’s team at National Semiconductor was one of the first to use a Customer Scenario® approach for strategic advantage. Since 1999, Phil Gibson and his team at National Semiconductor have been providing National’s most important customers—analog design engineers—with an online design environment, WEBENCH, that lets them explore options, select components, explore characteristics, design circuits, analyze those designs, simulate performance and interoperability, prototype, test, receive samples overnight, and iterate those designs in record time. Webench supports the trial and error, learn-by-doing mode of operation that is the hallmark of a good innovation toolkit. National’s sophisticated Web-based electronic design environment is open and free to all to use by registering at National’s Web site, national.com. There were 125,000 registered Webench users in early 2006, with 3,000 new engineers joining each month. Eighty-thousand design engineers come to National’s site every day to do their jobs; 1.35 million come every month. The use of National’s Webench tools and resources to design analog circuitry translates into design wins for the engineers, and for National’s components. The design engineer may only order a few sample devices or a prototype board for testing, but once the design is in production, the manufacturing arm (often a contract manufacturing firm in China or India) will order tens of thousands of the components the engineer specified. And, by gaining visibility into engineers’ designs, National’s distributors and its direct sales force can preregister design wins to ensure that the needed components are available in the necessary quantities. Webench has evolved over time in response to its customers’ design needs. What started as an online toolkit to make it easy for engineers to design power management subsystems has evolved into a comprehensive design, simulation, and testing environment for hundreds of different applications. Whether you are designing the circuitry for an MP3 player, a mobile phone, or a medical imaging system, you can use Webench to iterate through all the design choices

National Semiconductor

and trade-offs, simulate and test your circuitry electronically, generate the bill of materials required to build the circuitry (including components from competing and complementary manufacturers), and either order the parts so you can build and test your own circuits, or order a custom-built prototype to be delivered overnight. This entire end-toend design environment collapses the design cycle from weeks to hours. The result is that most engineers are able to run through more iterations for each design than ever before.

Explore Options If a designer is investigating different ways to solve a particular design problem, he may start by exploring the rich resources of National’s just-in-time learning environment, Analog University, or exploring National’s online knowledgebase. When you log on to explore the resources in a particular field—wireless, amplifiers, displays, audio, thermal management, low voltage differential signaling, signal path design, etc.—you declare your expertise in that particular field: novice, mid-career, or experienced engineer. You’ll be directed to the appropriate level courses, including video lectures, online labs and tools, test-yourself quizzes. Each of these courses is taught by a subject matter expert at National. The most popular ones are “Analog by Design” shows, featuring Bob Pease and guests, in which Bob, National’s most eccentric and funniest analog design expert, gives online interactive chalk talks and demos on many of the current design challenges facing analog engineers. Bob Pease has a cult following, attracting 10,000 to 15,000 engineers for each of his shows. Not only can they listen and watch Bob and his guests tackle some thorny design problems, but they can play along, using the online design tools. You can watch these shows in real time, asking your questions, or you can look at them when you happen to need the information. If you have a specific question or problem to solve, you can type your question into National’s natural language search engine (so you don’t have to spell correctly), and get appropriate application notes, data sheets, and answers from knowledgeable experts.

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NATIONAL SEMICONDUCTOR EXECUTIVE SUMMARY

National Semiconductor/ Manufacturing National Semiconductor is manufacturer of high-performance analog devices and subsystems. National’s products include power management circuits, display drivers, audio and operational amplifiers, communication interface products, and data conversion solutions. National’s key analog markets include wireless handsets, displays, and a variety of broad electronics markets, including medical, automotive, industrial, and test and measurement applications.

Case Study Focus How National Semiconductor developed and evolved its Webench online toolkit to support customer innovation.

Target Customers

Customers’ Issues

Design engineers responsible for the design of analog circuitry in electronic devices such as mobile phones, computers, flat-panel display screens, medical imaging systems, and highdefinition televisions.

Design engineers are concerned about shortening time from end-toend design to manufacturing cycle. Engineers are often skilled in a number of disciplines, but sometimes need guidance in related areas to complete optimized designs. Customers need to close the time and communications gap created when products are designed in one country, tested in another, and manufactured in yet another.

National Semiconductor

Key Customer Scenarios

Customers’ Results

Business Results

There were 125,000 registered Webench users in early 2006 with 3,000 new engineers joining each month. Every day, approximately 80,000 engineers visit National’s site. Customers’ time savings are estimated, on average, at 60 hours per month. Customers report time reductions from days to hours in design, and hours to seconds in finding relevant materials.

Over two years, National Semiconductor’s revenues have grown almost 20 percent. The company reported sales of $1.91 billion in 2005. Gross margins have increased from 40 percent in 2003 to more than 60 percent in 2005.

Find Sample Solutions and Customize Them A good way to approach many design problems is to start from someone else’s design. National provides an interactive design environment—solutions.national.com—which includes a library of prebuilt designs in dozens of application areas, ranging from automotive to broadband applications, to displays, industrial, medical systems, personal/consumer electronics, wireless communications, and more. Once you select the solution area of interest, you’ll find clickable block diagrams for dozens of applications. You can click on any of the component parts to see a list of recommended parts. Then you

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can do your own ‘what if ’ design trade-offs quickly and easily, compare performance (make your customers happy). Compare prices (make your purchasing guys happy). Create the best design (make yourself happy).1

Design and Simulate Your Own Circuitry from Scratch If you know the parameters of the design you want to create, you can plunge right in, using the Webench online design environment. Engineers begin by entering the parameters that represent their design requirements for a part, and selecting from the parts that meet their specifications. They then go onto the design phase in which they can add additional components, exchange components, exercise values, such as current flow, voltage, drift, etc. They can interchange parts (both from National Semiconductor and other suppliers) to compare performance, size, and cost. They can create a custom bill of materials out of available components, or they can use National’s dynamicallygenerated recommended bill of materials. In addition to the powerful software in Webench (tens of thousands of lines of code for design, simulation, and testing), there’s a treasure trove of carefully-tagged product information: a database of tens of thousands of parts that can be sorted, filtered, and searched based on all the parameters that engineers care about, detailed design specifications for each part, software simulations of each part, and sample designs. These can be searched visually—by looking at schematics and pointing to the part you’re interested in; by parameters; or by application—what are you trying to build? Once the design engineer has a design she wants to analyze, she can run electronic simulations to test all kinds of properties of the design, including thermal simulations (how hot will these parts get as they interact with one another?). Engineers can store their designs in their own personal work spaces and invite colleagues to analyze and critique their designs. They can build the design, by ordering the components for a prototype to be delivered within 24 hours, or they can download an electronic design for testing in their own environment.

National Semiconductor

Combining Two Innovation Toolkits: National Semiconductor’s WEBENCH and National Instruments’ LabVIEW In the analog design world, there are design engineers and test engineers. As we’ve just seen, many analog design engineers use National’s Webench online design toolkit to do their jobs. Many test engineers use National Instruments’ LabView virtual instrumentation software to test and validate the design and to ensure that the manufactured design meets the target specifications and parameters. National Semiconductor’s lead customers, who are always pushing the envelope, began to ask for more integration between their virtual design and physical test environments. They wanted to shave more time out of the end-to-end design to manufacturing cycle. They also wanted to be able to close the geographic and cultural gaps. When products are designed on one continent and tested and manufactured on another, the ability to transfer the designs and the simulations electronically and to run the premanufacturing and manufacturing quality tests electronically using online toolkits that talk to one another is a huge time and cost savings. So in 2003, Phil Gibson reached out to his counterpart at National Instruments, Christer Ljungdahl, who heads up National Instruments’ e-business initiatives. Together, they agreed to link their two companies’ toolkits in order to provide an end-to-end designthrough-test experience to the global community of design and test engineers. With a small investment in interfaces, the two companies were able to quickly combine their environments. The result is that a design engineer using National’s Webench can simulate his design online, then order a prototype board from National Semiconductor, and test it on the bench using National Instruments’ measurement equipment and NI’s SignalExpress™ interactive measurement application built on LabView. The test engineer can download the software simulations developed by the design engineer and compare them with the actual hardware tests. This linking of toolkits bridges a number of gaps—the gap between design engineers and test engineers, the gap between designers in one company and testers in another company,

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the gap between design in one country, testing in another country, and manufacturing in a third country, and the gap between two supplier organizations—National Semiconductor, the manufacturer of the analog components, and National Instruments, the supplier of the virtual instrumentation software and physical test equipment used to ensure manufacturability.

Results What’s the result of providing these design tools to the customers who design their products around National Semiconductor’s components? National estimates that it saves its customers, on average, sixty man-hours per design based on time savings reported by customers. National’s customers typically also get to try more options in a given time period, thereby producing better designs. The number of electronic designs per month being done using National’s Webench online design environment increased more than ten times, from 2,000 per month in the year 2000, to 21,000 product designs per month in 2005. The result: more design wins for National Semiconductor. Over the last twenty-four months, National Semiconductor’s revenues have grown almost 20 percent more than the rest of the players in each of the analog application markets it serves: standard linear, power, amplifiers, data conversion, and interfaces. At the same time, the company increased gross margins from 40 percent in 2003 to 60.7 percent in 2005. National’s tools for design engineers are used at the beginning of the design cycle in industries in which specification, design, test, and manufacture are typically outsourced to a variety of subcontractors around the world. So it is not always easy to gain a closed-loop picture of the impact of streamlining customers’ design process on the volume and profitability of parts ordered by manufacturers. On the other hand, the fact that 80,000 designers come to use National’s tools every day, that these engineers create and save, on average, 20,000 designs per month, and that National’s orders for high-end analog circuitry have outpaced competitors by 20 percent, indicates to me that empowering customers’ design processes pays off!

National Semiconductor

The benefits to customers from the streamlining of this end-to-end design–simulate–prototype–test–manufacture–test scenario are shorter time-to-market, fewer design/test iterations, and the ability to eliminate travel to manufacturing sites while ensuring that the designs are being manufactured to spec.

Summary: How National Empowers Customers to Reach Their Outcomes What has the National Semiconductor team done to empower design engineers through the use of online toolkits and other services? 1. Targeted design engineers—the most influential “customers” at the front of the design cycle 2. Identified those customers’ most critical scenarios—e.g., design a power management system for a new electronic gadget, design the controls for a thermostat, design a portable DVD player, design a game console system, design an X-ray imaging console, design an ultrasound monitor, design an RFID reader system 3. Provided a comprehensive design environment that presumes the engineer will want to explore many different trade-offs and options; included advanced simulation software to model the way the circuitry will perform in the real world; provided streamlined ordering for samples and prototypes 4. Integrated National Semiconductor’s design and simulation environment with National Instruments’ virtual instrumentation toolkit for testing the physical circuitry to provide an end-toend solution that bridges design, test, and manufacturing 5. Provided an online just-in-time learning environment—Analog University—and a detailed knowledgebase of design documents 6. Enhanced the Webench toolkit for almost a decade, evolving it to meet customers’ needs, by adding more and more application functionality, yet keeping it quick and easy to use

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7. Provided a set of common software services—including Webench—that are reused across National’s online environment, including: multiple search engines (natural language, parametric, image-based, full text), a massive database of components that can be searched and sorted based on customers’ attributes, advanced software simulation tools, online courseware, etc. TAKEAWAYS FROM NATIONAL SEMICONDUCTOR As the leader in its market space, National understands that it has a responsibility to its customers to make it easier for them to be successful on their jobs. The company put a lot of effort in understanding exactly who its target customers were and what their most critical scenarios were. What can you learn from National’s efforts and bring to your organization? • Target the customers that have the most power to influence sales and identify what they really want—their primary scenarios.

• Provide tools that help the customers reach their desired outcomes and continuously enhance the tools as new requirements emerge.

• Load these tools with your subject matter expertise that customers may lack. This will not only help them achieve their goals, but will make them look at your company as a partner in their solutions.

• Ensure that your customers are succeeding in using your tools to best effect, adding functionality, but keeping it quick and easy to learn and use.

N E V E S R E T CHAP Let Customers Co-Design and Promote Your Products

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n this last set of examples, you find a group of companies that are engaging with customers to design and promote products. As I explored this dimension of customer co-design, I realized that I could have researched and written another forty or so case studies. So this last handful of examples is representative of a huge and growing category of “outside in” companies: companies that have been designed to be shaped by their customers. The number of businesses that are encouraging customers to play an active role in developing products, in co-designing their offerings, and in actively promoting and building referral networks and ecosystems is increasing exponentially. Many of them are young companies or newer companies, but not all. For example, Muji is a retail brand that has been around since 1979. As you read through these next four quick examples, here are some design principles to keep in mind:

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1. Many customers are creative by nature. While the majority may go along for the ride, a creative minority—many of them “lead customers”—would like to strut their stuff, to express themselves by designing new looks, clothing, environments, furniture, and activities. Some of these may be physical goods—T-shirts, lamps, couches, or wallpaper. Others may be virtual goods— avatars, vehicles, dwellings, or accessories—that can enliven a virtual world. 2. It seems that customers who design or contribute products want recognition above all, and possibly some form of compensation. But the main reason they design and contribute valuable intellectual property is to express themselves. 3. Customers whose self-image is heavily invested in creating a particular brand, look, environment, or product seem to be happy to promote the brand to which they’ve contributed. After all, it’s a form of self-promotion as well. 4. Customer co-design is a communal effort. It’s much more fun to create new things and contribute them if you know that others are going to see, appreciate, interact with, vote on, and possibly purchase your creations.

Threadless Selling Customers’ Designs to Other Customers

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hat about letting customers compete to create the designs for the products you manufacture and sell? That formula has proven to be an extremely profitable one for Threadless’ founders, Jake Nickell and Jacob deHart. The two “Jakes” met on an online design forum in 2000, when they submitted entries for the New Media Underground Festival T-Shirt design competition in April 2000. Jake Nickell’s design won the contest. The fun and excitement of the competition got the two of them thinking.

Customers Compete with One Another to Provide the Products They Sell As Jake Nickell recalled, “We thought it would be interesting to have an ongoing competition through which the winning designers could win prizes and the winning designs would be our product.”1 Thus was born the idea of Threadless.com—a Design Your Own T-shirt competition and retail Web site. While there are many Web sites that let customers submit their designs to be printed on T-shirts, mugs, and

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posters, Threadless was one of the first to presume that customers wanted to strut their stuff by having their designs produced as commercial products that other customers could buy. Threadless was also one of the first design-your-own T-shirt sites to involve its customers in a design community, by having them vote on and comment upon each others’ submissions. What works so well about Threadless is that its customers, who are design-conscious people of all ages and from all over the world, value one-of-a kind clothing designs. They don’t want to be seen wearing mass-produced apparel. T-shirts have become a fashion statement. The cooler the T, the cooler the person. So the Threadless business concept is to have a constant supply of unique, fresh designs and to produce a limited quantity of the designs that customers like the most. Fresh new designs keep these style-conscious consumers coming back for more.

Customers Submit their Own Designs. Here’s how Threadless works. Designers (both amateurs and professional graphic designers) are encouraged to submit T-shirt designs for other designers and potential customers to rate. Each week, several shirts are selected as the winners and are produced for others to buy. The name of the design and of the designer are printed on the back of the T-shirt he or she designed. And the winning designers are interviewed and featured on the Web site. The winning designers receive a cash prize as well as recognition and acclaim. Over time, the size of the awards required to lure great submissions has increased. Back in 2000, the winners won $50 and a free t-shirt. In 2001, the prize was $100. In 2003, the prizes were $500. By 2005, winners received $1,000 ($750 in cash and $250 in store credits they can use to purchase their own shirts or others’). By early 2006, each winning designer received $1,500, a $500 Threadless gift certificate, and a $200 membership in 12 Club (Threadless’ T-shirt of the month club). The Threadless site provides a couple of templates that people use to submit designs. There’s also a clear set of design specifications (four colors, including black and white; dimensions; “designs must

Threadless

not be overly offensive or contain copyrighted material;” photographs are not permitted). Most designs are accepted unless they are duplicates or they don’t conform to the specifications. Each accepted design submission has a rating period of seven days. Submitters are encouraged to “promote” their designs during the scoring period. When a designer submits a design, they’re sent an online “promote your design” packet, which includes a banner to post on their personal site to promote their Threadless entry and a promotional e-mail to forward to all of their friends.

Customers Rate Designs. As a registered member of the Threadless community, you can rate designs on a scale of zero to five. At the same time, you can indicate whether or not you are really interested in buying the shirt, if it wins. And you can post reactions, comments, and suggestions. Designers say that they value the criticism and suggestions that are liberally doled out on the site. After the seven days of rating are up, the founders evaluate the top-rated designs. Jake describes the process of picking the winners this way: “We basically look at the top 100 to 500 designs every month and pick out twenty to thirty designs that we want to print. They are not always the top scoring designs but we do use various scoring queries to help us determine which designs will sell the best. For example, users who score a design high and have bought a shirt from us have their vote counted a little higher than a user who has never bought a shirt.”2 By 2003, the Threadless “experiment” had generated $320,000 in revenues. There were 40,000 active raters and buyers, and 17,000 people had submitted designs. By 2004, Threadless had grown to $1.6 million in revenues. By the end of 2005, more than 300 winning designs had been chosen from 60,000 submissions. By early 2006, Threadless was releasing four to six new T-shirts each week and reprinting four revived designs. The active community had grown to 100,000 users, with an average of 1500 signing up each week. Revenues had grown to $2 million. Not bad for a company with four employees and a dog.1

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THREADLESS EXECUTIVE SUMMARY

Threadless/Design, Retail, Online Communities Skinny Corp. is the parent company of a number of retail and online community businesses, including Threadless, focused on customers providing the designs for the products and the content for the communities. Each Web-based business is designed for people who want to share their designs, ideas, recipes, music; to vote on others’ creations; and to build communities around their passions.

Case Study Focus

1. How Threadless created multiple businesses out of customer ideas and designs.

2. How to engage customers via friendly competition.

3. How to expand your market by building on customer community.

Target Customers

Customers’ Issues

Design-conscious people of all ages who value one-of-a-kind merchandise. People who want recognition for their creativity.

Threadless’s customers want to be part of the community and to know that their creativity is appreciated and their votes count.

Key Customer Scenarios

Threadless

Customers’ Results

Business Results

Customers receive recognition as well as cash prizes for their designs and ideas.

In early 2006, revenues from Threadless had grown to $2 million. In 2005 alone, over 60,000 T-shirt designs had been submitted to Threadless. By early 2000, over 100,000 slogans had been submitted to OMG. The brand new music site, 15 Megs of Fame, had attracted 1,600 musicians who posted over 5,000 songs in the first week the site went live.

What did the Jakes accomplish in a few years? They perfected a customers-as-creators-community business model. Customers’ creations are acknowledged and rewarded. Customers maintain their own intellectual property and copyright, but Threadless produces and sells the designs. Customers promote their wares, luring others to the community. The cost of goods sold is low. The profit margins are high. The overhead is in tending the community—something the Jakes are really good at. Skinny Corp: Spawn Business to Promote Customer-Created Products Since the success of Threadless, the two Jakes have kept going, creating a whole set of high-growth companies, under their parent company, Skinny Corp. These companies include: • OMG Clothing. Based on the common Internet/IM slang for “Oh my God!,” rather than submitting designs, contributors submit slogans or concepts for a design. By early 2006, over 100,000 slogans had been submitted. • Naked and Angry. Naked and Angry emerged from the discovery that what some of the designs customers wanted to create were really patterns, not logos or pictures that would look good on a T-Shirt. The Jakes launched a separate business “to manufacture

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products and garments created from winning fabric patterns ranging from ties to tops to pillows to belts to socks to sweaters.” • 15MegsofFame. Like the other Skinny Corp. businesses, this one is designed to let musicians submit tracks for the audience of other musicians and listeners to rate. • Others. Skinny Corp. also has spun off Extra Tasty, Mixblox, and FAQthis, with more to come. What all of these companies have in common is a vibrant community of creators—people who are invested in designing and showing off their music, fabric designs, taglines, recipes, and other creations.

Business Models The Jakes have proven their ability to spawn one community-drawing Web site after another. Each of their sites quickly becomes a magnet for people who want to share their designs, ideas, recipes, music and vote on or buy others’ creations, and to build discussions and community around a particular passion. In addition to selling customer-created content and designs, the Jakes could monetize their communities through advertising or sponsorship, but have so far chosen not to do so. By early 2006, they had twenty employees and a vibrant small business, able to support their lifestyles as well as their ever-expanding portfolio of new business ideas. In the past, Internet entrepreneurs wanted to grow a huge business and go public. The Jakes are good examples of the new breed of Internet entrepreneurs. They are much more interested in experimenting with new customer-designed businesses and communities than they are in “cashing out.”

TAKE-AWAYS FROM THREADLESS What can we learn from Skinny Corp.’s Threadless, et al., as customer-driven business models? There are probably many fields in which customers’ ideas and customers’ designs can be easily

Threadless

monetized. Notice that the Jakes created their business by engaging customers in friendly competition to keep them interested and involved. Customers can and do participate both as creators and as critics. Note as well that Threadless doesn’t just take customers’ words for what will sell. The founders make sure that the people who actually buy are the ones whose votes count the most. Have you thought seriously about inviting customers to design any of your products? Don’t you think that your customers may know more than you about what other customers would like? If you run a design contest, make sure that your customers are the ones who get to vote on the submissions. Think about the fact that in many fields, customers are happy to share their designs as long as they are acknowledged and rewarded, and they don’t have to cede control over their intellectual property. You can use their designs, let them hold the copyright or the patent, and still make money producing and distributing the products.

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Muji Engaging Customers to Help with Product Design

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uji is a well-known and respected specialty Japanese retail chain that sells household goods, apparel, and food products of its own unique design. Muji’s “no frills” products have captured the hearts, minds, and pocketbooks of its target customers—baby boomers and their kids—in Japan and in Europe. These are products that are simple in design, simply packaged, low cost, and produced to be energy efficient and environmentally friendly. Muji’s signature products include stationery, housewares, clothing, and food, as well as a newer line of baby products (for the kids’ kids/boomers’ grandkids).

The Muji Brand: No Frills, Simple Design Fiona Rattray, a style columnist for the London Observer, described the origin of the Muji brand this way: When Muji first began (in 1979)—as Mujirushi (no brand) Ryohin (quality goods)—it was as a no-frills label within the established Seiyu supermarket chain (though the two have long since parted). Wrapped in clear cellophane, with labels

Muji

of plain brown paper and red writing, the original range focused on ways to save the customer money. At the time, for example, consumers at other shops were only being offered intact, perfect slices of dried shiitake mushrooms—the remainder, the ends, were simply thrown away. Muji reasoned that they tasted the same whole or broken, so it sold those bits as well. Its slogan was “lower priced for a reason.” Later, it sold U-shaped spaghetti—made from the join that is cut off to make it straight.1 That was the humble beginning of a brand icon that became a magnet for people who like simple, well-designed, functional goods. Muji opened its first store in 1983 in Tokyo. The Muji brand became so successful that the Muji division was incorporated in 1989 as its own corporate entity, under the name Ryohin Keikaku. Muji products are now sold in 141 Muji direct and 144 Muji licensed retail stores in Japan, as well as in “Com Kiosks” at train stations. Muji sells through direct subsidiaries in the United Kingdom (fifteen stores), France (six stores), Italy, Hong Kong, Taiwan, and Korea, and through licensed stores in Ireland and Scandinavia. In the United States, you can find a few Muji products at the Museum of Modern Art (MOMA) stores in New York.

Brand Extensions. Muji also runs summer campsites where families can camp, fish, and play using Muji products. The company now also offers Muji cafés, Muji meals, Muji florists, and Muji furniture, as well as complete Muji-designed homes. Distinctive Muji Design. Minimalist design is an art form for Muji. Paper and packaging is brown and natural. Clothing is simple. The company has its own top-notch design team. It also commissions designs from famous designers around the world; however, their designs are anonymous; there are no designer labels. Muji is very selective about both its brand image and about the manufacturing processes it uses (no extra finishing steps, lots of recycled materials, etc.). Yet despite, or maybe because of, the careful oversight of the brand and the

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MUJI EXECUTIVE SUMMARY

Muji-Ryohin Keikaku/Retail

Case Study Focus

Muji is a well-known Japanese retailer of its own unique simple, functional, and esthetically pleasing “no frills” brand of 4,000+ products, in categories such as household furniture and appliances, apparel, baby gear, and food. Muji sells its products through its own stores and in licensed stores in Japan, Asia, and Europe.

How Muji involves customers in codesigning its products.

Target Customers

Customers’ Issues

Baby boomer women, their children and their families in Japan and Europe.

Japanese customers are very particular about product details. Many customers prefer simple, esthetically pleasing products.

Key Customer Scenarios

Customers’ Results

Business Results

Customers proposed and codesigned five of Muji’s leading products and collaborated on the design and refinement of many others.

In 2005, Muji’s sales grew 15.6 percent to 140,890 million yen, with profits of 11 percent.

Muji

distinctive look of Muji products, the firm has engaged its customers to help with product design.

Customer Involvement in Product Design at Muji Lots of product ideas come directly from customers. Muji is known for harnessing and leveraging its customers’ guidance. According to Patrick Reinmoeller, who studied Muji’s customer knowledgecapture,2 Muji has long encouraged customers to submit product suggestions and pays attention to them. “Every staff member on the sales floor carries a little booklet, the ‘information contact memo.’ Notes taken on customer behavior or short quotes from dialogue with customers are then related to the sales or marketing department,” Patrick explained. Because Muji pays attention and acknowledges customer input, the flood of customer suggestions has been consistent. For example, back in 1998, Patrick wrote, Muji was already receiving an “average of 6,200 suggestions each month for product improvements or new product ideas—suggestions are sent on postcards attached to catalogues (2,000 postcards) and information contact memos (2,000 memos). About 1,200 e-mails are received via Internet. Finally about 1,000 calls and letters arrive at customer services. Fifty people in middle and top management can access customer mail online.”3 By 2005, Muji was receiving more than 8,000 product ideas a month, from its Japanese customers alone.

Products Resulting from Customer Suggestions Customers know that Muji pays attention. “Products triggered by suggestions of customers are marked clearly in the catalog. For example, in the apparel catalog of the winter of 1999, 94 out of 631 products were identified as initiated by messages from customers,”4 Patrick elaborated. Nevertheless, the process for vetting customer suggestions remained closed until a few years ago. In an article published in the Sloan Management Review in early 2006,5 Susumu Ogawa described Muji’s product development this way: “Notwithstanding this openness to

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external input, product planning and product development remains a closed, internal, managed process. Customer input is collected, categorized and evaluated in a structured process, resulting in an internal short-list of top ideas which are discussed in a ‘business improvement meeting’ by a management board including the company president.” The board makes the final decision about whether or not to commercialize a product.

Customers Offer, Vote on, and Commit to, Product Ideas As more and more Muji customers began to flock to the company’s Web site, Muji.net, to browse the company’s product catalog, to submit product ideas and suggestions for improvements to existing products, and to request that discontinued products be reactivated, Muji’s management team decided to take an idea that had already gained popularity in Japan, and try it with Muji’s online community. The idea was to enable customers to submit product ideas for consideration, to vote on the ideas they liked the best, and then to commit to the final product by agreeing to purchase it, before the product is commercialized. This idea of customer-designed products with customers’ voting on product ideas had gained attention in Japan, starting in 1999, when two young industrial designers, Kohei Nishiyama and Yosuke Masumoto, at Elephant Design launched a Web site called cuusoo .com (which means daydream in Japanese). Within a year, more than 10,000 customers came to the site to describe their needs and/or their product ideas. Other customers voted on each others’ ideas. Then, when an idea got a lot of votes, Elephant Design offered the customer-validated concept to companies to commercialize, produce, and market. A handful of successful products were commercialized as a result. Muji emulated Elephant Design and offered an open customer codesign process. Each step is visible on the Muji.net Web site. Customers begin by offering product ideas. (These products don’t have to be unique but they need to be something Muji doesn’t already offer that customers need.)

Muji

Next, Muji selects the most promising product concepts among the customer ideas (and also selects some of its own products) for customer co-design and requests customer participation by relevant customers. For example, in the case of a child’s bib with a catch-all pocket for spills and food, Muji solicited a panel of mothers with children between twelve and twenty-four months old. Customers fill in an online questionnaire. Muji selects a couple of hundred customers to help in fleshing out the product idea. These carefully-screened customers are invited to test different versions of the products and to offer critiques. They may do some product testing and/or they may be invited to a face-to-face product feedback meeting. Customers provide suggestions and improvements to the product concept. In the case of the child’s bib, mothers recommended the use of a firmer wire to hold the pocket open so that food would drop in, a deeper pocket, better water repellent characteristics, as well as both sleeved and sleeveless versions of the “meal apron.” These recommendations are showcased on Muji.net for other customers to see and comment upon.

Customer Commitment as a Screening Mechanism. Then the customer community is given an opportunity to vote on whether or not the resulting product should be produced, by precommitting to purchase the product. If enough customers preorder (the minimum number of orders is 300), Muji will decide whether or not the product can be successfully commercialized. There are some products that don’t make it past this step, even though customers have precommitted. But there are many other products that are commercialized and have been very successful, including the child’s meal apron, which went on sale in August 2005. Muji reports that only about 15 percent of the people who say they’ll purchase the product don’t follow through with the purchase. Muji uses the same “open” process to make changes to products and/or to restock a product that it has discontinued. Customers’ comments and suggestions are posted. If enough customers precommit to purchase the product, Muji may bring it back.

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Among its customer-originated products, Muji has had some blockbusters, including a portable lamp, a beanbag chair, and a Freedom Shelf that can be hung at many different angles, with no visible fixtures. (The Freedom Shelf received 300 pre-orders in a single day, so it made the cut quickly.) According to Susumu Ogawa, “The results are impressive. . . . Muji’s customers co-designed a number of new products which all generated sales far beyond the sales volume of comparable conventionally developed products. The most successful of these products is a kind of beanbag sofa chair which generated annual sales of 1,344 million yen in 2004 (compared to 24 million yen of average annual sales in this category).”6 Summary: How Muji Has Harnessed Customer Innovation Muji accomplishes several goals with its customer co-design activities: 1. Engage Customers in Discussions Around Product Requirements. Customers come back to the Muji.net community site because they are interested in influencing the design of Muji’s products to make them better and more useful for themselves and others. 2. Build Customer Loyalty and Referrals. Muji’s customers feel they have a stake in the company’s products, so they purchase them more often and tell their friends. 3. Engage Customers as Consultants in Product Development and Evolution. By soliciting groups of customers to vet new products (those the company designs as well as those that other customers have proposed) early in the development cycle, before the company has committed to produce them, Muji introduces products that meet customers’ needs. 4. Get Customers Precommitted to Purchase New or Improved Products. By getting customers to “commit to buy,” by preordering products before they’re commercialized, Muji has a much better idea about which of its new or improved products are likely to be successful.

Muji

One of Muji’s customer-designed products—a bedside lamp that can be carried around.

TAKE-AWAYS FROM MUJI Do you have a distinctive brand that resonate with customers? Think of all the ways that you could encourage customers to make suggestions about new product ideas and improvements to products. Engage customers in proposing and co-designing products. • Nurture an online community of customers who are passionate about your products and your brand. • Offer customers lots of ways to submit ideas for new products and/or for product enhancements, including postcards they can mail in as well as forms to fill in that are prominent on your Web site. • Incent associates who interact with customers to jot down notes about customer behavior, comments, and suggestions, and to submit them each week to an online database. • Make sure that top executives and middle-management executives in sales, marketing, and product development read and comment on customers’ suggestions. • Develop a structured process for sorting through customers’ product suggestions and getting them into the pipeline for consideration.

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• Recruit customers from your online community to engage in refining the product concept. • Engage with these target customers in consultative design sessions to get their input during the prototype stage. • Before you commit to commercialize a product, ask customers to vote by precommitting to purchase the product at a target price. Establish a threshold below which you won’t commercialize the product. Track which customers actually purchase and how well the product does.

Karmaloop Making a Business Out of Catering to Lead Customers

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here is nothing more challenging than guessing right about the fashion needs and wants of hip and trendy young people. Yet 32-year-old Greg Selkoe has been doing just that (with the help of his customers) since 1999. Karmaloop began as a sideline. In addition to his day job in urban planning for the Boston Redevelopment Authority, Greg contributed articles to Decontrol, an electronic music and urban culture magazine run by his high school buddy, Al Haney. Greg and Al decided to put up a Web site to try selling the streetwear that appealed to the magazine’s hip subscribers, and to give away the music CDs that artists and record labels were happy to supply. Greg convinced four clothing brands—Snug, Kappa, Gat, and Esdjco—to give him clothing to sell on consignment in exchange for promoting their brands. His market: urban young adults who wanted cool clothes—not the kind of clothes you’d find in a mall—the kinds of clothes that hip musicians, DJs, and graffiti artists wear. You see people wearing cool stuff on campus or on the street, but there isn’t a store you can go to find “cool stuff.” In fact, part of the reason that it’s cool is because

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there isn’t such a place. “Karmaloop was founded in 1999 to battle the evil forces of McFashion,” states its Web site proudly. “In a world populated by Abercrombie Zombies, Karmaloop was created to provide a universally accessible alternative—a boutique to outfit cutting edge culture. Plus, it seemed like it would be fun to start a web site & get free clothes.” For the first couple of years, Greg ran the fledgling operation out of the basement of his parents’ house in Jamaica Plain, in the suburbs of Boston. His partner, Al Haney, built the Web site. Greg Selkoe was a natural promoter and Karmaloop’s reputation began to grow—as all good street fashions do—through word of mouth and viral marketing. Soon, Karmaloop outgrew his parents’ basement, Greg raised $2 million from fourteen angel investors through friends and family. He was able to move his business and warehouse into a back room in downtown Boston—low-rent space behind Sherman’s luggage and appliance store, offered to him at cost by Bill Sherman, one of his angel investors. By early 2006, Karmaloop had close to twenty employees, 750,000 customers in forty countries, a Korean Web site, a Boston boutique, and a larger-than-life reputation as a streetwear trendsetter. Getting your clothes or gear onto Karmaloop has become a rite of passage for any clothing label. If you aren’t sold on Karmaloop, you probably aren’t cool.

KARMALOOP EXECUTIVE SUMMARY

Karmaloop/Retail

Case Study Focus

Karmaloop is an “online urban boutique”—a specialty retailer of “urban streetwear” for 18- to 30-yearold men and women. Karmaloop has a Web site, Karmaloop.com, a single physical retail outlet in its home market of Boston, and a Korean retail site.

1. How Karmaloop became a successful specialty retailer against all odds by building a fanatical customer community.

2. How Karmaloop has harnessed customers as promoters, trend spotters, and salespeople.

Karmaloop

Target Customers

Customers’ Issues

Hip, young, style-conscious consumers who are fanatical about putting together their own looks and wearing the coolest stuff.

Don’t want to wear “McFashion” clothes. Want to be viewed as the hippest person in my crowd. Happy to promote the brand but expect to get discounts and free stuff, if I do.

Key Customer Scenarios

Customers’ Results

Business Results

Customers feel “understood” by Karmaloop. They can find the new trends before anyone else. They don’t have to worry that they’ll be out of style. They earn points by promoting Karmaloop to their friends—points they can redeem in cash or in clothes.

Privately-held Karmaloop survived the dot-com bust when hundreds of better-funded fashion brands bit the dust. The company is considered THE company that can make or break a new streetwear brand. Karmaloop went from having to convince designers to let it sell their clothes to turning away 10 brands a week who are beating on their doors, wanting access to their customer community.

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Karmaloop’s Customers Karmaloop’s target customers are hip 18- to 30-year-olds, but the clothing, the look and the lifestyle appeal to younger teens and to older adults as well. So the actual demographic that Karmaloop attracts ranges from fourteen to forty. Although these customers like “urban streetwear,” they may live in suburban or even rural areas. Karmaloop appeals to both men and women of all races. They are intelligent, alpha influencers. They create trends. They’re design conscious and socially conscious. They care about the label/brand. They’re always on the lookout for a new find. They like good design. They care about the way that clothes are manufactured (no sweat shops). They are ecologically conscious. They don’t believe in cookiecutter fashion. Each person wants to assemble his or her own unique look by combining an interesting assortment of eclectic, but definitely cool, clothing and accessories.

Providing the Personal Touch. In the seven years that Karmaloop has been in business, Greg Selkoe has set high standards for personal customer service. Customers can call in, e-mail, and instant message, and know they’ll reach a live person who is young, hip, fashion conscious, and knowledgeable about the specific merchandise as well as the latest trends in fashion, music, and culture. Greg still calls and e-mails customers himself every month to take their pulse and find out what’s hip. Being Part of a Community. Karmaloop customers feel that they’re special. They’re part of a countercultural cult. Greg has fostered that sense of community in a variety of ways—the most important community-building vehicle is “the Loop,” the monthly e-mail zine that goes out to 350,000 Karmaloop fans. Karmaloop’s blog is another community builder. Customers send in postings in a variety of categories—music, fashion, art, culture, and events they attended. These are vetted and then posted by Karmaloop’s staff, so the blog remains high-quality and true to the spirit of the community. Karmaloop’s most fanatical customers become part of the company’s “street team.” They share new fashion finds, promotional tips, cultural

Karmaloop

news, and artwork. Karmaloop is a “community of style,” according to Tina Wells, the CEO of the Buzz Marketing Group, a full-service youth marketing agency, that partnered with Karmaloop in early 2005.

Building the Karmaloop Brand

Urban Streetwear. There’s no one look that makes up the Karmaloop style. It’s an eclectic, ever-changing culture. “Karmaloop has always been set apart by the fact that it’s eclectic . . . the underlying thread that ties us together is unique, cutting-edge style. A lot of streetwear is moving in that direction. . . . If someone sees something that’s dope, they’ll wear it. Mixing and matching is such an American philosophy, because it’s such an amalgamation of different cultures. People adopt pieces of cultures that reflect this, and have woven them into their look, their feel and their lifestyle.”1 The urban streetwear style borrows as much from New York as it does from Tokyo, from Montreal as from L.A. Apparel ranges from T-shirts and hoodies, to pants, shorts and hats, to purses, tops, skirts and jackets, and shoes. One way of tuning into the Karmaloop look is to be clear about what it’s not. Anything that is mass market, advertised on TV, or sold in a mall is definitely not part of the Karmaloop counterculture. Focus on Great Photography. Greg knows that what his target audience cares about is “the look.” So from the outset he invested in having a great photographer, Chris Churchill, shoot real people modeling the clothes he sells. Great professional photography was a huge selling point in convincing new brands and labels to take a flyer with an unproven online retailer. While other Web sites have their online catalogs, Karmaloop features “the look book”—a collage of many of the best photos featuring this season’s looks. Tune into the Passion for Music. A shared love for music is another thing that Karmaloop’s customers have in common. “There isn’t one musical taste,” explains Greg Selkoe. “Our customers like hip hop, they like punk, they like underground, you name it.” But above all,

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they like to discover new bands and new sounds. So Greg contacted up-and-coming musicians and offered to give away their CDs to seed the market. Karmaloop might ship a free CD with each order, or run an online contest and give away CDs to the winners.

Celebrate Creativity and Art. Art and esthetics matter to Karmaloop’s customers. They’re interested in new artists, new photographers, new exhibitions—particularly ones that showcase fresh new talent. So the Karmaloop team promotes local talent, sponsors art shows, and encourages its customers to spot and blog about new talent. Celebrate Fun! Above all, Karmaloop’s employees and customers like to have fun. They go to parties, gallery openings, clubs, concerts, movies, bars, and they hang out with friends. They share new finds. The atmosphere in the company’s funky office in downtown Boston is eccentric, cool, and laid back. At 32, Greg is the oldest employee. Most of team members are in their 20s. There are always several people on the phone talking and IMing with customers, tracking down errant shipments, modeling new clothes, adding new stuff to the Web site, and playing with the funky line of toys that Karmaloop now offers along with its apparel. In the summer, the staff swells as a new summer crew of college interns brings fresh ideas and energy into the company.

Karmaloop’s Customers Are Its Trend Spotters and Guides Karmaloop gets tips every day, from customers who see something cool on the street and send an IM or a photo, from customers who chat online or call, from those who drop into the office or shop in the retail store in Boston, and from its 5,000 customer reps in Tokyo, Korea, Montreal, Manhattan, or the Valley. Street cred is everything. Whether a new clothing label is hot or passé, Karmaloop’s fanatical customers are quick and vocal. According to Greg, “40 percent of the brands we sell were spotted and recommended by our customers.”

Karmaloop

Of course, Greg and his buyer travel to scout out new wares. They frequent the clothing trade shows. But before they rep anything they find at one of the shows, they check it out with customers first.

Karmaloop’s Customers Are Its Promoters and Sales Reps From its early days, Karmaloop’s most fanatical customers were clamoring for more ways to become involved with the company. As trend spotters and influencers, they were already actively promoting Karmaloop’s brand and its wares to their own sphere of influence. Greg and his ten customer service reps had become friends with many of these loyal customers. It was like one big family. But the customers wanted more—more recognition for the role they were playing as Karmaloop’s virtual sales force, more support for their promotional activities, and, of course, free clothing and toys. So in 2004, Karmaloop formalized its customer referral program. You can apply on the Web site to be a member of the Karmaloop Street Team. “Do you think you have what it takes to be a Karmaloop Rep? Earn cash and free gear battling the evil forces of McFashion,” reads the promo on the Web site. Within two years, Karmaloop’s active street team has grown from a handful of natural promoters to 5,000 dedicated reps all around the world. Once you are accepted into the Street Team, you customize or create your own Web site banners and ads to put on your MySpace site, your blog, and any other place you can put them in cyberspace. You can customize and print out flyers and stickers to hand out at parties, on the street, at school, in the gym, etc. Each of the ads and banners has your unique ID and lets the customer know that they’ll get a discount at Karmaloop if they order using that code. Each rep gets a link for their Web site or blog that tracks their sales in real time. For each $10 one of your customers spends at Karmaloop, you get fifty points, which you can redeem via Paypal, or trade for merchandise. Reps can earn points in other ways, too. You get points for Web site placement—you post your banner, take a screenshot of it on the Web site on which you posted it, with the date and URL, and add

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it to the Street Team’s photo gallery. You get points for “street bombin”—handing out flyers and stickers—by documenting your activity with a photo you post in the gallery. You get points for designing your own poster or banner and posting it for other reps to customize and use. And you get points for sending a post that gets used on the Loop blog and e-zine. The result of empowering customers to promote and sell Karmaloop’s products is that more than 15 percent of the company’s sales (and all of its guerilla marketing) are now generated by its Street Team of 5,000 customers worldwide.

Karmaloop Is a Hip Brand’s Best Marketing Vehicle Karmaloop prides itself on carrying the hippest styles and brands as well as showcasing new labels from up-and-coming designers. From the beginning, Greg Selkoe has known how to showcase his brand partners’ wares through his signature photography. He also offers full service interactive marketing. The site is always running contests with surveys and questionnaires, featuring promotions, and offering exclusives and trial marketing of hot new product ideas. Many larger brands now pitch Greg to gain a coveted spot to test out new merchandise or ideas. Karmaloop has grown from offering four brands in 1999 to more than 50 brands today. His loyal customer base of more than one million urban streetwear buyers, his Web site traffic of 750,000 unique visitors per month, his monthly Loop which reaches 350,000 of his most fashion-conscious customers, and his street team of 5,000 proactive representatives around the globe, bring fresh new buyers every month.

Next Step: Designs by Customers for Customers I was tickled to stumble across the ad promoting “Karmaloop’s Kazbah” on the Web site. Naturally, many of Karmaloop’s designconscious, creative customers are artists and designers too. Why not give them a place to offer their wares for sale as long as the style and quality of their products match the Karmaloop ethos?

Karmaloop

Since Karmaloop’s inception, we have been continuously contacted by super-talented individuals who design t-shirts, paint, make crazy cool stencils, sculpt, take pics, make macramé and otherwise undertake a whole host of creative endeavors, asking about selling their stuff on the site. . . . Over the years, we have communicated with and seen the work of hundreds of artists, but as it is difficult for us to engage every talented person to sell their stuff on the site in the traditional manner, we haven’t always been able to take stuff that we love . . . UNTIL NOW!!!! We put our little noggins together and Karmaloop Kazbah was born. . . . Karmaloop Kazbah is a bazaar featuring original design/art product made in the kitchens, lofts and vestibules of Karmaloop’s hyper talented customers. The Kazbah will feature the wares of select artists.2 The Kazbah set-up is similar to what Amazon.com offers to its smaller retailers, like Karmaloop. Forty-five carefully selected artists and designers get their own “stall” in the marketplace, they service their customers directly, and the marketplace owner—in this case, Karmaloop—charges a commission as well as a service fee for handling the credit card transactions.

Summary: How Has Karmaloop Harnessed Customer Innovation? Like any business that is designed to support its customers’ selfimage, value system, and aspirations, Karmaloop listens carefully to what its customers care about and what they think is cool. Greg Selkoe observed an unmet need—a single source for cool clothes— within a defined customer demographic, urban young adults. He: 1. Identified an unmet need of a customer segment 2. Understood the values and interests that appealed to this segment and created a culture and mission customers could rally around

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3. Solicited product and assistance from brand manufacturers and promoters who targeted the same demographic 4. Solicited input from customers on spotting new trends and products to offer 5. Formalized a program for customers to act as sales representatives 6. Leveraged talents from the customer base to launch a new line of business

TAKE-AWAYS FROM KARMALOOP Greg Selkoe has created a very successful and growing business out of an observation that there was an unmet need of a customer segment he understood very well. Here are the lessons to be learned from the Karmaloop story: • Build a business for a customer segment based on their attitudes. Create customer interest and loyalty by appealing to their values and by making it “cool” to be part of the community.

• Validate your merchandise selection with your customers and solicit customer input.

• Make it very easy for customers to provide input using methods they are comfortable with.

• Reward your customers for promoting your products. • Gain loyalty by making them feel like part of the business and by making it an honor to be selected to do so.

• Recognize other unmet needs/desires from your customer segment and find ways to fulfill them.

The Ultimate Customer-Created Experiences: Virtual Worlds The Implications of Online Gaming: Your Customers, Kids, and Employees Expect to Co-Design Your Business

Why Are Game Worlds Important? I believe that there are four important reasons that executives who are interested in business strategy and innovation should be immersing themselves in virtual worlds: 1. Gamers will expect to co-create your business in the way they co-design their virtual worlds. 2. There is a huge number of people for whom video gaming and online gaming is second nature. These are your customers and your employees. You need to understand their behavior and their needs. 3. Virtual worlds and game worlds are real. They have economic consequences. People are creating value by spending time in virtual worlds.

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4. Synthetic worlds provide innovation labs in which society can try out different ways to solve many of the complex problems that confront us: environmental challenges and health challenges, among others. Watching your kids play online games will not show you what this experience is like. You actually need to experience it yourself. “Imagine that all you knew about movies was gleaned through observing the audience in a theater—but that you had never watched a film. You would conclude that movies induce lethargy and junk-food binges. That may be true, but you’re missing the big picture,”1 game designer Will Wright wrote.

Gamers Will Expect to Co-Create Your Business Will Wright has become one of my heroes. He is the game designer of The Sims and of Spore, a game that will be launching in late 2006. He is also one of the most thoughtful (and influential) game designers. He explained: Just watch a kid with a new videogame. The last thing they do is read the manual. Instead, they pick up the controller and start mashing buttons to see what happens. This isn’t a random process: it’s the essence of the scientific method. Through trial and error, players build a model of the underlying game based on empirical evidence collected through play. As the players refine this model, they begin to master the game world. It’s a rapid cycle of hypothesis, experiment, and analysis. And it’s a fundamentally different take on problem-solving than the linear, read-the-manual-first approach of the parents. . . . The fact that they’re learning in a totally new way means they’ll treat the world as a place for creation, not consumption. This is the true impact videogames will have on our culture.2 Will Wright developed Sim City in the 1990s and then the hugely popular Sims series which launched in 2000. Will has intentionally

The Ultimate Customer-Created Experiences: Virtual Worlds

developed games in which the gamers create much of the environment of the game—from homes to cities to toasters to wallpaper. Vibrant online communities of customer designers and contributors surround all of his games. Other game designers have followed Will’s lead for two reasons. First, having gamers contribute their own creations makes customers happy and keeps them engaged. Second, it’s very expensive to create a modern-day video game or online game. You need hundreds of designers, developers, animators, etc. So there’s both a customer loyalty incentive and an economic incentive to give customers an active role to play in co-designing the games in which they participate. For people who spend much of their leisure time co-developing the environments, the characters and the activities in their virtual worlds, interacting with (or working in) a business that doesn’t encourage this kind of co-creation will be hard to take.

How Large Is the Virtual Gaming Community? I’m using the term “virtual gaming” to describe an activity that includes everything from the use of handheld video games to the massively multiplayer online games.

Gen G. While people of all age groups and psychographics have gravitated to console gaming, PC gaming, and online gaming, there is a generation of people who grew up with computer games and online games, playing PC games as toddlers, carrying around Nintendo Game Boys and plugging into TV console games as young kids, playing Dungeons and Dragons with school friends, gravitating to Ultima Online, HalfLife, Everquest, or The Sims on their computers, testing their skills with Sony PlayStations, Microsoft Xbox, Nintendo Revolution, and/or joining the virtual worlds of Doom, Warcraft, or Second Life. According to John Beck and Mitchell Wade’s book Got Game, this “Gamer Generation” (Gen G) is now two generations old, and has a population of 90 million in the United States alone.3

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A Multigenerational and Multicultural Phenomenon. The demographic make-up of online gamers may surprise you. As of 2005, when Edward Castronova’s book Synthetic Worlds was published, he listed the following demographics: • The people who play video or computer games in the U.S. alone, now represent over 50 percent of the population over age 6. • The average game player is 29 years old. • 43 percent of game players are women. • 97 percent of games are purchased by adults over age 18. • 60 percent of parents play games with their children at least once a month.4

What are the Behaviors of Gen G? In their book Got Game, John Beck and Mitchell Wade talk about the behavioral differences that you need to be prepared for when developing products or experiences for Gen G customers, and/or integrating them into your workforce. Spending time in virtual worlds makes you more flexible, adaptive, and self confident. These virtual worlds have their own customer co-created economies and ecosystems, in which the quests are challenging and unexpected, and the rewards of success are both psychically and financially satisfying. These are worlds in which you gain reputation and wealth by being smarter, more creative, and more charismatic than your co-players—players who are the smartest and most creative people from all corners of the globe. John Seely Brown and Douglas Thomas described gamers’ behavior: When role-playing gamers team up to undertake a quest, they often need to attempt particularly difficult challenges repeatedly until they find a blend of skills, talents, and actions that allows them to succeed. This process brings about a profound shift in how they perceive and react to the world around them. They become more flexible in their thinking and more sensitive to social cues.5

The Ultimate Customer-Created Experiences: Virtual Worlds

In the workplace, we need to harness the incredible creativity that comes from gamers who know how to fail fast and often, and pick themselves up and start over. One way is to set the team’s goals high, and make the boundaries, constraints, and rules of the game very clear. Then step back and let the magic happen. Do not, under any circumstances, tell them how or what to do! And be prepared for some knock-your-socks-off results!

How “Real” Are Synthetic Worlds?

Economics: GDP of Synthetic Worlds. According to economist Edward Castronova, the GDP of synthetic worlds was more than $1 billion by mid-2004.6 Castronova calculates the GDP of synthetic worlds by looking at the number of players and the number of hours they play multiplied by the amount each player earns per hour using the in-game currency. In fact, if you spend two hours picking up gems in a mine, or fighting dragons to reach a pot of gold, or chopping down trees to build a house, or designing a new wallpaper, you can trade the results of your in-game labor for currency or for other items of value. Guess what? These in-game acquired objects have value in the “real” world. You can trade characters, accomplishments, trophies, and designs on eBay and other auctions for actual cash. This provides an exchange rate from synthetic worlds to real-world currency. Edward Castronova estimated in 2004 that virtual worlds had, on average, a GDP of $2,000 per capita, based on 20 million people spending an average of 20 hours a week in their virtual worlds. He converted those 20 million part-timers into 2.37 million full-time equivalents. The Virtual Worlds’ GDP, as calculated by Castronova in 2004, was equivalent to the GDP of Namibia. So if you look at synthetic worlds as Edward Castronova does, they are parallel economies in which people spend time, contribute value, and interact with one another, often in more satisfying and rewarding ways than their “real world” existence affords. Earning Real World Money in Virtual Worlds. In the game of Second Life, players buy and sell real estate with in-game currency. But

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this real estate and the dwellings, stores, and possessions that gamers create and buy and sell to one another also have value in the real world. One Second Life real estate maven actually sold so much property on eBay to people who wanted prime locations in the game, that she paid income tax in the real world on the $100,000 of real-world income she received by buying and selling Second Life real estate. As of early 2006, one financial analyst friend of mine did a quick backof-the-envelope accounting and said that the assets in Second Life, if sold in the parallel “real” world, were currently worth $4.5 billion! In early 2006, Ge Jin, a PhD student from University of California, San Diego, published a controversial film on YouTube. It was a preview of a documentary entitled “Chinese Gold Farmers.” The film chronicles a booming business in which young Chinese men work and live in “Gaming Workshops”—dorm rooms filled with computers, with young men sleeping in the adjoining room in between bouts of productivity. Their mission: play games like World of Warcraft and Lineage at the highest levels, amassing booty and building avatars with lots of valuable characteristics. These are then sold on eBay to the highest bidder. Ge Jin reported that one farm owner told him that there are more than 2,000 gold farms in China and more than 200,000 gold farmers. One of the workshop owners, Tietou, described the business this way: “I don’t know if you’d call this a service industry, but Chinese workers are providing a service to American gamers. When I was in America, I noticed that the price of a meal, a haircut, and many other things are eight times more expensive than in China, just as one American dollar equals eight Chinese yuan. But currently it’s impossible to transmit a meal made in China, or Chinese labor to China, otherwise, it would be easy to make money. But I suddenly realized that exporting virtual items through the Internet is the same as transmitting Chinese labor to America.” The young men who work in Tietou’s workshop appear to be having fun. In fact, they enjoy competing and playing together at the highest levels of these games. One of them, Xiong Xiong, said “We are playing at the highest level, not just for money, but for fun. . . . When so many people are playing together, it’s important to have fun. . . . there’s a sense of achievement.”7

The Ultimate Customer-Created Experiences: Virtual Worlds

Synthetic Worlds as Social Experiments A number of ethnographers and social scientists are now flocking to virtual worlds. So are biologists and other experts eager to learn from watching how groups of people, gaming together, begin to experiment, learn, and problem-solve. For example, in October 2005, an outbreak of the plague hit the World of Warcraft. The game designers had intended the disease to have a limited effect. “The disease was not originally supposed to spread, but was intended as a way to inflict temporary damage on high-level players attacking a ‘boss’ in one area of the game. It (was) meant to spread within the raid group attacking him with the plague as it does . . . damage to anyone who gets it,”8 according to Erik Jacobson, one of the players who fell victim to the plague. But what happened was that the code that caused the disease could be easily replicated to players’ pets, and spread through the pets to other players. Soon thousands of players were being “killed off.” What was interesting to watch was how players began to take evasive action—to quarantine themselves off from other groups, and/or to pass the disease along intentionally to those they wanted to harm. It also took a while for people to figure out how the disease was being spread. Researchers at the Center for Disease Control heard about the plague and began watching the ways in which the virtual community members dealt with it. To some scientists and educators, virtual reality outbreaks like the one that slammed World of Warcraft could prove a valuable tool for studying the spread of infectious diseases— as well as public response to them. The correlation between online and real-world behavior in the face of epidemics, they say, takes on heightened significance in the face of publichealth threats like a potential avian flu pandemic.9 In fact, Pam Omidyar hopes to harness the ability of online gaming to shape behavior and to influence the spread of disease. She founded HopeLab in 2001 to develop games that would help young cancer patients both understand and conquer their disease. She designed a game called Re-Mission. “Players fly a nanobot called Roxxi through a cancer patient’s body on missions that range from

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free-roaming exploration to a run-and-gun combat. Along the way, power-ups energize weapons like chemotherapy, radiation, and diet, as well as response to complications like bacterial infection, nausea, fever, and constipation.”10 HopeLab began distributing the game for free to treatment centers and for online download in April 2006.

The Evolution of Synthetic Worlds as Customer-Co-Designed Businesses The most important trend to note for readers of this book is that an ever-increasing percentage of the content and design of synthetic worlds is being co-created by the gamers themselves. What started out as a way to engage players in personalizing their environments is rapidly morphing into peer-production.

The First Generation of Customer-Created Gaming “Content”

Customers Customize Their Avatars. When you join any game world, you have the opportunity to create or customize your avatar or character. You usually select a type of character from a variety of different available roles (elves, trolls, wizards), genders, and species (people, pets, orks, etc.). As you play the game and explore, your avatar gains experience in different fields (farming, armor making, gold mining, slaying) and you acquire possessions which you can sell or trade (in the virtual world, or in the “real” world). Customers Design Their Environments. There are now many virtual worlds in which most of the “action” is actually customers designing their characters’ environments, their outfits, their household appliances and wallpaper and gadgets, their towns, as well as creating multiple characters, setting them in environments and watching them interact. As a woman watching this activity, I realized that it’s a lot like playing with dolls in a dollhouse, except that you get to create the dolls, design the dollhouse, and the rest of the town. The hugely popular Sims phenomenon is probably the bestknown Western example of this phenomenon. But there are many

The Ultimate Customer-Created Experiences: Virtual Worlds

games in Korea, Japan, and China in which customers have also been actively engaged in the design of characters, towns, and worlds.

Customers Create “Content.” The developers in the gaming world refer to this phenomenon as “creating content.” Content—whether it’s wallpaper, scenery, buildings, music, sound effects, or animation— is time-consuming and expensive for game companies to develop. They have to hire hundreds of designers, animators, artists, and composers and tell them what to design. Turning “content creation” over to the end customers makes economic sense. And, it turns out that millions of people will actually pay for the privilege of designing their own universes! That means the game developers can focus on the hard part: creating the rules of the game and the rules of physics that govern behavior in these worlds.

Second-Generation Game Worlds: Reusable Platforms I predict that the future of gaming platforms will be similar to the evolution we’ve seen for operating systems in the computer software world. Each platform was originally optimized for a particular combination of computer hardware and application functionality. Unix and Linux came from the academic computing arena; Microsoft Windows came from the PC world. The Macintosh OS was optimized for consumers. The mobile phone operating system platforms sprang up separately. So did the operating systems for handheld devices, like the Palm Pilot and the RIM Blackberry. Similarly all the video gaming environments (Sega, Nintendo, Xbox) and all the online gaming platforms (Sims, World of Warcraft, Everquest, etc.) have evolved independently. But in the online gaming world, as with the world of general-purpose software, there’s a trend afoot to be able to build on and extend pre-existing platforms, as well as a customer-generated push to provide interoperability among virtual worlds.

Gaming Platforms Are Becoming Standard and Reusable. The software that describes a game environment, the gaming platform,

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typically takes hundreds of person-years to develop. That’s one reason why a well-designed, robust platform is typically re-used many times to create multiple game-worlds. For example, the gaming platform used in Second Life has been reused for game worlds as widely divergent as Stonehenge on earth and a new civilization on a distant planet 100 years in the future. Two other platforms, There and Active Worlds, are being used by other game developers. Many game developers start with one of these extensible platforms and build on top of it.

Customers Will Start Demanding Interoperability. In a cogent article, “When Virtual Worlds Collide,” Steven Johnson describes the current state of affairs from the customer’s point of view. “Your World of Warcraft persona can’t visit a Stonehenge replica in Second Life. You can’t impress an Everquest elfin hottie with Jedi skills honed in Star Wars Galaxies. If you want to buy an Ultima scepter with Therebucks, you’ll have to exit both worlds and consummate the transaction on eBay.”11 This is one reason why I believe that we’ll soon see more virtual bridges among our virtual worlds. The other reason is the cost of reinventing the wheel over and over again to provide the basic underpinnings for virtual gaming worlds. Steven Johnson agrees. He points out: “All virtual worlds require a communication protocol that lets you talk with other people, a software platform that lets you build things on top of it, and a currency that enables trade. These three elements share one thing: a gravitational pull toward a common standard.”12 Whether one or more of the popular gaming platforms becomes the de facto standard for building virtual worlds, or whether a new de facto standard emerges, has yet to be seen. There are currently at least three open source projects to create open source “metaverses”—interoperable gaming worlds.

Next-Generation Gaming: Customers Create Games on Top of Common Platforms Here’s the daunting business dilemma that the online gaming world is confronting: “the price of developing a game for the next-generation

The Ultimate Customer-Created Experiences: Virtual Worlds

of systems is going to skyrocket. It’s going to take warehouses full of artists and level designers to create all the content for every title. For many, this proposition is terrifying.”13 The solution to this ever-increasing cost and complexity spiral is to give end users the tools to create much of the content, game layers, characters, behavior, and environment of the synthetic worlds of the future. In fact, Will Wright, the creator of SimCity and The Sims “believes he’s found a way to make gaming a much more personal experience for everyone it touches. And it won’t take hordes of content developers.”14 Will Wright’s next game platform, Spore, will be out in late 2006. And it’s going to provide a fascinating opportunity to watch customer co-design in action. Spore is an environment that lets each user create an entire ecosystem, defining behavior at every step of the way. You begin at the cellular level by defining how your plants and animals evolve out of the primordial ooze. You create species by adopting and adapting body parts, which have basic behavior built into them. Hands know how to grasp. Feet know how to walk. Your creatures learn by adapting to the environment in which you place them. In essence, what’s predefined are the building blocks and behaviors at a very basic level. Everything else, you design yourself. I’m presuming that as lead customers/game designers create their own worlds in Spore, they’ll share them with others who want to come and experience and play in them but who aren’t interested in developing their own worlds. Yet even those “player only” gamers will have a lot of abilities to customize, modify, and create their characters, their pets, their homes, their dwellings, their weapons, and their transportation vehicles. Spore is likely to set a new standard for customer-created synthetic worlds and one that will no doubt give rise to many imitators. At the same time, if Spore is successful, it is likely to become a platform that will be used by thousands of game developers to create “Son of Spore” game universes.

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TAKE-AWAYS FROM ONLINE GAMING

• Online games are here to stay. They’re not only big business, but they’ve already shaped the expectations of two generations of customers and employees. You should experience this phenomenon in order to better understand how virtual worlds might affect your business. • Recognize that “Gen G” customers and employees have different expectations about how they want to relate to companies. They assume that they can add value to your base solutions by rolling their own environments and/or extending yours. You should watch and understand this behavior carefully and take learnings from the gaming world to apply to your business. • For a variety of reasons, including cost factors, the next generation of games will be even more customer-interactive. Game companies will be engaging customers in co-designing and contributing much of the rich content and interactivity for the next-generation games. How well will your brand experience resonate with those customers who are accustomed to participating in the online gaming world?

Making Outside Innovation the “Path of Least Resistance” in Your Organization A Blueprint for Harnessing Customer-Led Innovation

T

he organizations we’ve studied that are successful in fostering and harvesting the results of customer innovation all have one thing in common: a large percentage of their employees at every level of the organization are deeply curious about what problems and issues their customers are trying to solve and what those customers’ aspirations are. The people in these organizations aren’t just focused on developing, producing, and delivering great products and great service. What they really love is to get into their customers’ shoes, to view the world from their customers’ perspectives, and to appreciate what it is that each group of customers ideally wants to accomplish. When you visit one of these companies, you can feel the energy and passion. People are having fun. They tell stories about customers’ accomplishments and about customers’ dilemmas. Meetings are focused. There is little organizational politics. Resources are allocated in ways that make sense to everyone. What’s the difference between

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these companies—the ones we’ve described in these pages—and many other firms? It’s this: everyone in the organization genuinely wants to learn more about what their customers are trying to do and how their firm’s current and future products and solutions could help those customers accomplish their goals. Customer-led innovation happens almost organically in organizations with this kind of culture. If everyone is focused on what your customers are trying to accomplish—your customers’ scenarios— rather than on your own internal business processes, it becomes natural to empower customers to invent new ways of achieving their outcomes. It’s a classic win/win. Customers win by achieving their goals. Your firm wins by harvesting the knowledge, the processes, and the inventions that are created by and for customers. Note that while you may begin these efforts in one corner of your organization, with a particular target audience, your goal should be to reinvent your organizational culture around customer-led innovation, not to cloister these activities in a skunkworks or a lab.

Five Steps to Outside Innovation 1. Identify and Study Lead Customers The fastest path to true innovation is to harness the creativity and inventiveness of your smartest customers—the ones that are the most knowledgeable and passionate about your field. These may be the sharpest dressers (Karmaloop), the most advanced gamers (Spore), the most adventurous engineers (National Instruments) or the most passionate freeformers (Zopa). Get into their heads. Learn what they care about. Engage in ethnographic research. Watch these customers in their normal contexts—in their homes, in their offices, in their classrooms, where it is they do what they’re trying to do. Remember that Staples’ usability designers went to customers’ offices and watched them order office supplies. Koko’s founders watched customers exercise. Both Staples and Koko interviewed customers deeply about what frustrated them, what they cared about, and what they were trying to accomplish. Unilever, Hallmark, and others engaged in a different, but

Making Outside Innovation the “Path of Least Resistance”

equally valid form of ethnography. They engaged customers to bring their lives online—to share photos of their lives, to talk to their peers about the things they enjoyed and the things they needed.

2. Provide Customers with Tools to Use to Co-Design Their Ideal Scenarios Give customers tools they can use to achieve their desired outcomes. These may be interactive feedback tools like the personalized strength training routines on Koko’s Smartrainer, or they may be tools for exploration and design, like SEI Wealth’s Life and Wealth Priorities game board. They may be open-ended design tools, like National Instruments’ LabView or Lego’s Mindstorms. Or they may be tools that leverage and unlock your firm’s deep domain expertise, like GE Plastics’ ColorXpress design tools or National Semiconductor’s Webench. Or use our Customer Scenario® Mapping technique to co-design customers’ ideal scenarios and brainstorm innovative solutions with them. The co-design part is important. You want to be part of the customer’s creative process. Ideally you want to be able to watch how customers use, customize, improvise, modify, and extend the tools you provide. Capture all of these improvisations, modifications, and extensions. They’ll give you patterns you can learn from. What works, what doesn’t work? What are customers trying to do? What capabilities have they added? Where are they getting stuck? These patterns give you important insights about what it is customers are trying to accomplish and where you may want to take your business.

3. Nurture Customer Communities Become part of the customer communities that your customers are part of. Ensure that executives and employees at all levels of your organization are hanging out with customers in these communities— both in face-to-face communities and in online communities. Build and nurture your own communities, specifically for the purpose of “hiring” customers as consultants to help you shape your business

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strategy, brainstorm new solutions, co-design new products, and debug and test new offerings thoroughly. Don’t rely only on online communities or only on customer advisory boards. Develop a strong set of focused online communities punctuated by physical get-togethers. Use these face-to-face meetings as an opportunity to co-design customers’ ideal scenarios, then validate your findings with the broader community online. Leverage your online customer communities to provide you with continuous feedback and to help you with tradeoffs and prioritization decisions. We recommend that you dedicate a focused effort to building, maintaining, and harnessing the inventiveness of a solid community of your lead customers. Make this a special “in crowd,” one that customers belong to not because they spend the most money or make the most noise, but because they have the most to offer in helping you codesign the future of your business. Make sure that your most thoughtful and influential executives are engaging with these customers on an ongoing basis. Recruit these lead customers to help you shape your business. Monitor the results of this collaboration carefully. Keep track of how well you’re doing in helping these customers achieve their outcomes and how you’re doing in delivering on their metrics. (Remember the way Phil Gibson at National Semiconductor tracks the hours saved by the design engineers who use his co-design tools as well as their design wins and time-to-market?) Also track the new business breakthroughs that come from this design collaboration. What customer-impacting business processes have you streamlined? What new markets have you penetrated? What new solutions do you now have that you didn’t have before? And what’s the value of those solutions to your business?

4. Empower Customers to Strut Their Stuff Encourage your customers to contribute their ideas, their designs, their creations, and their inventions to their peers. Acknowledge and reward customers for contributing content, for submitting their applications and tools, for providing tips and techniques, for spotting

Making Outside Innovation the “Path of Least Resistance”

great new products or trends and sharing them with others, for answering other customers’ questions, for solving each others’ problems. Encourage customers to organize, filter, and categorize the products and information you offer in ways that make sense to them. Enable them to share their filters and categories with others. Elicit new product ideas and designs from customers. Encourage customers to review, comment, and vote on each others’ contributions respectfully. Consider turning these customer contributions into products you can sell (with their permission). Be respectful of customers’ intellectual property. 5. Open Up Your Products and Engage Customers in Peer Production Today’s customers expect to be able to roll up their sleeves and “mess” with your products, see into your business processes, and access and extend your intellectual property. Don’t fight it. Harness it! When customers begin to hack or extend your products, embrace that behavior as Lego did. In fact, plan ahead by making your products open and extensible to customization and modification. Assume that customers will want to roll their own, to create derivative works leveraging your intellectual property, to redesign your tools, to bend the rules. Take a page out of the open source book and set a structure for productive community development. Set clear guidelines, be open and honest about what’s allowed and what isn’t (and why not). Set up a good governance structure so that you maintain the authority and the final say over how your products evolve, but encourage customers to build on your work and on each others’ to chart new territory.

Five Core Competencies to Master 1. Story-Telling Encourage everyone to tell stories about customers, about the situations that customers are in, about the ideas that customers have, about the problems they’ve encountered, and the inventive ways in

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which they (and you) solved those problems. Celebrate customers’ inventiveness. In the Axe brand room at Unilever headquarters, you see great examples of customers’ inventiveness in the techniques these guys have used to “get the girl.” At every sales meeting at National Instruments, sales reps outdo one another with the weird and wonderful things customers have done with their products. Lego celebrates customers’ creations on their Web site and in their meeting rooms with pictures of customers and their creations. Staples runs an InventionQuest contest every year, encouraging both customers and employees to come up with new office products to make life easy. Innovation spreads by word of mouth. So make sure that you have a great process in place for communicating and celebrating customers’ innovations. Tetra Pak, a manufacturer of packaging equipment and supplies for the beverage and food industry, has global storytelling down to an art form. For example, when a Spanish food manufacturer began packaging olive oil in light-proof cardboard containers, within twenty-four hours Tetra Pak’s sales teams in China, Thailand, Chile, and Argentina were making presentations to their customers in those countries about this new cost-effective approach to packaging and distributing olive oil. Does your customer innovation grapevine work this quickly?

2. Community Building Invest in nurturing and supporting online and face-to-face communities. Facilitating healthy communities is not a part-time job. Take it from eBay. EBay has long invested in having employees who are dedicated to each customer segment (e.g., coin collectors, stamp collectors, Disney collectors, etc.) as well as employees in charge of each type of discussion board (Q&A versus eBay Café). You can learn a lot by watching how eBay runs its communities. Every time in the company’s history that it has changed a policy without first involving the community members in discussing and debating it, eBay has rued the day. Of course some of the decisions you’ll need to make—like

Making Outside Innovation the “Path of Least Resistance”

raising prices or “end-of-life’ing” a product, or changing a policy that impacts a group of customers—aren’t always popular with community members. But it’s important for community members to know what’s coming, to voice their opinions, for their concerns and objections to be acknowledged. Then you do what’s right for the business. They’ll complain but accept it because you kept them in the loop.

3. Customer Co-Design There are many people who know how to consult with customers and to solve their problems. There are lots of people who can market and sell to customers. There are fewer people who know how to survey customers or to run focus groups. But there aren’t that many people (yet) who are experienced at co-designing with lead customers— particularly with groups of them. We’ve been doing this work successfully for many companies for more than a decade. We’ll be happy to train your best people to lead customer co-design sessions. Your co-design facilitators should be excellent listeners and good interviewers. They should be visionary thinkers—able to think outside the box and encourage others to do the same. They need to be respected and influential in your organization, otherwise the good work they do with your lead customers won’t result in action.

4. Open Development Take your product planning out of its veil of secrecy and open it up, at least to your lead customers. Don’t wait until your products and business models are “baked” before you invite customers to test them. You’ll be amazed at how many person-months of time you’ll save by engaging customers early in helping you formulate your designs, your trade-offs, your solution set, your business models. Don’t keep your R&D team and product developers isolated from customers. Make sure they’re working closely with the right lead customers. Take a page out of National Instruments’ book. Make sure that each new

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skunkworks team is working with a representative group of lead customers before their ideas pass the go/no-go tollbooth. 5. Peer Production and Peer Promotion Build a competency in organizing and running customer-peer group development projects. Lead customers, enthusiasts, academics, and subject matter experts will want and need to be part of co-designing and co-inventing the platforms and solutions that will tackle the world’s most complex and challenging problems. While you’re at it—and this is actually easier—harness the goodwill of the advocates in your customer base to help market and promote your products to their peers. Get your customers involved in your guerilla marketing efforts. Let them come up with your next ad campaign or marketing slogan. Give them the tools and the support they need to promote your products. “Street bombin” Karmaloopstyle may not be your customers’ cup of tea, but there are plenty of ways in which they’ll be happy to strut their stuff and tell a friend or ten about what they enjoy about your brand. Make sure that your product marketers and brand managers are actively engaging with customers in promoting themselves (and your brand).

Five Pitfalls to Avoid 1. Brand Erosion If you let customers run roughshod over your brand, you’re in trouble. You should be developing and evolving your brand experience to closely match the ideal self-image of the customers in your target audience. When you do a good job, you’ll know it because they’ll see themselves in your brand. They’ll resonate with it. They’ll defend it. And they’ll extend it in surprising and fun ways. (Just think of all the “non-office-supplies-related” uses that Staples’ Easy Button has been put to—like making it easy to pass exams or to get a date.) But be careful that customers don’t trash your brand or damage it. If this starts happening, counter it with humor and regain control of your brand experience. Take the high road. Your brand experience

Making Outside Innovation the “Path of Least Resistance”

embodies much of the perceived value for customers. To them, your brand says: “We know what you care about, we know what you need to accomplish, we know how you want to feel as you accomplish it, and we’ll deliver that experience to you.” Don’t let competitors dilute or muddy your brand. You may be opening up your intellectual property for others to reuse and distribute. But your brand should be carefully embodied and wellrepresented. Remember Lego’s struggle when Adult Fans of Lego began hacking Mindstorms? The lawyers were afraid that activity would damage Lego’s brand, in the same way that the brand is damaged when low-cost copycat producers try to manufacture cheaper building blocks. But the Mindstorms product team understood that hacking Mindstorms was true to the brand image of invention, so they encouraged and even endorsed the activity.

2. Unanticipated Consequences of Customers’ Behavior As you open yourselves up to customer innovation, there will be unanticipated consequences. There’s no way around that. You can’t think of everything that customers are likely to do. In fact, that’s the point. The best way to deal with these issues is adapt quickly, make sure no one is harmed, protect your brand, and defuse the situation with apologies and humor. Here’s an example: Chevrolet ran a gutsy promotional campaign for the Chevy Tahoe in early 2006. They encouraged customers to come to their brand Web site, take film clips from Chevy Tahoe ads, mix them in creative ways, and resubmit them to be viewed and appreciated by the customer community. Perhaps the brand execs should have anticipated all the nasty things that customers would do to trash the brand (gas guzzlers, road hog, and worse!). But they didn’t. They simply removed the promotion as quickly as possible. But it got a lot of attention and plenty of laughs. Wikipedia’s founders didn’t anticipate the dark side of customers’ slandering each other. But as this activity became obvious, they have taken steps to change the policies that encourage slanderous and mischievous behavior. You won’t predict the negative consequences. Just fail fast and move on, just as the gamers do.

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3. Business Models that Rely on IP Protection Your business has intellectual property. You have patents, copyrights, and trade secrets. You don’t need to give these up in order to enable customer innovation. But you shouldn’t build your business model around the idea that customers will pay more for your brand because you have a secret sauce that is protected. In this day and age, piracy, reverse engineering, and fast copying are all very easy to do. They may be illegal. But they are easy. So take legal precautions and don’t let competitors steal your IP. Build your profit margins around value that customers care about. Your intellectual property rights aren’t something they value (even if they choose to respect them). In fact, the smartest executives know that rapid innovation of your brand experience to match customers’ evolving self-images and scenarios is much more valuable to customers than a patent or a copyright.

4. Lock-In Don’t build your business models around locking customers into a proprietary platform of some kind. It won’t work. It doesn’t matter whether your platform is a software service like Apple’s iTunes with its built-in digital rights management, or a gaming platform, like Everquest, or a set of banking services, like bill pay. Customers will find a way to open up your platform and migrate out of it, as well as to integrate with it. You don’t keep customers by preventing them from migrating to another brand. You retain them because they’re delighted with your brand experience. Plenty of people know how to move music out of Apple’s environment and onto competing MP3 players. But notice that not many people do. People still buy iPods and they still download songs from iTunes. Even if Apple is forced by law to make it easier for customers to migrate the music they’ve purchased from an iPod to a competing hardware device or into another music library service, customers will continue to value the Apple iTunes experience, as long as Apple keeps it fresh and innovative.

Making Outside Innovation the “Path of Least Resistance”

5. Commodity Pricing Just because you’ve opened up your business to enable customers to see into the processes that impact them, doesn’t mean you have to lower your prices. Just because customers can inspect your code and extend it, doesn’t mean you have to give it away for free. Just because you’ve given customers tools that make it easy for them to roll their own solutions and to mix and match your products with competing and complementary products and services, doesn’t mean that you’ve decreased the value you’re providing. In fact, the opposite is true. The more you enable customers to customize, improvise, invent, extend, modify, build upon and create derivative works with your solutions, the more value you’re providing, not less. In fact, if you play your cards right, as Nike, Reebok, and others are discovering, customers will walk themselves up to higher margin products faster on their own than they will if you try to up-sell them. Experiment with new pricing models that work well for customers. Notice the way the software and telecommunications industries have migrated to “not to exceed” subscriptions and pay-per-use models. Remember that customers who value your services want you to stay in business. If you’re having trouble maintaining margins in a world in which customers are co-designing your business, there’s an obvious solution: invite your customers to co-design your business models with you!

How do You Become an Outside Innovation Organization? When you’ve read this book and are ready to take the next steps, come download my free Customer Innovation Guide at www.outsideinnovation. com. This guide provides a self-assessment to help you identify where you are in the customer innovation continuum and will help you to identify next steps and a roadmap for moving forward.

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Notes

Introduction: The Outside Innovation Imperative 1. 2.

3.

Patricia B. Seybold, The Customer Revolution: How to Thrive When Customers Are in Control (New York: Crown Business, 2001). Foreword by John Seely Brown in Henry W. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press, 2003). Eric von Hippel, Democratizing Innovation (Cambridge, MA: The MIT Press, 2005).

Chapter 1: How to Harness Customer Innovation 1. 2.

Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution (Boston: Harvard Business School Press, 2003), 75. The term “conditions of satisfaction” is borrowed from Fernando Flores’s ontology. Fernando Flores described a very powerful canonical model for capturing all business interactions. This was documented in his and Terry Winograd’s seminal book, Understanding Computers and Cognition: A New Foundation for Design (Reading, MA: AddisonWesley, 1987). The Flores model describes interactions as a four-step, closed-loop process. As applied in business, the first step is when the customer makes a request of a performer (I want . . . ) or the performer makes an offer to a customer (Do you want . . . ?). The second step is

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3. 4. 5.

where the customer and performer negotiate until they reach an agreement about the work to be done and clearly define the conditions of satisfaction. The third step is when the performer fulfills the agreement and reports completion. The final step is when the customer evaluates the work and either declares satisfaction or points out what remains to be done to fulfill the agreement. Robert Fritz, The Path of Least Resistance (New York: Ballantine Books, revised edition, 1989). Author’s conversation with Robert Fritz, February, 2005. Robert Fritz, The Path of Least Resistance for Managers (San Francisco: Berrett-Koehler Publishers, 1999). I studied the creative process with Robert Fritz for several years and taught both his basic and advanced courses to dozens of students.

Give Customers Important Roles to Play in Shaping Your Business 1.

von Hippel, Democratizing Innovation.

Chapter 2: Lego Mindstorms NXT 1.

2.

3.

4.

5. 6. 7. 8.

The FIRST LEGO League (FLL) is the “Little League” of robotics’ competition. FIRST (For Inspiration and Recognition of Science and Technology) is a not-for-profit organization that was started by inventor Dean Kamen in 1989. The first FLL competition was held in 1998. Fred Martin, Bakhtiar Mikhak, Mitchel Resnick, Brian Silverman, and Robbie Berg, “To Mindstorms and Beyond: Evolution of a Construction Kit for Magical Machines,” MIT Media Lab. There were already quite a few Lego-related discussion groups on the Internet well before 1998, when Lego Mindstorms was announced, such as the Usenet newsgroup rec.toys.Lego (known as RTL). Lugnet.com sprang up in the mid-1990s. LUGNET was designed for “Adult Fans of Lego” or AFOLs. A Mindstorms-focused discussion was one of the first to turn up on LUGNET. Paul Wallich, “Mindstorms: Not Just a Kid’s Toy,” IEEE Spectrum, September 2001, http://www.ece.rutgers.edu/~kdana/teaching/ece471/ handout/lego1.pdf Brendan I. Koerner, “Geeks in Toyland,” Wired, February 2006. Excerpted from “About FIRST” on the USFirst.org. Web site: http:// www.usfirst.org/about/ Dave Baum, Michael Gasperi, Ralph Hempel, and Luis Villa, Extreme Mindstorms (Berkeley: Apress, 2000). Koerner “Geeks in Toyland.”

Notes

National Instruments 1. 2. 3.

Dr. James Truchard, “The Vision of Virtual Instrumentation,” NI Week, Keynote. Chris Anderson, The Long Tail: Why the Future of Business Is Selling Less of More (New York: Hyperion, 2006). National Instruments uses Lithium Technologies’ online forum software.

Chapter 3: Help Customers Reach Their Goals Staples 1.

2. 3. 4. 5.

6.

7.

“Make it easy for customers to do business with you” was the tagline of my first book, Customers.com, published in 1998. The phrase has become widely used since then. Constantine Von Hoffman, “Easy Does It,” CMO Magazine, November 2004. Tim Smart, “A Second Wind,” U.S. News & World Report, January 31, 2005. Staples Annual Report for the fiscal year ending February 1, 2003, Form 10-K. Forty percent is the industry average according to Brian Grow, “The Great Rebate Runaround,” Business Week Online, November 23, 2005. http://www.businessweek.com/bwdaily/dnflash/nov2005/ nf20051123_4158_db016.htm As of early 2006, the Easy Rebates Web site was a separate site hosted by Parago. By mid-2006, it had been streamlined and integrated more tightly into the main Staples.com Web site. Staples press release, “Staples Launches New Staples.com for Easy Online Shopping; Reinvented E-commerce Site Driven by Comprehensive Customer Research,” July 27, 2005.

Bathing Your Organization in Real-Time Customer Context 1.

2.

3. 4.

Communispace and Hallmark joint press release, August 6, 2001: “Hallmark Expands Use of Communispace as New Method for Consumer and Market Research.” Faith, Keenan, “Friendly Spies on the Net,” BusinessWeek Online, July 9, 2001. http://www.businessweek.com/magazine/content/01_28/ b3740624.htm Hallmark.com Web Site: http://www.Hallmark.com/our products/ cards & stationery/personal boxed cards/everyday occasions/birthday Hallmark press release: “Consumer Thoughts on Journal-Keeping,” 2002. http://pressroom.hallmark.com/journals_consumer_thoughts .html

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5.

Hallmark press release: “Idea Exchange Keeps Hallmark Connected with Consumers,” Updated 06/05. http://pressroom.hallmark.com/ idea_exchange.html 6. Hallmark press release: “Research Reveals Win-Win Situation for Graduation Gift-Giving,” April 2004. http://pressroom.hallmark. com/graduation_research.html 7. Melanie Warner, “Snacks Go On a Diet,” International Herald Tribune, May 29, 2005. http://www.iht.com/articles/2005/05/29/business/ portion.php 8. Melanie Wells, “Have It Your Way,” Forbes.com, February 14, 2005. http://www.forbes.com/free_forbes/2005/0214/078.html 9. Robert Berner, “How Unilever Scored with Young Guys,” BusinessWeek Online, May 23, 2005. http://www.businessweek.com/magazine/content/05_21/b3934050_mz011.htm 10. Ibid. 11. Alison Zelen, Presentation to the American Marketing Association, September 27, 2005. 12. Wells, “Have It Your Way.” Zopa 1. 2. 3. 4. 5. 6.

7. 8. 9.

“Freeformers and How They’re Changing Things,” Zopa Web Site, © 2006 Copyright Zopa Ltd. Read the complete case study of Egg in The Customer Revolution. (2001). Crown Business, pp. 116–141. Zopa: ibid. Living on Thin Air, by Charles Leadbeater (2000). Penguin Books. From Zopa’s Web site, © 2006 Copyright Zopa Ltd. “Introducing the Peoples’ Bank,” by Jane Mack, The Fool’s Eye View, The Motley Fool, U.K., March 8, 2005. http://www.fool.co.uk/news /foolseyeview/2005/fevo50308c.htm “Is Greed Good?” The Economist, May 21, 2005. Charles Hendry, Shadow Trade and Industry Minister, speaking in the House of Commons. “Zopa to Start Charging Loan Fees,” by Michael Clarke, thisismoney .co.uk, April 3, 2006.

Chapter 4: Let Customers Strut Their Stuff Tripod Built a Multimillion-Dollar Business 1.

Bo Peabody, Lucky or Smart?: Secrets to an Entrepreneurial Life (New York: Random House, 2005).

Notes

The Blogosphere 1. 2. 3.

4.

Dave Sifry, “State of the Blogosphere, February 2006, Part 1,” February 6, 2006. http://technorati.com/weblog/2006/02/81.html See http://creativecommons.org John Hiler, “Blogosphere: The Emerging Media Ecosystem; How Weblogs and Journalists Work Together to Report, Filter and Break the News,” Microcontent News, May 28, 2002. “Virtual Anthropology,” Trendwatching.com. http://www.trend watching.com/trends/VIRTUAL_ANTHROPOLOGY.htm

Flickr Attracts Both Amateur and Professional Photographers 1. 2.

3.

4.

Brad Stone, “Photos for the Masses,” Newsweek, March 18, 2005. http://www.msnbc.msn.com/id/7160855/site/newsweek/ “Reinventing a category whose flashbulb burnt out,” 2004 Contest Entry Submission. Stewart Butterfield, Fast Company, 2005 Fast 50 Awards, http://www.fastcompany.com/fast50_05/winners/13.html Customer testimonials published by Fast Company in response to Flickr’s award as a “2005 Fast 50 Company,” http://www.fastcompany .com/fast50_05/winners/13.html An up-to-date list of Flickr applications is available at http://www .quickonlinetips.com/2005/03/great-flickr-tools-collection.html

Why “Mash Ups” Matter 1. 2.

3.

From the About Page on ccmixter.org, as of March 23, 2006. http://ccmixter.org/media/view/media/about Tim O’Reilly, “What Is Web 2.0? Design Patterns and Business Models for the Next Generation of Software,” O’Reilly.com, September 30, 2005. http://www.oreillynet.com/pub/a/oreilly/tim/news/2005/09/30/ what-is-web-20.html There is no single place to register mash ups; several blogs track them, such as http://www.programmableweb.com/mashups and http://www. mashupfeed.com/. You can also find them in the developer sections of Amazon, Yahoo!, Google, and on the sites of Web services providers like the BBC.

BBC’s Backstage 1. 2. 3. 4.

From http://backstage.bbc.co.uk/ideas/ From comment posted on the author’s blog on February 28, 2006. http://outsideinnovation.blogs.com/pseybold/ From Matt Locke, Personal e-mail to the author. See http://backstage.bbc.co.uk/prototypes/

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Chapter 5: Promote and Leverage Open Source Development 1.

Yochai Benkler, abstract of “Coase’s Penguin, or, Linux and The Nature of the Firm,” http://www.benkler.org/CoasesPenguin.html. Full article published in the Yale Law Journal, December 2002.

A Personal Introduction to Open Source Software 1.

2. 3. 4. 5.

A Brief History of Free/Open Source Software Movement. http://www .openknowledge.org/writing/open-source/scb/brief-open-source-history .html Netscape Communicator Open Source Code White Paper, http://wp .netscape.com/browsers/future/whitepaper.html http://www.catb.org/~esr/writings/cathedral-bazaar/ History of the OSI, http://www.opensource.org/docs/history.php VA Linux Systems press release, http://www.vasoftware.com/news/ press.php/2000/1.html

Mozilla Firefox 1.

2. 3. 4. 5. 6.

7.

8. 9.

Mitchell Baker, “The Mozilla Project: Past and Future,” in Open Sources 2.0: A Continuing Evolution, edited by Chris DiBona, Danese Cooper, and Mark Stone, O’Reilly, 2006. Ibid. Ibid. Ibid, p.12. Ibid. “Others of us are simply using this as a prototype to demonstrate possible optimizations to the trunk, such as stripping overlays or separating the application into separate processes instead of running one monolithic suite.” From FAQs, http:/www.blakeross.com/firefox/ FEADME-1.25html “Principles, Strategy, Tactics, and Concrete Design Decisions.” Extract from the document that launched the Firefox development, http:/www.blakeross.com/firefox/FEADME-1.25html Ibid, p. 14. Sandeep Krishnamurthy, “The Launching of Mozilla Firefox: A Case Study in Community-Led Marketing,” University of Washington, Bothell, Version 1.0, January 27, 2005.

Asterisk and Digium 1. 2.

Interview with the author, February 14, 2006; all other unattributed quotes in this section are from the same author interview. Howard Wren, “From Analog to VoIP: Asterisk Brings Telephony

Notes

3.

4. 5.

Together Under One Open Source Platform” (Diggable, posted January 12, 2006). Interview with Mark Spencer, by Sean Michael Kerner. Developer Column on InternetNews.com, May 13, 2005. http://www.internetnews .com/dev-news/article.php/3504931 Wren, “From Analog to VoIP.” Mark Brunelli, “Digium founder opens up about Asterisk,” Search OpenSource.com, April 21, 2005. http://searchopensource.techtarget .com/originalContent/0,289142,sid39_gci1081911,00.html

What Business Models Work in an Open Source World? 1.

This is often done using Lesser GNU General Public Licenses (LGPL). http://www.opensource.org/licenses/lgpl-license.php

Open Source Biotechnology 1.

2. 3. 4. 5.

6. 7. 8. 9.

10. 11. 12. 13.

Stephen M. Maurer, Arti Raj, and Andrej Sali, “Finding Cures for Tropical Diseases: Is Open Source the Answer?,” PLos Medecine, Vol. 1, Issue 3, December 2004. Introductory description to the Science Commons Licensing Project, as of March 26, 2006. http://sciencecommons.org/licensing Kenneth Neil Cukier, “Navigating the Future(s) of Biotech Intellectual Property,” Nature Biotechnology, Volume 24, Number 3, March 2006. Alex Steffen, “BioForge,” WorldChanging, February 1, 2005. http:// www.worldchanging.com/archives/002034.html “Australian Genetics Pioneer Recognized in Global Top 50,” press release, November 25, 2003. http://www.bios.net/daisy/bios/164/version/ live/part/4/data “About BiOS Open Source Licenses,” from the BiOS Web site, March 26, 2006. http://www.bios.net/daisy/bios/BiOS_licenses.html Transbacter overview from Bioforge.net. http://www.bioforge.net/ forge/entry.jspa?externalID=1&categoryID=2 “About BiOS Licenses” on March 26, 2006. http://www.bios.net/ daisy/bios/BiOS_licenses.html “Open Source Biotechnology Alliance for International Agriculture,” press release, December 7, 2005. http://www.bios.net/daisy/bios/ 1375 Science Commons. http://sciencecommons.org/weblog/archive/2006/ 02/09/worlds-largest-protein-db-now-under-cc-license Maurer, Raj, and Sali, “Finding Cures.” See Dndi.org Jamais Cascio, “Open Source Biotech Makes Its Mark,” The Tech Bloom, February 10, 2005.

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Notes

Wikipedia 1.

From Wikipedia entry on Jimmy Wales, March 25, 2006, http:// en.wikipedia.org/wiki/Jimmy_Wales 2. Larry Sanger, “The Early History of Nupedia and Wikipedia: A Memoir,” Open Sources 2.0: The Continuing Evolution, 2006, p. 313. 3. Ibid, p. 315. 4. http://en.wikipedia.org/wiki/Wiki 5. John Seigenthaler, “A False Wikipedia Biography,” USA Today, November 29, 2005. 6. This sleuthing was reported in an article in Editor and Publisher, titled “Culprit in Smearing Seigenthaler on Wikipedia caught” http://www. editorandpublisher.com/eandp/news/article_display.jsp?vnu_content_ id=1001658493 7. http://blog.outer-court.com/archive/2005-11-10-n36.html 8. http://wikimediafoundation.org/wiki/Press_releases/Wikipedia_tightens_editorial_control 9. See http://en.Wikipedia.org/wiki/Wikipedia:Semi-protection_policy. 10. http://www.nature.com/news/2005/051212/full/438900a.html 11. http://news.bbc.co.uk/2/hi/technology/4534712.stm]. (Nice to see at least someone in the media knows how to use Wikipedia!) Kit 22:23, 16 December 2005 (UTC). Chapter 6: Enabling Customer Co-Design 1.

Eric von Hippel, “Perspective: User Toolkits for Innovation,” Journal of Product Innovation Management, 18 (2001) 4 (July), pp. 247–257.

Customized, Built-to-Order Products 1. 2. 3.

4. 5.

Stan Davis is often credited with coining the term, in his book Future Perfect (Boston: Addison Wesley, 1987), 169. Frank T. Piller, Mass Customization and Open Innovation News. http://mass-customization.blogs.com/ Christoph Berger, Kathrin Möslein, Frank Piller, and Ralf Reichwald, “Cooperation between Manufacturers, Retailers and Customers for User Co-Design: Learning from Exploratory Research,” published in a revised version in the European Management Review, No. 1/2005: 70–87. http:/www.palgrave-journals.com/emr Ibid. Lara Rivera, and Marta Walker, “Levels of Use of Information Technology in Mass Customization (A Study in the Automobile Industry),” paper published at the University of Stockholm, Department of Computer and System Sciences IT-Management, November 14, 2004.

Notes

6. 7.

8.

9.

Lego press release, August 2005. Frank Piller, “Lego Factory Hacked by Users—and the Company Loves It,” Mass-Customization and Open Innovation News, November 1, 2005. http://mass-customization.blogs.com/mass_customization _open_i/2005/11/lego_factory_ha.html Daniel Terdiman, “Hacking’s a Snap in Lego-Land,” C/Net News .com, September 15, 2005. http://news.com.com/Hackings+a+snap +in+Legoland/2100-1046_3-5865751.html Tim Vandergrift, quoted by Frank Piller, “Update, the Roots of Custom Wine-Making,” 2006. http://mass-customization.blogs.com/mass_ customization_open_i/2006/01/custom_winemaki.html

GE ColorXpress Services 1.

Quoted in “GE Advanced Materials Moves Forward,” Chemical Week, March 24, 2004, 17. 2. Ibid. 3. Ibid., 18. 4. Customer Scenario® Mapping is a methodology of the Patricia Seybold Group, Inc. A Customer Scenario, by our definition, is the customer’s ideal process for achieving their desired outcome. 5. From author’s interview with Brigitte Mailloux on January 31, 2006. 6. Ibid. 7. William Cheetham, “Benefits of Case-Based Reasoning in Color Matching,” computer science paper published at Rensselaer Polytechnic Institute, 2001. 8 Ibid. 9. www.gecolorxpress.com 10. For more information, see www.gecolorxpress.com/jsp/extranet/user/ innovation/innovation.jsp 11. Andy Richardson interview with the author on February 3, 2006. 12. www.gecolorxpress.com/jsp/extranet/user/home.jsp National Semiconductor 1.

“Bull’s-eye Every Time! Hit your target with National’s online design tools,” National Semiconductor brochure, 200013-001, 3.

Chapter 7: Let Customers Create and Promote Your Products Threadless 1.

Interview by Shane Bryant on Crown Dozen, October 21, 2004. http://www.crowndozen.com/features/archives/000561.shtml

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Muji 1.

2.

3. 4. 5.

6.

Fiona Rattray, “Your Life in Their Hands,” The Observer, September 18, 2005. http://observer.guardian.co.uk/magazine/story/0,11913, 1571089,00.html (as of March 2006). Patrick Reinmoeller, “Dynamic Contexts for Innovation Strategy: Utilizing Customer Knowledge,” Design Management Journal, Academic Review 2, no. 1, 37–50. Ibid, 46. Ibid. Susumu Ogawa and Frank T. Piller, “Collective Customer Commitment: Turning Market Research Expenditures into Sales,” Sloan Management Review, vol. 47. Ibid.

Karmaloop 1.

2.

Interview with Greg Selkoe by Ralph Di Donato, “You’ve Come a Long Way, Baby,” Synthesis. http://www.synthesis.net/tech/story.php? type=website&id=38 Karmaloop web site, 2006.

Virtual Worlds 1. 2. 3.

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Will Wright, “Dream Machines: Will Wright explains how games are unleashing the human imagination,” Wired, April, 2006, 111–112. Ibid. John C. Beck and Mitchell Wade, Got Game: How the Gamer Generation is Reshaping Business Forever (Cambridge: Harvard Business School Publishing, 2004) 59. Edward Castronova, Synthetic Worlds: The Business and Culture of Online Games (Chicago: University of Chicago Press, 2005) 57. John Seely Brown, and Douglas Thomas, “You Play World of Warcraft? You’re Hired!” Wired, April, 2006, 120. Castronova, Synthetic Worlds, 13. Ge Jin, Chinese Gold Farmers, Documentary film, 2006. Daniel Terdiman, “Virtual epidemics may hold scientific promise,” CNET News.com, October 13, 2005. Ibid. Pat Christen, “Fighting for their Lives,” Wired, April, 2006, 143. Steven Johnson, “When Virtual Worlds Collide,” Wired, April, 2006, 125. Ibid. Dave “Fargo” Kosak, 2005, “Will Wright Presents Spore . . . and a New Way to Think About Games,” Gamespy, March 14. Ibid.

Acknowledgments

Thanks to Ronni Marshak, my co-creator, consultant, and guide, without whom this book wouldn’t exist! And thanks to Fanny Wong, whose assiduous revision tracking made it possible to please so many case study participants, and to Kerstin Delaney, our Chief Community Officer, who scheduled (and rescheduled) hundreds of interviews!

Index

The letter f following a page number refers to a figure on that page. Adbrite, 172–73 Adidas AG, 278–79, 287 Adult Fans of Lego (AFOLs), 31, 44, 46, 75, 283–84 Agrobacterium, 246 Alexander, James, 136 Allred, Doug, 166–68 Almeda, Dave, 84 Almgren, Ray, 51, 54, 55–57 Amazon.com, 25, 168 American Institute for Research, 92 American Institute of Physics, 25, 152–54, 161–64; summary, 163; Take-Aways, 163–64 American Recreation Products, 297–98 Anderson, Chris: The Long Tail, 59 Angelfire, 158–59 Answers.com, 256 Apache Web Server, 207, 208–9, 237 Apple Computer, 4 application interfaces (APIs), 189 Application Service Provider (ASP), 208 artificial intelligence, 205

Ashton, Lisa, 304, 305 Asterisk and Digium, 221–28; challenges, 226–27; the companies, 221–22; Take-Aways, 227–28 Axe, 111–14; Axe Effect Web site, 112; Bodyspray Limited Edition 2004, 113; Take-Aways, 114 baby journals, 103 Backstage BBC, 194–95 “Back to Brighton Strategy,” 82 Baker, Mitchell, 211–15, 218 Barnes, John, 45 Bass, Bill, 276–77 “bastard pop,” 187–88 Beagle, Christine, 213 Beck, John: Got Game, 370 Behlendorf, Brian, 246–47 Benchmark Capital, 143 Benkler, Yochai, 200–201; Coase’s Penguin or Linux and the Nature of the Firm, 201 Berger, Christoph, 278–79

404

Index BioForge, 247 Biological Innovation for Open Society (BiOS) initiative, 244–47; open source commons and, 246–47; Open Source licensing, 245; open toolkits and processes, 245–46 biotechnology, open source, 242–49; growth of, 248–49; patents and licensing, 243; required tools, 243 Blair, Kim, 122 Blogads, 172–73 Blogdex, 175 blogosphere, 154, 171–78; advertising models, 172–73; size, 171–72; summary, 176; Take-Aways, 177–78 “Blogosphere: The Emerging Media Ecosystem” (Hiler), 174–75 Bloom, Mike, 112 BMW, 281–82 Bob the Builder Click Bricks, 109–10; Take-Aways, 114 Borteck, Jamie, 107–8 Bowden, Andrew, 193 Brailsford, Tom, 100–101 brands: “confused,” 238; erosion, LEGO and, 387; experience, mash ups and, 190. See also specific case studies Brandt, Daniel, 257 “breakage,” 86 British Broadcasting Corporation (BBC), 193–96; customer codesign, 195–96; customer ideas and, 193–94; “My Commute,” 193–94; New Media Group, 193–95; Take-Aways, 196 Brown, John Seely, 3, 370 Build-A-Bear Workshop, Inc., 265, 285, 286 business models. See open source business models Business Week, 111 Butterfield, Stewart, 180–86 call-tracking, 167 CAMBIA, 244–46 Cascio, Jamais, 249

case studies: American Institute of Physics, 161–64; Asterisk and Digium, 221–28; Axe, 111–14; Bob the Builder Click Bricks, 109–10; British Broadcasting Corporation (BBC), 193–96; CohesiveFT, 238–41; Flickr, 179–86; GE Plastics, 292–309; Hallmark, 102–6; Karmaloop, 357–66; Koko Fitness, 115–29; Kraft Foods, 106–9; LEGO Mindstorms NXT, 30–50; Mozilla, 210–20; Muji, 348–56; National Instruments, 51–70; National Semiconductor, 329–38; SEI Wealth Network, 310–18; Staples, 80–99; Threadless, 341–47; Tripod, 156–60; Wikipedia, 250–61; Zopa, 130–51 Castronova, Edward, 371 “Cathedral and the Bazaar, The” (Raymond), 207–8 Celera, 244 Charles Schwab, 9–10, 110–11; TakeAways, 114 Cheetham, William, 301–2 Cheng, Tony, 168 China, 295–96 “Chinese Gold Farmers” (Jin), 372 Christensen, Clayton: Innovator’s Dilemma, 13–14; Innovator’s Solution, 13–14 Churchill, Chris, 361 Cisco Connections Online (CCO), 167–68 Cisco Systems, 166–68, 270, 272–73 Coase’s Penguin or Linux and the Nature of the Firm (Benkler), 201 CohesiveFT, 230, 233, 235, 238–39; Take-Aways, 240–41 commons-based peer production, 200–201; innovation and, 202 Communispace, 100–101, 109–14 competitive advantage, 6–7 configuration toolkits, 269 configurators, customer co-design and, 264

Index consultants, 24, 25 content, customer-created, 152–55 contributors, 23–25 Cooper, Alan: The Inmates Are Running the Asylum, 95–96 coopetive ecosystems, 227 creation-by-customer-community model, 199–200 Creative Commons licenses, 173, 180, 182–83, 188, 247 “critical-to-quality” issues, 300 Cukier, Neil, 243 Cunningham, Ward, 252–53 Curry, Adam, 258 customer champions, 27 customer co-design: British Broadcasting Corporation (BBC), 195–96; configurators, 264; customizable solutions and, 289f; design principles, 339–40; DIY construction kits, 264–65; DIY Workshops and, 265; domain knowledge and, 263; merchandising categories, 95–97; outside innovation, core competencies, 385; “personas” and, 95–97; shopping process, 97–98; toolkits and guidelines and, 262–67; virtual gaming and, 374–75; web site usability, 97 customer-created content, 152–55, 197–98; Take-Aways, 198 customer development, open source, 238–39 customer guides, 27 customer innovation, harnessing, 13–21, 22–26, 165–69, 379–80, 382; Asterisk and Digium, 222–23; Cisco Systems, 166–68; co-design tools and, 381; customer communities and, 381–82; empowering customers and, 382–83; Karmaloop, 365–66; LEGO Mindstorms, 47; Muji, 351–52; National Instruments, 64–67; open and extensible products and, 383; open source development and, 199–200; SEI

Wealth Network, 316–18; TakeAways, 169–70 Customer Innovation Guide, 12, 389 Customer Revolution, The, 1, 280 customers, 8; as consultants, 28–29; content-creation and, 197–98; desired outcomes and, 4–5, 10–12, 14–18, 50, 266; innovation and, 151; loyalty of, 328; “moments of truth,” 89, 151, 320, 322; monitoring of, 77–78; research and ethnography and, 76–77; roles, 23–26; segmentation, 328 Customer Scenarios, 9, 13–16, 50, 85, 89, 91–93, 97–98, 321f; conditions of satisfaction, 322; customer codesign and, 320; desired outcomes, 322; Flickr, 185; GE ColorXpress Services, 296–97; health club owners, 120; identifying and streamlining, 77–79; innovation and, 15; Mapping, 319–28; moments of truth and metrics, 322; National Semiconductor and, 330; personal trainers, 120–21; supporting, 322–23. See also Mapping Customer Scenarios Customers.com, 166 CVS Corp., 112 Daum Communications, 158–59 Davis, Bruce, 134, 136 Davis, Michael, 250 Davis, Rob, 217 Decontrol, 357 deHart, Jacob, 341 Dell Computers, 4; Dell Direct model, 274–75, 286; product and system configuration, 274–75 Democratizing Innovation (Hippel), 23 “Design Your Own Web Page,” 157 digital photos, organizing, 181 Digium, 221–28 discovery and exploration groups, 139–41 distributed object computing, 204 distribution channels, 18–20; open source development and, 203

405

406

Index Diversity Arrays Technology (DArT), 246 DIY construction kits, 264–65 DIY toolkits, 284–85 DIY workshops, 285; customer codesign and, 265 domain knowledge, 263 Donnelly, Jim, 168 Dotzler, Asa, 213, 214 “Dover” format, 84 Drugs for Neglected Diseases Initiative (DNDi), 248 Duvall, Richard, 130–51 Dwight, Mark, 275 eBay, 4, 142–43 Eclipse, 237 ecosystems, customer-driven, 5, 7–8, 74, 200, 203, 224–28, 339 Eisen, Michael, 242 Elephant Design, 352 Elite Vintners, 264, 284–85 Encyclopaedia Britannica, 260 entrepreneurial lifestyles customer segment, 133–34 ethnographic research, 76–77, 85, 98, 380; Zopa and, 136–41 Executive Summary: GE Plastics, 294–95; Karmaloop, 358–59; Koko Fitness, 116–17; LEGO, 31–32; Muji, 350; National Instruments, 52–53; National Semiconductor, 332–33; SEI Wealth Network, 310–11; Skinny Corp., 344–45; Staples, 83–84; Zopa, 131–32 Experience Economy, The (Gilmore, Pine), 312 experience marketing, 311–15, 317 Extensible Markup Language (XML), 189 Extreme Mindstorms (Hempel), 45 Fake, Caterina, 179–86 “Fetch M4,” 195 Firefox: advertising, 217; customer community, marketing by, 215–17, 220; download site, 216; incompatible site list, 216–17

Fleming, Kevin, 225 Flickr, 179–86; Color Picker, 184; customer comments, 183–84; Magazine Cover, 185; summary, 185; Take-Aways, 186; Tivo and, 185; World Map, 185 Forbes, 113 For Inspiration and Recognition of Science and Technology (FIRST), 40–41 Fortune, 68 freeformers lifestyle entrepreneurs, 134–36; characteristics, 137–39; financial institutions and, 135–36; music and, 135; retail trade and, 135; television and, 135; travel and, 135 Freemarket, 136 Fritz, Robert, 15 “Gaming Workshops,” 372 General Public License, 228 Gen G, 369–71 GE Plastics: color matching process, 300–303; ColorXpress Customer Innovation Center, 303–4; ColorXpress Select, 302; ColorXpress Services, 292–309; company issues, 300–301; Customer Scenarios, 296–97; customers’ issues, 300; Executive Summary, 294–95; “FormTool,” 301; summary, 308; Take-Aways, 309 Getty Images, 270 Ghosh, Rajib, 168 Gibson, Phil, 330, 335, 382 Gilmore, Jim: The Experience Economy, 312 Givan, Lori, 104 GNU General Public License (GPL), 206, 208, 237 Goodger, Ben, 214 Goodman, Shira, 81, 84 Google AdSense, 172 Got Game (Mitchell, Wade), 370 governance, open source development and, 203, 237–38 guides, 24, 25

Index hacker community, helpfulness of, 205–6 Hallmark, 100–101; Idea Exchange (IdEx), 25, 102–5; “Project HaHa!,” 105; Take-Aways, 106; user communities, 100–109 Haney, Al, 357–58 Hassenplug, Steve, 45–46 Hempel, Ralph: Extreme Mindstorms, 45 Hessan, Diane, 100–102 Hewlett-Packard, 306–7 Hiler, John: “Blogosphere: The Emerging Media Ecosystem,” 174–75 Hippel, Eric von, 9–10; Democratizing Innovation, 23 HopeLab, 373 Horne, Peter, 204–6 Human Genome Project, 244 Hynes, Colin, 91–97 IgoUgo, 168–69 Immelt, Jeffrey, 295 Ingoldsby, Tim, 162 Inmates Are Running the Asylum (Cooper), 95–96 innovation: commons-based peer production and, 202; definition, 3; “inside out” approach, 4–5; myths, 6; “outside in” approach, 4–5, 7–8; process, 3; types, 3–4; user-led, 225–26 Innovator’s Dilemma (Christensen), 13–14 Innovator’s Solution (Christensen), 13–14 “inside out” approach, business design and, 18–20 intellectual property, 1–2, 7, 152–84, 196; academic community and, 243; biotechnology and, 243; customer-created content and, 153–55, 197–98, 200; financial services and, 206–7; LEGO and, 75; mass customization and, 269; open source development and, 203; patents and licensing, 243; protection of, 173, 182–83, 388

International Flavors and Fragrances, 264 International Rice Research Institute (IRRI), 247 Internet Explorer, 210–11 Jacobson, Erik, 373 Jechart, Thomas, 306 Jefferson, Richard, 242, 244–48 Jin, Ge: “Chinese Gold Farmers,” 372 Johnson, Steven: “When Virtual Worlds Collide,” 376 Journal of Applied Physics, 162 Journal of Chemical Physics, 162 Kahn, Leo, 81 Kamen, Dean, 40–41 Karmaloop, 26, 357–66; the brand, 361–62; business model, 360–62; customer innovation, harnessing, 365–66; customers, 362–63; Executive Summary, 358–59; Karmaloop’s Kazbah, 364–65; Street Team, 363–64; success of, 364; Take-Aways, 366 Kent, Jim, 244 Kerpan, Pat, 230–40 Kodosky, Jeff, 58 Koerner, Brendan, 39, 45–46 Koko Fitness, 78–79, 115–29; market research, 119–21; product design, 121–27; summary, 128; TakeAways, 129 Koko Smartrainer, 122–23; customer co-design, 123–26; field testing, 125–26; “Koko Points,” 125; lead customers, 127–28 Kraft Foods, 106–9; Take-Aways, 108–9; “The Consumer Channel,” 107–8 Krenicki, John, 295–96 Krishnamurty, Sandeep, 216 LabVIEW, 23, 35, 51–65, 73–74, 254–56, 266–67; bobsled trials, 59–60; cochlear hearing implants, 60; magnetic imaging, 60; Microsoft Xbox controllers, 60–61; oil rigs, 60; space telescope, 60; WEBENCH and, 335–36

407

408

Index Laidlaw, Tony, 306–7 Lands’ End, 276–77, 287 Lannon, Mike, 115–29 Leadbetter, Charles, 138; Living on Thin Air, 138 lead customers, 8, 9, 23, 24; characteristics, 10; engagement with, 11–12 lead users, 8, 9; characteristics, 10 lean manufacturing, mass customization and, 269 Lederberg, Joshua, 242 Lego, 26, 71–75; brand erosion and, 387; BrickMaster, 41; Digital Designer, 283–84; Digitial Designer, 267; FIRST Lego League, 30–31; harnessing customer innovation, 384; Lego Club, 41; LEGOFactory.com, 283; TakeAways, 50 LEGO Mindstorms, 30–50; adults and, 37–38, 49; beta testing, 46, 49; co-design, 43–46; company profitability and, 41–42; Executive Summary, 31–32; harnessing customer innovation, 47–49; initial success, 36–37; lead customers, 44–46; lead customers and, 38–39, 48–49; National Instruments and, 43, 49; online discussion forums, 39, 49; product direction and business strategy, 47–49; product planning, 42–43; RCX, 35, 38; robotics competitions and, 40–41; Robotics Invention System, 37; takeaways, 50; target markets, 34; teachers and, 41 Lem, Esther, 113 Lessig, Lawrence, 173, 247 “Life of an Order” project, 93–94 lifestyle patterns knowledgebase, 316 Linux Support Services, 222 Living on Thin Air (Leadbetter), 138 Ljungdahl, Christer, 335 L.L. Bean, 190 Locke, Matt, 194–96

Long Tail, The (Anderson), 59 Lucky or Smart? (Peabody), 159 Lund, Søren, 33–48, 75 “L Word, The” TV series, 177 Lycos, 158–59 Maillous, Brigitte, 297–300 Malec, Dan, 284 Mapping Customer Scenarios, 319–28; business model and process innovations and, 323; core design elements, 320; golf course maintenance and, 324; organizational benefits, 326–28; personas, 321; recruitment services, 324–25; results, 325–26; software and, 323; travel services and, 323–24. See also Customer Scenarios Martin, Fred, 23, 33 Martin, Hall, 66–67 mash ups, 185, 187–92; brand experience and, 190; building, 192; business services and, 191; consumer services, 192; defined, 187; financial services and, 191; maps and, 188; photos and, 189; travel and, 191; Web and, 188–89 mass customization, 268–72; apparel and bags, 275–77; cars, 280–82; computers, 272–75; DIY toolkits, 284–85; DIY workshops, 285; empowering customers, 288–89; learning more, 272; payback from, 286–87; product features, 270–71; recommended or popular solutions, 288, 290; shoes, 277–80; summary, 287–90; Take-Aways, 290–91; toys, 280–83 Masumoto, Yosuke, 352 meritocracy, open source development and, 203 metadata, 175 “meta-source” business model, 239–40 meta-tagging, 163, 176 Microsoft, 211, 237 money, freeformers and, 139–41

Index Mozilla, 210–20; Application Suite, 215; Firefox, 26, 214; Foundation, 213; organizations, 218; profitability of, 217–18; TakeAways, 218–20; Thunderbird, 214 Muji, 348–56; the company, 348–50; customer commitment and, 353; Executive Summary, 350; products, 354, 354f; summary, 354; TakeAways, 355–56 Mulligan, Brennan, 279–80 mutual transfer agreements (MTAs), 243 “My Commute,” 193–94 Nabisco 100 Calorie Packs, 107–8 National Instruments, 23, 25, 26, 56–57, 71–75; company, 52–53, 58–59; customer communities and, 61–62; customer contributions, 62–64; customer-led innovation, 64–65; customers, 52; Customer Scenarios, 53; customer stories and, 61; Executive Summary, 52–53; harnessing customer innovation, 384; “lead user” program, 65–69; National Semiconductor and, 335–36; partnership benefits, 57; profitability, 67–68; Take-Aways, 69–70 National Semiconductor, 329–38; “Analog by Design” shows, 331; Analog University, 331; the company, 329; customers’ designs, success of, 336; Executive Summary, 332–33; interactive design environment, 333–34; National Instruments and, 335–36; summary, 337–38; Take-Aways, 338; WEBENCH, 330–31, 334 Nature, 247, 260 Netscape, 207–8; Communicator, 210–11; Navigator, 211. See also Mozilla Network Professionals’ Connection (NetPro), 168 New York Times, 217 Nicholson, Dave, 141–42

Nickell, Jake, 341–44 Nike iD, 277–78 Nishiyama, Kohei, 352 Nowlin, Bill, 58 Nupedia, 250–52; expert volunteers and, 251; neutrality and, 251; problems, 251–52; review process, 251 Obana, Mary, 115–29 object-oriented software, 204 Observer, 348–49 Ofoto, 180 Omidyar, Pam, 373–74 online communities, 100–114, 111–13; Hallmark Idea Exchange, 102–6; Kraft Foods, 106–9; RC2 Corporation, 109–10; Take-Aways, 114; Unilever, 111–13. See also Communispace; specific case studies open-ended co-design environments, 266–67 open source business models, 229–41, 232f; biotechnolgy, 242–49; CohesiveFT, 233–34; custom development, 231, 234; customercritical scenarios and, 234–35; dimensions, 235–38, 236f; identifying the market, 232–33; industry-specific solutions, 230; monetizing value, 235; PBX software, 223–24; software as service, 231–32, 235; specialty software, 234; support services, 231 open source development, 199–203; bug- and issue-tracking, 212; challenges, 226–27; code commitment, 213; code review, 212–13, 219; community process and, 225; design principles, 202–3; governance structure, 225; intellectual property, 225; processes, 215; quality assurance, 213, 219; testing, 212, 219–20 Open Source Initiative, 208 Oracle, 237 O’Reilly, Tim, 189

409

410

Index organization roles, 26–27; commercializing innovations, 71–72; customer communities and, 28–29, 73; formal programs and, 27; invitations and rewards and, 28, 74–75; toolkits and guidelines and, 28, 72 “outside in” approach, customer outcomes and, 18–20 outside innovation, core competencies: community building, 384–85; customer co-design, 385; open development, 385–86; peer production and promotion, 386; story-telling, 383–84 outside innovation, five pitfalls: brand erosion, 386–87; commodity pricing, 389; intellectual property protection, 388; lock-in, 388; unanticipated consequences, 387 outside innovation, five steps: co-design tools and, 381; customer communities and, 381–82; empowering customers and, 382–83; lead customers and, 380–81; open and extensible products and, 383 Papert, Seymour, 33 Parago, 88 Patent Lens, 245–46 Patty’s Pioneers, 230 PBX software, 222–24; business model, 223–24 Peabody, Bo, 156–59, 160; Lucky or Smart?, 159 Pearson, Jeff, 122 Pease, Bob, 331 peer production and promotion, 386 peer review, scientific and technical journals and, 162–63 Perl, 207 photostream feeds, 181–82 Physics Today, 162 Picasa, 180 Piller, Frank, 272, 283–84 Pine, Joe: The Experience Economy, 312

“planets,” 159–60 Plantronics, 305–6 PreClick, 180 process innovation, 271 product and system configuration: Cisco Systems and, 272–73; customer codesign and, 219; Dell Computers, 274–75; design, 121–27 products, customized. See mass customization; specific case studies promoters, 24, 26 proprietary platforms, 388 purpose-built products, 6 R&D, 3, 18–20, 68 Rasmussen, Robert, 33, 35, 52 Rattray, Fiona, 348–49 Raymond, Eric, 207; “The Cathedral and the Bazaar,” 207–8 RC2, 109–10 Really Simple Syndication (RSS), 189, 190 rebates, 85–91; application process, 88; fraud and, 89–90; fulfillment process, 87–88 Reebok, 279–80 Reference.com, 256 Reis, David, 298–99, 306 Richardson, Andy, 305–6 Rivera, Lara, 282 Robins, Kevin, 311–12, 315 ROBOLAB, 54–55, 74; Robolab Mania!, 56–57, 74 Robotics Invention System (RIS), 54 Rogers, Chris, 23, 49, 51–55, 73–74 Ross, Blake, 214 Ryohin Keikaku, 349 Sanger, Larry, 250–52 Sargent, Ron, 82 Schilling, David, 45 Schlack, Julie, 102–3, 111 Science Commons, 247 scientific and technical journals, 161–62; peer review and, 162–63 Second Life, 371–72, 376 Seigenthaler, John, Sr., 256–57

Index SEI Wealth Network, 310–18; the board game, 313–14; the card game, 312–13; game plan cocreation, 314–15; harnessing customer innovation, 316–18; lifestyle patterns knowledgebase, 316; the play, 312; Take-Aways, 318 Selkoe, Greg, 357–66 Sendmail, 207 Shell, Tim, 250 Sherlock, Jim, 84–86, 88–90 Sherman, Bill, 358 Showtime Networks, Inc., 177 Silicon Graphics Unix systems, 205 Sims series, 368–69 Skinny Corp., 344–47; businesses, 345–46; business models, 346; Executive Summary, 344–45; TakeAways, 346–47; Threadless.com, 341–43 Smart, Tim, 82 Snapfish, 180, 265 Snap-on, 154, 191; Diagnostics, 165–66 Soduke, 185 software licensing, 237 solution-specific design environments, 266 source code: open source development and, 203; visibility, 236 SourceForge.net, 208 Spencer, Mark, 222, 229–33 Spöeth, Carl, 122 Spore, 377 SpreadFirefox.com, 216 Stallman, Richard, 206 Staples, 9, 25, 77–79, 85; case study, 80–99; the company, 81, 82; “easy” brand, 84–85; Easy Rebates program, 83, 85–91; Easy Reorder, 93–94; Executive Summary, 83–84; harnessing customer innovation, 384; product ordering and, 92–97; Take-Aways, 99 Starbuck’s, 190 Steffens, Alex, 244; WorldChanging, 244

Stemberg, Tom, 80–81, 82, 86 Stoelting, Curtis W., 110 strength training: men’s issues, 118–19; women’s issues, 118–19 Sulston, John, 242 symmetry, open source development and, 203 Synaptic Leap, 248 Take-Aways: American Institute of Physics, 163–64; Asterisk and Digium, 227–28; Axe, 114; blogosphere, harnessing the power of, 177–78; Bob the Builder Click Bricks, 114; British Broadcasting Corporation (BBC), 196; Charles Schwab, 114; CohesiveFT, 240–41; customer-created content, 198; customer innovation, harnessing, 169–70; Flickr, 186; GE Plastics, 309; Hallmark, 106; Karmaloop, 366; Koko Fitness, 129; Kraft Foods, 108–9; LEGO Mindstorms, 50; mass customization, 290–91; Mozilla, 218–20; Muji, 354–55; National Instruments, 69–70; National Semiconductor, 338; online communities, 114; SEI Wealth Network, 318; Skinny Corp., 346–47; Staples, 99; Tripon, 160; virtual gaming, 378; Wikipedia, 261; Zopa, 151 Technorati, 172 Terra Networks, 158–59 Tetra Pak, 384 Thomas, Douglas, 370 Thompson, Bill, 260 Threadless.com: success of, 343; summary, 345. See also Skinny Corp. Timbuk2 Designs, 275–76, 279 TransBacter, 246–47 Travelocity, 169 Tripod, 152–53, 156–60; business model, 157–59; Take-Aways, 160 Tropical Disease Initiative (TDI), 248 Truchard, James, 58

411

412

Index unanticipated consequences: outside innovation and, 387; Wikipedia and, 387 Unilever, 77, 111–12 USA Today, 256 U.S. News & World Report, 82 VA Software, 208 Vauxhall, 280–81 Village Ventures, 159 virtual gaming, 367–78; the community, 369–70; customer co-design and, 374–75; economics, 371–72; importance of, 367–68; interoperability and, 376–77; reusable platforms, 375–76; TakeAways, 378 virtual pharma approach, 247–48 visioning, structural tension and codesign tools, 266 voice over IP (VOIP) providers, 222 Volvo, 281 Vonage, 222 Wade, Mitchell: Got Game, 370 Waitley, Gretchen, 107–8 Wales, Jimmy, 250–52, 258 Walikis, Elizabeth (Libby), 305 Walker, Marta, 282 Wallich, Paul, 38 Watts, Jeff, 254 Web 2.0, 189 WEBENCH, 330–31, 334; LabVIEW and, 335–36; success of, 336 weblogs. See blogosphere

“When Virtual Worlds Collide” (Johnson), 376 Wikipedia, 250–61; anonymous authorship and, 258–59; birth of, 252; content-creation and, 254–56; content review, 259; governance model, 253–54; reliability of, 260; semi-protection policy, 259; TakeAways, 261; unanticipated consequences and, 387; vandalism and slander and, 259–60 wikis, 252–53 winning formula, 8–9 Wired, 39, 158 Wired.com, 158 Wood, Michael, 122–23 WorldChanging (Steffens), 244 World of Warcraft, 373 Wren, Howard, 222 Wright, Will, 368–69, 377 Yahoo!, 181, 183; Content Match, 172 Yon, Dennis, 292–93, 300, 302, 304 Zeigler, Robert, 247 Zelen, Alison, 113 Zopa, 79, 130–51; co-design and, 141–43; customer comments, 144–45; design testing, 143–44; discovery and exploration groups, 139–41; Executive Summary, 131–32; future plans, 148–50; growing the market, 147–48; market research, 136–41; profitability, 148; summary, 150; Take-Aways, 151

About the Author PATRICIA B. SEYBOLD is the author of the international best-seller Customers.com and The Customer Revolution. She is the founder and CEO of the Boston-based The Patricia Seybold Group (www.psgroup.com), which for more than 25 years has specialized in helping Fortune 500 companies design and continuously improve their customer-focused business strategies. www.outsideinnovation.com. Visit www.AuthorTracker.com for exclusive information on your favorite HarperCollins authors.

Copyright OUTSIDE INNOVATION. Copyright © 2006 by Patricia B. Seybold. All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, nontransferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of HarperCollins e-books. Adobe Acrobat eBook Reader January 2009 ISBN 978-0-06-183462-2 10 9 8 7 6 5 4 3 2 1

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