2. How Companies Turn Customers’
Big Ideas into Innovations
“Strongly engineering-driven
companies don't always appreciate
the emotional attachment
people have to products,” says
Wharton’s George Day.
The most effective product development and commercialization processes encourage dynamic
communication and idea sharing among engineers, marketers, and customers.
The Doom Loop
1
strategy+business knowledge@wharton
F
rom Thomas Edison to Steve So why haven’t they done it
Jobs, the conventional view of Many executives are aware that their already? Institutional barriers are per-
product development has companies need to improve how haps the biggest reason. Often, engi-
always portrayed the inventor as the they manage innovation: In a Booz neers are tucked away so far within a
hero. In fact, the inventor is only part Allen survey of European senior company that they don’t see firsthand
of the process. Edison himself hinted executives (mostly CEOs, chief what customers really need. Kevin
as much when he described the technology officers, and vice presi- Dehoff, a vice president at Booz
inventor as being a “specialist in dents of engineering and product Allen based in New York, whose
high-pressure stimulation of the development) completed in Octo- work includes providing advice about
public imagination.” ber 2004, nearly half of all respon- product development, says engineers
The truth is, most successful dents said they were dissatisfied often become so focused on solving
product innovation requires imagi-
native insights and incisive action
from heroes in the lab and in mar-
keting. Indeed, whether it was wiz-
ards in Menlo Park or Xerox PARC
who came up with the concepts, the
most effective product development
and commercialization processes
have always been based on a dynam-
ic and complex exchange of ideas
and interests among engineers, mar-
keting experts, and, most impor- with their company’s innovation technical problems that they over-
tantly, the end-consumer. performance. Specifically, 48 per- look the ways in which the customer
Yet few companies are good at cent were unhappy with their com- actually defines value.
managing this exchange, particular- pany’s ratio of innovation hits to George Day, a professor of mar-
ly when it comes to capturing and misses, and 51 percent were dissatis- keting at Wharton, also sees this
incorporating customer insights fied with how their company identi- overconcentration on technology as
into product design, according to fies new service and product cate- one of the most common sources of
product innovation experts at Booz gories. And they weren’t unclear trouble. “I think the biggest prob-
Allen Hamilton and the Wharton about how to solve the problem: lems occur when you get strongly
School of the University of Pennsyl- Out of a list of 12 potential steps engineering-driven companies that
vania. While it’s difficult to measure their companies could take to don’t really appreciate the emotional
the cost of such missed opportuni- improve their innovation practices, attachment people have to products
ties, these experts say that this fail- executives ranked understanding or their emotional reactions to
ure to incorporate the customer’s their customers better as the most them, and think it’s all about very
perspective often seriously limits the important step to increase the value specific product attributes,” he says.
potential financial and competitive of innovation created in the product The risk such companies face is
value of corporate innovation. development process. getting caught in a development
3. “Companies may lose their
innovative edge because, after
many years at the helm, senior
executives lose interest in the
products they’re selling.”
2. Successful innovators conduct
2
vigorous market research of
customer needs. Computerized
Levers for Innovation
strategy+business knowledge@wharton
dynamic where innovation is driven get it right, according to Moeller, is giant, not only conducts focus
not by a focus on what the customer Harley-Davidson of Milwaukee, groups but also undertakes what are
values and is willing to pay for, but Wisconsin. Many company execu- essentially anthropological expedi-
on solving an engineering problem. tives are great fans of the famous tions to see how consumers are actu-
This dynamic leads to an internally “hog,” and frequently attend rallies ally using their products in the
focused development cycle Dehoff with other Harley motorcycle home. Similar stories can be found
has nicknamed “the doom loop.” In enthusiasts. Such involvement cre- in the business-to-business world:
1. Employees use the product.
this iterative process, satisfying the ates real empathy with the customer, CLAAS KGaA, a manufacturer of
customer becomes a secondary con- Moeller says, and often provides agricultural equipment based in
cern. Dehoff says genuinely valuable executives with a clearer vision about Harsewinkel, Germany, maintains
innovation is generated through a both what the customer wants most practice centers in each of its major
different dynamic: “understanding, and what kinds of improvements markets. These are model farms
engagement, and participation of they would like to see. where farmers test new equipment
direct customers coming together and company employees can observe
with some kind of a technology close at hand what they like and how
improvement.” they use the new machinery.
The strongest innovators don’t
design and improvements in sup- overlook former customers, either.
Discovering customer insights about ply-chain dynamics have shortened Although it is natural to want to
products, and then incorporating product development cycle times to hear positive feedback from satisfied
those insights into product develop- levels that were unheard of just a customers, Day says companies need
ment, requires a number of initia- generation ago, tempting many to be more aggressive in seeking out
tives at a variety of levels — person- companies to try to take shortcuts the unhappy customer. Indeed, it is
al, interdepartmental, and strategic. with their market research to stay well known that dissatisfied cus-
Although no two companies inno- ahead of the competition. “When tomers and former customers are
vate in exactly the same way, success- you have such pressures, very often often great sources for useful infor-
ful companies often share a number companies skip the marketing mation for both modest and major
of characteristics, according to Booz research,” warns Wharton market- product innovations. But most com-
Allen and Wharton experts:
It might sound elementary, but
being a consumer of your own
product is an important way to stay
close to the customer. Many compa-
nies go wrong simply because after a
number of years at the helm, suc-
cessful senior executives lose interest
in what they sell, according to Leslie
H. Moeller, a Cleveland-based vice ing professor Yoram “Jerry” Wind. panies don’t pay as much attention
president of Booz Allen. “I once had “But that can be a huge mistake.” as they should to what they can learn
a client who didn’t like the products Booz Allen and Wharton from discontented customers.
produced by the division he ran. experts agree that the most success- In new markets, local partners
When they had product tastings, he ful innovators still spend a great deal can also be an important source of
wouldn’t taste them,” he recalls. of time trying to understand their insights. That’s especially true in
“How can you lead an organization customers’ needs, in spite of those developing countries, where it’s hard-
if that’s how you feel?” pressures. Procter & Gamble, the er to purchase market research, Booz
One company that does seem to Cincinnati, Ohio, personal care Allen experts note. For example,
4. “Procter & Gamble conducts
anthropological expeditions to
see how consumers actually
use their products in the home.”
3. The engineers stay close to
3
the market. It might seem reason-
strategy+business knowledge@wharton
Alexander Kandybin, a vice president ogy,” he explains. U.S. companies would often intro-
at Booz Allen based in New York, Kandybin contrasts the success- duce a product domestically first
says that sales of confectionary and es of Bose, the Framingham, Massa- and then introduce the same prod-
tobacco products increased in many chusetts, sound system company, uct with minor modifications into
emerging markets once the brands’ with that of Apple Computer of other markets, according to Jerry
owners understood that although Cupertino, California. Both compa- Wind. Today, they no longer have
most consumers couldn’t afford to nies are technology-driven. Apple, that luxury. Many companies must
buy packs of cigarettes or bags of can- with its exceptional focus on cus- introduce a new product simultane-
dies, they could and would buy indi- tomer insight, has been able to ously in many markets, he says, cre-
vidual pieces. “It’s really hard to invent great products with great ating huge difficulties for product
understand even such simple things technology, which Bose does too. and service-system designers.
unless you develop those [local] rela- Apple, however, also creates vast One emerging strategy to
tionships,” he advises. new markets. Witness the way it has address this issue in a global context
transformed the music industry is to build more research and devel-
with its hugely popular iPod. Inter- opment operations nearer to com-
estingly, Bose has a new sound sys- panies’ newest markets. Booz Allen’s
able that a company with strong tem specifically made for use with European innovation survey, for
R&D roots could afford to overlook the iPod, and it has dramatically instance, estimates that European
the smaller ebbs and flows of cus- raised its marketing and brand iden- companies will increase their
5. Innovative companies seek
tomer needs and related market tity push in the last few years. research and development expendi-
4. Companies perform R&D understanding of customer
opportunities, and just concentrate How do companies maintain tures in Eastern Europe and Asia
around the world. What do you behavior and motivations. There’s
on creating exciting new products, both a consumer and a technical from 16 percent to 31 percent by
2007, largely to get closer to those
new customers.
Although labor cost savings are
often seen by the media as the driv-
ing force behind such cross-border
moves, Thomas Goldbrunner, a
Booz Allen Hamilton principal
based in Munich, Germany, says
Booz Allen’s survey of innovation
but this strategy isn’t efficient. In focus? The use of cross-functional practices found that access to cus-
fact, Booz Allen consultants say that teams in product development is tomers’ knowledge was actually a
it’s an extremely risky — and expen- one way smart firms try to close the much more important motivator
sive — way to operate. gap between technical know-how for expansion. Executives surveyed
“These companies end up and customer understanding. At rated “access to customer know-how
introducing a lot of technology- Hewlett-Packard, for instance, the in new markets” as much more
driven projects and seeing what company requires “everybody on important (3.02 out of a possible 4)
sticks,” Kandybin says. It’s not that a the team to go together to a than factor cost advantages (2.46
market-blind strategy never works, prospective customer and hear the out of 4) or greater proximity to a
according to Kandybin; it is just customer themselves,” says Whar- place of production (2.25 out of 4).
that being tuned in to the market ton’s George Day.
has much more potential. “If a com-
pany’s engineers don’t understand
the market from the standpoint of
consumer needs, they are usually do if your customer is on the other more to incorporating customer
much less successful at creating mar- side of the world from the markets insights than simply listening to
kets, even if they have good technol- you are used to serving? Historically, customers more closely. Often, the
5. strategy+business (www.strategy-business.com) and Knowledge@Wharton (http://knowledge.wharton.upenn.edu) publish white papers
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