December 2009

By successfully managing value co-creation and exchange, companies can seek to maximize the lifetime value of desirable customer segments.”

Managing the Co-creation of Value

Today’s profit orientation forces companies to focus on their core competencies while providing customers with multiple new offerings. To meet these two requirements, companies need to develop innovations in collaboration with different stakeholders including suppliers, customers, and users. While managers and researchers discuss the benefits derived from the process of co-creating innovations, little is known about what motivates different stakeholders to engage in the co-creation of innovations. The purpose of this article is to highlight the first results of a qualitative study that focuses on the different types of value stakeholders can expect from co-creating innovations.

Introduction

In the current economic crisis, many companies find themselves in a financial struggle. While some companies have gone bankrupt, others have realized possibilities for change and future growth. In these critical times, managers are looking for and applying strategies that are both successful in the short term and are sustainable for a longer time horizon. Two well-known strategies are:

  • outsourcing business functions that do not belong to the core competencies of the company

  • outsourcing production to countries with lower wages in order to significantly reduce cost and stay globally competitive

In the past, these two strategies have proven to be successful in contributing to the sustainability and growth of many companies. Due to the fact that during the past 20 years many companies focused on economization, many non-core business functions have already been outsourced. Thus, this strategy is practically not available for many companies. Also, there are examples of multinational companies that have demonstrated the success or unsuccess of outsourcing production. For instance, Andreas Stihl AG & Co. KG, the world market leader in the motor saw industry, decided to build a new production plant in China to reduce production costs in 2006. At the beginning this strategy went well, but after a relatively short production period in China, the number of plagiarized low quality motor saws available on the market increased. Thus, the reputation of Stihl high quality motor saws declined. However, due to the high competition in this market, Stihl needs to keep its production in China and has to find ways to deal effectively with this problem.

Co-creation as Part of a Business Strategy

It is often emphasized that the key to enduring a crisis does not lie in cost reduction alone. It is important for companies to focus on innovation development. Some companies recognize the innovative capability of the different stakeholders (suppliers, customers, and users) involved in their value chain. Within this context, the value of co-creation is emphasized. But what is co-creation? Is it an old practice that is now stressed by academics as important within the current economic context? Or, is it a new and innovative way that shows companies a new possibility to overcome the economic crisis and to boost their performance for the future?

Co-creation is not totally new and a number of companies have been using the rudiments of co-creation for many years. One example for the early implementation of co-creation is IKEA, the Swedish home furniture retailer. The success of the business idea of IKEA is simple and well known:

  • produce high quality furniture by sourcing components worldwide

  • match the creative capabilities of the different participants more efficiently and effectively

Particularly, the second part of IKEA's business strategy can be understood as co-creation. IKEA offers its customers high-quality products for a favourable price. It also enables them to take over some key tasks that are traditionally done by the manufacturer: the final assembly of the furniture. Enabling customers to take over specific tasks in order to contribute value is a key to understanding the value of co-creation. Implementing a co-creation strategy is not always easy and requires a good product offering from the company. Companies need to make their customers aware that taking over some key tasks increases their benefit. It is only when the benefits to customers are well articulated, visible, and measurable that a value co-creation approach can become part of a successful and promising business strategy.

Another example of co-creation is the development of Linux. In contrast to the top down approach of the IKEA example, some computer users realized the need for the innovation of an alternative operating system. A group of users started to develop a new operating system by freely sharing the source code. The success story of Linux became an example for further open source developments in the information technology sector. It can also be argued that the unprecedented advancements of Internet networking and communication technologies have opened new ways for collaborative value creation and innovation.

Value co-creation changes the understanding of the different roles of the stakeholders involved in the development of new products and services. This new understanding necessarily affects the way we think about innovation development. Taking into consideration and successfully managing the value contributions by all relevant stakeholders is becoming highly important. Companies have realized that developing successful innovations based on their own resources is costly and often does not lead to the type of innovations needed to address unstable and turbulent markets. Many companies have successfully realized the benefit of co-creating innovations by opening the development process to different stakeholders.

Such an engagement in a value co-creation strategy requires the development of the proper resources and mechanisms to protect the company's innovative ideas. It also requires a complete change of the traditional company-centric and competitive mindsets. An open value creation process requires a proper balance between competition and cooperation activities as part of everyday business operations. Co-creation is not a silver bullet as companies have to work hard in order to successfully co-create innovations. Each company has to choose the degree of openness that fits their entire strategy or the single idea they are working on. Companies should also decide whether they will be the only owner of the developed idea/product, or if contributors will be co-owners. Besides making these important decisions, companies have to motivate the different stakeholders to engage in-depth into the joint development of innovative products and services.

Research in Co-creating Innovations

Over the last two decades, several studies have shown the importance of co-creating innovations with stakeholders. Suppliers, customers, and users have a wide range of knowledge and skills that are needed for innovation development, but which often remain untapped. Through collaboration with stakeholders, companies can learn to better meet customer requirements while improving development time, performance, and costs. It is valuable for companies to regard stakeholders as partners in new product or service development. Other studies have shown that companies seem to struggle in collaborating with stakeholders during innovation development and that managing stakeholder integration presents challenges. Thus, companies have to reconsider the meaning of value which can be generated by co-creating innovations with stakeholders. Stakeholders need to consider which value can be expected from joining such projects so they can be motivated to engage in-depth into new product and service development.

We present the first findings of a research project which conducted several interviews with managers of companies developing new products and services and some of their stakeholders in these joint projects. An interview lasted between 1 and 1.5 hours. The questionnaire checklist consisted of open-ended exploratory questions. The objective was to develop insights into how the developing company and the involved stakeholders perceived the value developed during co-creation innovation projects. Knowing the perceived benefits generated by joint innovation projects supports companies in motivating their stakeholders to engage in these projects.

Motivating Stakeholders to Co-create Innovations

The easiest way to motivate stakeholders to co-create innovations is to offer financial incentives to compensate incurred expenses. Investing time and effort, offering knowledge and expertise, and taking over development risks are often associated with expenses that accrued by developing innovations with different partners. But being paid for co-creating innovations is often not perceived by stakeholders as an adequate way to compensate their investments. Shared knowledge is difficult to measure and adequately reward. Offering money to co-create innovations is often not a sufficient motivation.

Developing innovations is often associated with a high potential of development failure or inappropriateness of the product or service to the end customers. Highlighting that co-creating innovations reduces the risks for all involved stakeholders might increase the motivation to participate in such projects. For example, fashion companies traditionally needed about 12 months from initial design to the sale of their products in stores. The long development time resulted in large inventories. Fashion companies were not able to react to market changes quickly and needed to offer discounts in order to sell their products. These challenges forced some fashion companies to identify a new business opportunity. The new idea was to co-develop innovative products, including clothes and production machines. End customers were offered the possibility to develop their own clothes design and production companies were asked to develop machines that were able to produce smaller quantities of clothes in a profitable way. The development of the new machines was necessary to ensure that end customers could receive their new design within a short time period. Co-creating this innovation offered all involved parties the possibility to reduce their risk and one of the key benefits was increased satisfaction for all stakeholders.

Neither of these approaches ensures the engagement of all the stakeholders in co-creating new products and services. How can companies intrinsically motivate their different stakeholders to co-create innovations and achieve a higher engagement? This is a highly relevant but difficult question to answer. Based on the conducted interviews, preliminary identified factors that motivate stakeholders to engage into co-creating innovations will be highlighted.

Although product and service innovations always target profitability, experience shows that building relationships is an important factor in achieving profit. Building relationships with representatives from all of the relevant stakeholder groups has been shown to stimulate engagement in co-developing innovations. Relationships between innovative individuals can evolve out of personal or virtual meetings. No matter where and how different representatives of the involved partners meet, they are able to build up relationships. Building relationships is often associated with high costs due to the invested time and effort. Nevertheless, established good relationships produce high benefits for current and future projects. Knowing people personally increases engagement in the project and thus the probability of successfully finalizing projects. The process of jointly developing new products and services offers the possibility for different stakeholders to build new relationships that otherwise would not be possible. Co-creating new products and services provides all involved partners with the opportunity to build new relationships while increasing their engagement in the current co-creation project.

Another important factor to motivate different stakeholders to engage more intensively is to highlight the possibility for acquiring new knowledge. For example, one stakeholder might be willing to share their in-depth knowledge about how end-customers use a final product. All involved parties receive the opportunity to acquire and use the new knowledge in future product or service development projects. In addition, sharing knowledge between all developing partners might lead to new solutions that parties by themselves are not able to develop. Co-creating innovations increases the probability to create new knowledge that is relevant for all.

To create new knowledge and to develop new products and services, developing and acquiring capabilities is vital. Companies can hire employees with the needed capabilities or train existing employees, but this is often associated with high costs and may need the development of additional resource infrastructures. Co-creating innovations can provide all stakeholders with access to capabilities at no or reasonable cost. By engaging in co-creation activities, all stakeholders bring specific capabilities and open new possibilities to innovate. Stakeholders can develop capabilities which otherwise would be expensive or take a long time to develop while developing highly innovative products and services at reasonable cost.

These factors only represent the first findings of a recent qualitative research project. Future research is needed to examine which techniques and methods positively influence the engagement of stakeholders during new product or service development.

Conclusion

Companies need to focus on the development of innovations. Companies increasingly realize that developing innovations is a task that requires several partners. Using co-creation to develop innovations seems to be a promising approach to increase company performance.

Companies interested in co-creating innovations have to identify the factors that trigger different stakeholders to join such projects. It has been highlighted in this article that monetary factors are to some extent important to motivate stakeholders to join a project. However, this factor does not ensure their engagement. Additional factors have to be identified that motivate stakeholders to engage in-depth into joint innovation development projects. Based on the first results of this study, four important factors were identified:

1. Reducing risks.

2. Building new relationships.

3. Developing new knowledge.

4. Building new capabilities.

A quantitative study is now underway to validate these findings.

Recommended Resources

Managing Supplier Involvement in New Product Development: A Multiple-Case Study

 

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