Harnessing the power of innovation through living labs

By Katharina Greve

Engaging with customers in the creation of new products and services is now of paramount importance for firms. Such a revolutionary approach can shorten the time to market and ensure a better fit between a company’s offer and market needs, two of today’s strategic imperatives to survive in progressively more competitive environments. In order to derive insights from customers, firms are experimenting with innovative organisational solutions: amongst them the use of living labs is increasingly capturing the interest of managers.

Success stories of co-creation are emerging across various industries, and involve both small and large firms. Organisations that are embracing this approach outperform the market, develop better products and place them faster onto shelves, provide superior service, and build deeper, more loyal relationships with their customers. For example, LEGO employs co-creation to successfully engage many of their adult customers in the design process of new products. Peter Espersen, head of global community co-creation at Lego explains “We have learned some big lessons. First, that creativity has almost no boundaries; people can do amazing things. Second, we can’t always predict what consumers want. [..] When you combine the idea of Lego with another strong community, and a fun one, that is rocket fuel in the engine - it really works.”

In spite of the term co-creation being now widely used, all co-creation is not the same. The catch-all term has meant that everything from crowd-sourced marketing ideas to general collaboration has been labelled as co-creation. This led many organisations to believe that they have practiced co-creation, when they actually have experienced a tactical (and often far less value adding) interpretation of the practice. Co-creation is not a tactical marketing method, nor is it just a synonym for collaboration. It is a way of innovating that can truly revolutionise how organisations work and address customers’ unmet needs. So what is co-creation exactly? Co-creation refers to collective creativity that results in something that is not known in advance. In essence it is the idea that organisations can be more successful by innovating with customer rather than for customer. In its purest form, co-creation suggests that customers are no longer at the end of the value chain, but take up a key role in the process of value creation.

In order to engage with customers in the co-creation process, the use of living labs has emerged as a new way to sustain competitive advantage. Living labs are open innovation platforms that enable systematic customer co-creation whilst integrating research and innovation processes in real life settings. One example is JOSEPHS – a living lab located in the town centre of Nuremberg in Germany. JOSEPHS offers an open innovation space where five companies display their product and service innovations for three months under one theme. This space is open to the public. JOSEPHS as facilitator encourages customers to try out products and services and then give feedback.

However, the understanding of how the co-creation process can be best facilitated is limited. To support managers pursuing this strategy and engage in a vibrant and growing academic debate, we conducted a study to identify factors that are critical to successful co-creation in living labs. The case JOSEPHS has been chosen for this study due to its set-up as a continuous platform for interactive innovation. The outcomes of this research are available through our webinar or monthly Cambridge Service Alliance paper, and as a podcast.

Why service innovation is different, and why that matters

Service companies comprise 75 percent of economic activity in developed countries.  But companies are often seen as less innovative with service provision than with product design, manufacture and sales. But is this really the case or we are just misunderstanding the process of innovation in services?  We recently did some research to find out.

The focus was put on four providers of complex relational services, such as performance-based contracts that guarantee product availability. The research has shown that the conception of the product orientated innovation process  (company innovates- company sells – customer uses) doesn’t hold in the relational services, where the customer’s involvement in co-creating the service is accentuated. That means that the new services development is simultaneous to their production and use, thus making the customer a co-creator of the service. Firms that prepare properly for these two characteristics – simultaneity and co-creation – before engaging in relational service provision are likely to be more successful.

The service contract is designed, contracted for and then delivered by the service provider on the basis of the outcome that the customer wants. The service is innovative when the service provider offers a new outcome- an outcome he never provided before. The innovation actually takes place through interaction of the service provider and the client, making them co-creators of the service through the delivery.

Risk and reward in service innovation have a different nature as well. Although the service provider may invest in the infrastructure necessary to provide the new service, through payment of service fees the client effectively co-finances the innovation process.  As customer signs a long-term contract, the service provider avoids the market risk. But the service provider must address the risks inherent in delivering a novel service, whether these are higher service costs, contract penalties, loss of profits, or a dented reputation.

Problems with initial service delivery might cause the company to withdraw from the innovation. This actually disables it to understand the lessons from the initial innovation and reap the benefits that accrue over time through additional services to existing and new clients. The potential benefits for the service provider include: first-mover advantage, enabling the firm to leverage its learning by using it to secure further contracts with existing or new clients; cross leveraging innovation infrastructure investments and learning across other service contracts; and using the initial service innovation as a catalyst for other types of innovation –both services and products.

Firms that wish to be good service innovators need to have cross-functional teams and company-wide incentives to innovate, in other words an organizational-wide entrepreneurial culture should be encouraged throughout the company. This stresses how crucial adopting a long-term approach to innovative services is. The client and the service provider have to have a long-lasting, mutually trusting relationship in order to capture the full benefits of the innovation. They have to be well acquainted with one another in order to overcome the initial problems.

Ivanka Visnjic,
Research Lead, Cambridge Service Alliance

The research reported in this blog can be found in this report 'When Innovation Follows Promise - Why service innovation is different, and why that matters' Executive Briefing, Ivanka Visnjic, Taija Turunen, Andy Neely

Beyond Co-Creation: Think About Co-Evolution

In the world of service many people talk about the co-creation of value - the idea that customers and providers work together to create value in service. Take, for example, a restaurant. As a patron you and your companions (assuming you are not eating alone) help create the experience. You engage in conversation. You banter with the waiters. You compare and often share your food. In a more complex business-to-business setting, the provider of the service is often dependent on customer inputs. When maintaining complex engineered equipment, for example, customer feedback - what's working, what's not - is an essential input to the maintenance diagnosis process.

I have spent the last couple of days at the launch meeting of the NEMODE - New Economic Models in the Digital Economy - network. One of the most interesting themes to emerge for me was the idea of the co-evolution of business models, rather than the co-creation of value. An apposite example is provided by eBay. When eBay was first launched it was created as a market place for selling cheap, second-hand goods. The idea was that you could go to your garage, find an old set of tools, put them on eBay - a form of electronic car boot sale - and sell them, rather than trash them.

Over the years eBay has evolved - it has become a virtual market place. People use it to sell everything - from second hand garage items to new cars. Some use eBay as virtual store, selling their goods online. What has happened over the years is the users of eBay have found ways of using the platform that were never originally envisaged. As the users have innovated their use of the platform, eBay has responded and innovated its business model.

Co-evolution doesn't rest there - it is not just the interaction of customers and providers. You also have to consider the broader eco-system. Take, for example, Apple. Through the Apps store and through Apps themselves, Apple have created a platform that allows others to offer services (Apps) to customers. The three parties involved - Apps developers, Apple and the customers - are jointly co-evolving the business model. This raises an interesting question - how good are you are co-evolving your business model with your customers? Have you created a platform that allows the customers to find new ways of creating value? And if so, are you capable of spotting these customer innovations and incorporating them into your business model to allow the next round of co-evolution?