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Innovation through Co-Creation

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Innovation has long been the cornerstone of the software industry. Yet today, few customers would venture to call their enterprise software vendors “innovative.”

The reason is that most software vendors have gained a reputation of being slow moving and intractable in their business methods. This perception holds true even as innovative technologies, business models and processes are taking hold throughout the software business.

Today, enterprises are changing the ways they think about innovation in their business. That’s why software vendors need to change as well – in order to support their customers better.

By working closely with their customers, software vendors can co-create value and deliver innovation that will form the basis for a competitive advantage and mutual success.

Experience Platforms are the Future

Four market shifts are causing fundamental changes between companies and their customers.

  1. Ubiquitous Connectivity – More than three billion people will be connected by 2010 either by cell phone or PC for the first time in human history. All connections are faster, including voice, data and images. Everything is more easily accessed than ever before.
  2. Intelligent Products – Digitization is going on in a massive fashion. Devices can communicate with each other and with their users – for example, cars doing remote diagnostics, or chairs adjusting posture depending on the sitter. This has allowed companies to create products that can communicate in new and interesting ways.
  3. Beyond Necessities – At the time of Henry Ford, an automobile that offered any mobility was fine. People were stuck in villages using horse-drawn carriages. But because the need for transportation grew and fragmented, there are 800 different models of cars on the market today. This confronts consumers with tremendous choice.
  4. Customers as Activists – Customers are taking a proactive role in their purchase decisions – and telling others about their experiences. As an example, witness the number of blogs maintained every day by consumers of a variety of products and services.

Consumers want to take part in creating their own experiences. If you look at the breakout successes of the past few years, such as the iPod, all have created an “experience platform” – a place in which the customer is empowered to create an individualized experience, perfectly suited to his or her needs.

And customers want to participate in making the choices themselves – they don’t want companies to make these decisions for them.

Innovation is not necessarily innovation in technology. Innovation comes from the ability to personalize an experience. The iPod did not present new technology. Its success is derived from an entire package of products, services and content that enabled owners to personalize their own experience.

Look at the success of MyPage in Google. I can create my own news page with news specifically suited to me. I can have cricket news from the BBC, business news from the Wall Street Journal, weather for my home town, and so on.

Or look at the success of Build-a-Bear. To be sure, Toys’R'Us has dozens of different teddy bears to choose from. But by allowing a child to visit a shop with hundreds of bear-building options, it is more likely that the child will end up with “her bear”- the perfect bear. The shop is a platform for experience creation.

A Shift in Enterprise IT Needs

Build-a-Bear. OnStar. iPod. Amazon.com. Google. eBay. These companies are illustrative of the new way consumer companies are creating and building value for their customers. At the same time, thousands of other companies seek to emulate their success by offering experiences delivered through “experience platforms.”

The question is: can the information technology of these companies handle it?

In most cases, it cannot.

IT systems must graduate from being transaction-oriented to being event-oriented. Vendors must create these event-based systems with real-time response capabilities and managers who are trained to respond in real-time as well.

For example, with OnStar, the functioning of the engine can be monitored in real time. If there is an accident, it doesn’t help to respond three days later.

Next-generation offerings mean companies will need to work collaboratively with a wide range of vendors who may start with incompatible IT systems. OnStar is the largest reseller of wireless minutes. It does not own the carrier but it must make the relationship work seamlessly.

Savvy companies will succeed in offering these elements of the customer experience by building a network of relationships with – not ownership of – preferred vendors. These relationships will not be driven by ownership and control but by access and influence. That means IT vendors must help them work with a wide variety of vendors and a wide variety of components, all delivered to provide a unified experience for the consumer.

The challenge for companies to provide customized products is significant. Consider the case of a single mother in Pikes Peak, Colorado. As an OnStar customer, the system knows where she typically drives and also knows the weather service is predicting a blizzard for the area.

The system can respond and alert her individually – despite the fact that the service is monitoring the needs of millions other customers. There is tremendous technology behind the ability to deliver this service: database management, improved data structures, compatibility, interoperability, real-time response, analytics and so on..

Opportunities for Technology Vendors

At a time when personalization, flexibility and scalability are key considerations for enterprises, the entire IT industry must redirect its focus to the areas which matter most for businesses.

  • Interoperability – Much attention is focused on open source. While many consider the greatest value of open source is that it is “free,” the reality is that the main advantage of open source is its interoperability. Is the industry putting enough energy behind delivering on open source’s potential for interoperability and transparency?
  • Large Databases – Ten terabytes used to be considered a large database. Today, WalMart is working with approximately 500 terabytes-worth of data. There is a huge opportunity to increase the size and speed with which data is accessed. These systems must go beyond providing decision tools to providing more sophisticated analyses. They must perform data mining and understand behaviors through analytical models – both industry-oriented and strategy-oriented. There is a huge opportunity for application developers to be analytically focused.
  • Simple Interfaces – Whether for an on-demand application, a database or a large network, there is a huge opportunity to improve user interfaces. Increasingly, people with less experience or lower-level skills will be using the systems. Software vendors must work to create less-complex user interfaces, ones not dependent on language skills, yet functional enough to deliver productivity to users with higher skill sets as well. Take OnStar. You press a button and hear a human voice. There is no training required.
  • Business Processes – Dell can turn over its inventory 100-times during the same time that HP converts 10-15-times. UPS can handle packages so efficiently that it created a new industry called “logistics.” FedEx invites customers into its operations to gather critical data. The common thread for these competitive advantages is that they are all driven by business processes. These companies have leveraged a deep understanding of their business operations and converted it into a competitive weapon. Technology to automate these areas will be critical in the coming years.

Implications for Software Vendors

Everyone in the IT industry has the opportunity to capitalize on these opportunities if they can adopt a new mindset of innovation similar to that of their customers.

There is a tendency for the large software vendors to deliver products that are “hard wired.” They connect to legacy systems and deliver innovation slowly, rolled out across large installed bases – so slowly, in fact, that most software vendors would not be considered “innovative” by their customers today.

This need to protect their installed base is slowing innovation. As consolidation between vendors continues, the need to demonstrate operational efficiencies is often not translating to dynamic, innovative offerings from the ever-larger vendors. There is too much fear of “rocking the boat.”

Software vendors can reverse this perception by co-creating value for their customers. By working closely with their customers and responding to their individual needs they can become innovative: Demonstrating clear returns-on-investment (ROI) – not just in monetary terms but in tangible business results as well, speeding implementation, working with business units on R&D for new initiatives, building products which can leverage legacy assets. These are just a few of the ways in which a software vendor can become an innovation partner.

Connectivity, intelligent products, increased choice and consumer activism will drive the nature of business for years to come. Business processes and IT infrastructure and systems must combine for an extremely flexible, response-driven, real-time enterprise. Software vendors must adopt an innovative, flexible mindset in order to deliver products that will drive their customers’ success in the years to come.

Dr. CK Prahalad is currently no. 3 on the list of the world’s most influential management gurus. He is the Paul and Ruth McCracken Distinguished University Professor of Corporate Strategy at the University of Michigan Ross Business School, in Ann Arbor. CK is author of Competing for the Future, The Future of Competition and most recently, The Fortune at the Bottom of the Pyramid. CK is also founder and CEO of The Next Practice, a business advisory firm.

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