Frank Piller's Web Site on Mass Customization & Open Innovation

Glossary: Mass Customization, Open Innovation, Personalization and Customer Integration

Mass customization refers to a customer co-design process of products and services which meet the needs of each individual customer with regard to certain product features . All operations are performed within a fixed solution space, characterized by stable but still flexible and responsive processes. As a result, the costs associated with customization allow for a price level that does not imply a switch in an upper market segment.

Some more discussion of the main points of this definition:

• Customer co-design: The genus of mass customization is customer co-design. Customers are integrated into value creation by defining, configuring, matching, or modifying an individual solution. Customization demands that the recipients of the customized goods transfer their needs and desires into a concrete product specification. Different to a do-it-yourself (DIY) setting (i.e. autonomous creation activities of consumers), this is done in a mode of interacting with the manufacturer who is responsible for providing the custom solution (“co-creation”, Ramirez 1999). Co-design activities are performed in an act of company-to-customer interaction and cooperation. Without the customers' deep involvement, the manufacturer would be unable to adequately fill each individualized product demand. In my understanding, co-design is the core element that differentiates mass customization from other strategies like agile manufacturing or postponement strategies in the distribution chain. Customer co-design in a mass customization context establishes an interaction between the manufacturer and customer which offers also possibilities for building up a lasting relationship. Once the customer has successfully purchased an individual item, the knowledge acquired by the manufacturer represents a considerable barrier against switching suppliers.
• Meeting the needs of each individual customer: From a strategic management perspective, mass customization is a differentiation strategy. Customers gain from customization the increment of utility of a good that better fits to their needs than the best standard product attainable. The larger the heterogeneity of all customers' preferences, the larger is this gain in utility. From a managerial point of view, customization can be carried out with regard to fit, style, and functionality . To match the level of customization offered by a manufacturer with the customers' needs becomes a major success factor.
• Stable solution space: The space within which a mass customization offering is able to satisfy a customer's need is finite. A successful mass customization system is characterized by stable but still flexible and responsive processes that provide a dynamic flow of products. Value creation within a stable solution space is the major differentiation of mass customization versus conventional (craft) customization. A traditional (craft) customizer re-invents not only its products but also its processes for each individual customer. But a mass customizer uses stable processes to deliver high variety goods.
• Adequate price and cost level : Mass customization practice shows that consumers are frequently willing to pay a price premium for customization to reflect the increment of utility they gain from a product that better fits to their needs than the best standard product attainable But mass customization goods are still targeting the same market segment that was purchasing the standard goods before. Traditionally, craft customization is related to price premiums of such an extent that it targets a completely different market segment. Premiums of mass customization offerings may be substantial, but have to be still affordable.

See also the discussion of the definition of mass customization in No 1 / 2003 of our Newsletter. Some excamples of mass customization can be find in these introduction texts

Open innovation describes collaboration for innovation within networks of firms and external entities like customers, retailers, suppliers, competitors, universities, and other research labs. It is opposed to the conventional model of closed innovation taking place just within the boundaries of a manufacturer. Open innovation in the understanding of my research and this web site is focused on cooperation between manufacturers and customers and users.

The main benefit of open innovation is to capture the large base of information and knowledge about needs, applications, and solution technologies that resides in the domain of the users of a product or service. Analogous to the open source idea, users can build upon other users contributions or collaborate with other users to develop a final product without the help of a manufacturer. If user interaction platforms also provide features for consumer-to-consumer interaction in online communities, powerful user networks around a core product can be established.

A major instrument to enable open innovation are toolkits for user innovation and co-design. Von Hippel (2001) defines toolkits for user innovation as a technology that (1) allows users to design a novel product by trial-and-error experimentation and (2) delivers immediate (simulated) feedback on the potential outcome of their design ideas. The idea is to build and operate platforms where (communities of) customers and users create, develop, and discuss new products and services with the objective to capture the joint creativity and knowledge of both the company and its customers. The result shall be innovative products and service that better meet the requirements and needs of their users. Some very complex toolkits offer a large solution space and can not be employed without a precise technical understanding. They depend upon the customer taking on a very active role as designer and allow substantial innovations. Most of them are employed in B2B settings where the economic benefits of toolkits are apparent in many situations. Other toolkits, particularly in consumer markets, only offer a small solution space and only allow users to combine relatively few options. Although the underlying principle is the same, the latter toolkits focus on individuality and customization rather than on innovation.

More information and some examples of open innovation can be find in these introduction texts

Both mass customization and open innovation integrate the customers deeply into a firm's systems of value creation. Customer integration describes a mode of value creation in which customers are taking part in both operational and innovational value creating activities which used to be seen as the domain of the firm. This co-creation builds the basis for a voluntarily cooperation between both actors, which is driven by specific (not compulsory coherent) motives of both parties

We argue that customer integration can supplement traditional economics by a new set of economies resulting from the integration of each customer into value creation. We call this effect 'economies of integration'. Economies of integration arise from postponing some activities until an order is placed, from more precise information about market demands, and from the ability to increase loyalty by directly interacting with each customer.

Personalization must not be mixed up with customization. While customization relates to changing, assembling or modifying product or service components according to customers' needs and desires, personalization involves intense communication and interaction between two parties, namely customer and supplier. Personalization in general is about selecting or filtering information objects for an individual by using information about the individual (the customer profile) and then negotiating the selection with the individual.

Thus, personalization compares strongly to recommendation: From a large set of possibilities, customer specific recommendations are selected. From a technical point of view, automatic personalization or recommendation means matching meta-information of products or information objects against meta-information of customers (stored in the customer profile). Personalization is increasingly considered to be an important ingredient of Web applications. In most cases personalization techniques are used for tailoring information services to personal user needs.

A good example of both customization and personalization is provided by Lands' End, a catalog retailer. The company is a pioneer of exploring personalization techniques on the Internet and has been using a virtual model and recommendation service on its web site since 1999. The system recommends a customized bundle of standard mass products matching each other and the customers' style profile. This service provides customers with a set of coherent outfits rather than with isolated articles of clothing. But each product is still a standard product.

In 2001, Land's End also introduced mass customization. Customers can order made-to-measure trousers and shirts. All products are made to order in a specially assigned factory. The company offers a substantial number of design options and varieties. However, this customization process is not supported by personalization. A consumer has to know by herself which style, waistline and length suits her best. The configuration toolkit used by Land's End does not provide any information or consultancy. For this company, personalization as performed for (almost ironically) standard products would only provide real additional benefit for the mass customization operations. Combining personalization with customization would empower a customer without the knowledge of a tailor to customize a product more easily.