Interactive Value Creation - Mass Customization

About “Testing the Value of Customization: When Do Customers Really Prefer Products Tailored to Their Preferences?”


Essay, 2011

18 Pages, Grade: 2,0


Excerpt

Table of Contents

List of figures and tables

1. Introduction

2. Paper review: Franke et al. (2009)
2.1. Aim, motivation and positioning
2.2. Interactive Value Creation - Open Innovation and Mass Customization
2.3. Experimental model
2.3.1. Hypotheses
2.3.2. Procedure and sample
2.3.3. Findings
2.3.4. Evaluation of the methodology

3. Comparison

4. Conclusion and outlook

Bibliography

List of figures and tables

Figure 1: Hypotheses. Source: Own design; based on Franke et al. (2009), p. 105

Figure 2: Benefit gain as per WTP. Source: Own design; based on Franke et al. (2009),

Table 3, p.115; Franke et al. (2010), Figure 2, p.32

Table 1: Some literature with related issues to Franke et al. (2009)

1. Introduction

Due to the shift from seller to buyer markets in recent times, where instead of productivity and cost efficiency now other goals like quality, time and flexibility become more important, firms have to react. Furthermore, availability of modern information and communication technologies, notably the internet and the resulting market transparency enhances the bargaining power of customers. Along with globalization, shorter product life cycles, a wide variety of variants and increasing market saturation firms are confronted with highly competitive global markets. Therefore, it is all the more crucial that companies distinguish themselves in the market to succeed. An extremely important point in this context is the ability of firms to innovate. Only with innovative and marketable products a company can survive in a market in the long-term. To ensure innovativeness that is strongly linked with competitive advantage, sustainability and long term profitability firms are increasingly in search of new sources.

Customer co-creation, customer integration, user innovation, open innovation and
mass customization are just some terms behind which a new paradigm in technology and
innovation management is hidden. The accurate umbrella-term for all these concepts is
“interactive value creation”. Firms, most notably in the last four decades1, recognized that external actors, especially customers and users, are a crucial source for innovative knowledge.

Accordingly interactive value creation means the active integration of customers and users in the value creation process within a firm, so far mainly performed internally. In this regard, interactive value creation is primarily divided in two basic types: open innovation and mass customization (product individualization).2 Whereas, put simply, open innovation targets the innovation of new products by opening the innovation process to external actors, mass customization implies the development of individualized products. Within this thesis the focus lies particularly on mass customization.

The aim of this work is to provide a review of the research paper by Franke et al.
(2009) and position it into the relevant research domain while comparing with some pertinent papers. In the following sections, first the paper will be presented by outlining the aim of and motivation for the research, then the positioning in the literature and afterwards I will screen relevant concepts and methods of interactive value creation. The next step, then, aims to describe and evaluate the methodology of the authors. Before finishing with a conclusion and outlook, the paper by Franke et al. will be compared with some selected other publications.

2. Paper review: Franke et al. (2009)

2.1. Aim, motivation and positioning

While in the past, research has predominantly shown that strategy of customization and so individualized products offer new opportunities and great merits for companies, some recent failures left room for objections.3 In addition, although some empirical studies emphasize the benefit increase of customized products, there are also some investigations, which strengthen the opposite. However, the latter findings may not appear self-evident at first sight. Why should not products tailored to individual needs and preferences of customers allow to draw much more benefits out of that product?

One possible strong argument, as known in appropriate literature by the term “sticky information”, indicates one of the reasons for the complex handling of customization strategy, which is, certainly in combination with some other factors, responsible for known recent failures in industry. The term of sticky information, originated by von Hippel (1994), relates to the problem-solving process of an innovation, where both need information, located at customers, and solution information, to be found at manufacturers, are required. The former includes among others information about wishes, preferences and buying motives, whereas the latter relates to technological problem-solving capabilities.4 According to von Hippel information is sticky, if it is “costly to acquire, transfer and use.”5 There are some reasons for this. First, information can be tacit, this means, hard to put into words.6 Then, the organization that needs information can lack the ability and the skills to get it or else the customer lacks the ability to express his/her information (e.g. preferences) correctly.7 As a result, the individual product based on the expressed preferences does not match to the real preferences of the customer and includes an error term. The last mentioned point also delivers an explanation that in some cases products adapted to average preferences may provide a higher benefit than customized products.8

Besides these arguments, no research is conducted in literature so far that provides representativity and a general validity and additionally examines the contribution of individual preference aspects.9

The aim of Franke et al. (2009), thus, the central research question based on the above motivation, is to investigate systematically, whether there is an increased benefit for customers by consuming customized products. Doing so, they aim to feed the mass customization research literature with a broad and representative study that draws a direct comparison between mass customization and the opposite market cultivation strategies segmentation and mass marketing and in so doing it allows some general implications. In order to achieve this purpose, they conduct a study with integrating different products, those customization is pretty realistic. Withal, they particularly take into account the moderating effect of three conditional variables on the gained benefit, namely preference insight, preference express ability and product involvement, and so, enrich the inquiry domain with the aspect of individual characteristics of customers.

As the paper is mainly positioned as a contribution to the mass customization literature, in the following some relevant basic concepts and characteristics will be outlined to create a common understanding for this thesis.

2.2. Interactive Value Creation - Open Innovation and Mass Customization

As stated above, the innovation process can be characterized by two different types of information that has to be brought together ideally: need and solution information. Traditionally, need information is sought outside - means not necessarily through interactive integration of customers- and solution information inside the companies’ boundaries.

Facilitated by the given new technological possibilities, the pursuit of opening the innovation process to external actors, like universities, experts, research labs and consumers enables the companies to get access to need information and even to solution information, and in this way to improve their performance of the innovation process. This means that an undefined network of actors is addressed consciously by the company to contribute actively to defined problems that are solved by internal staff before. The aim is to be admitted to the required information by overcoming two fundamental challenges in the context of innovation, namely the previously mentioned sticky information, located at customers’ side, and the problem of local search bias. The latter means that if innovation solely happens inside the own firm, researchers and developers tend to concentrate only on their knowledge within their research domain and as a consequence the input for the innovation process is derived from their tunnel vision.10 The customer is the most substantial resource in the context of the interactive process of exchange.11 This so-called interactive value creation is also described as crowdsourcing by Jeff Howe, he states the outsourcing of a task to the crowd as crowdsourcing.12

If interactive value creation refers to the creation of a new product and so the innovation process itself, it is taken to mean open innovation. In this context, it is in particular the lead user who creates new ideas. According to Urban / von Hippel (1988) lead users are characterized by their present strong needs that will become general in a marketplace some time later.13

But it is the operational production process where the customers are integrated in the value creation, this is called mass customization. In-depth mass customization bears on providing personalized and customized products for individual customers, whereby the customers become co-designers in the design process, but the product is still produced near mass production costs and efficiency.14 As a result, mass customization allows the ordinary customer to get a product that has been manufactured due to his/her own unique needs and preferences at an affordable price near to a comparable mass production price.

Generally, the higher the preference fit and so the expected value, the higher is the willingness to pay (WTP) for that product.15 This implies that customers know what their preferences are and in the second step how they can articulate these appropriately. However, as theory and practice show this is not the case, the authors Franke et al. consider inter alia the mediating effect of it.

2.3. Experimental model

To analyze the value of customization empirically the authors conducted two independent studies by using different products and let compete customization with segmentation and mass marketing. For this purpose they formulated five hypotheses. In the following section these and the underlying variables will be presented.

2.3.1. Hypotheses

As it is assumed, tailored products meet customized needs and therefore create higher benefits for the individual. Furthermore, the closer the product comes to these needs and preferences the higher is the benefit. But the authors assume that the intensity of the benefit depends on three aspects. The better the preference insight, the ability to express these preferences and the product involvement, the higher the individual benefit gain out of the customized product. As so often in literature, benefit is measured by the WTP regarded as the maximum price one is willing to pay for a product. So as not to consider only one aspect, the authors also include the purchase intention and the attitude toward the product as a measurement for benefit.

illustration not visible in this excerpt

Figure 3: Hypotheses. Source: Own design; based on Franke et al. (2009), p. 105.

2.3.2. Procedure and sample

The hypotheses were then tested in two different studies with different products and a different methodological approach. The first study included only one single product, namely the newspaper and was presented to the participants in three variants according to the three strategies of market cultivation, whereas the second study was conducted with newspapers again and additionally four completely other product categories- fountain pens, kitchen, skis and cereals.

[...]


1 For further research see for instance von Hippel (1976), Urban / von Hippel (1988).

2 Piller / Reichwald (2009), p.9.

3 For example, the approaches to customization of Levi Srauss’ “Original Spin” and Mattel’s “My Design Barbie” miscarried. Franke / Piller (2004), p.5.

4 Piller / Reichwald (2009), p. 63.

5 Von Hippel (1994), p. 2.

6 Ibidem, p. 3.

7 Ibidem, p. 5f.

8 Franke et al. (2009), p. 104.

9 Franke et al. (2009), p. 104.

10 Piller / Reichwald (2009), p. 67.

11 Ibidem, p.1, 45f.

12 Howe (2006).

13 Urban / Von Hippel (1988), p. 570.

14 Piller / Reichwald (2009), p. 225f.

15 Ibidem, p. 90, 257f.

Excerpt out of 18 pages

Details

Title
Interactive Value Creation - Mass Customization
Subtitle
About “Testing the Value of Customization: When Do Customers Really Prefer Products Tailored to Their Preferences?”
College
RWTH Aachen University
Grade
2,0
Author
Year
2011
Pages
18
Catalog Number
V170870
ISBN (eBook)
9783640900763
ISBN (Book)
9783640900848
File size
834 KB
Language
English
Notes
Paper Review zu “Testing the Value of Customization: When Do Customers Really Prefer Products Tailored to Their Preferences?” (Franke et al. 2009)
Keywords
Mass Customization, Tailored Product, Individualized Product, Open Innovation, Interactive Value Creation, Willingness to pay, Individual Customer
Quote paper
B.Sc. Yasemin Sari (Author), 2011, Interactive Value Creation - Mass Customization, Munich, GRIN Verlag, https://www.grin.com/document/170870

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