Collaborating to Create. SAWHNEY. REFERENCE

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MOHANBIR SAWHNEY, GIANMARIO VERONA, AND EMANUELA PRANDELLI

© 2005 Wiley Periodicals, Inc. and Direct Marketing Educational Foundation, Inc.

JOURNAL OF INTERACTIVE MARKETING VOLUME 19 / NUMBER 4 / AUTUMN 2005

Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/dir.20046

n the networked world, firms are recognizing the power of the Internet as

a platform for co-creating value with customers.We focus on how the Internet

has impacted the process of collaborative innovation—a key process in value

co-creation.We outline the distinctive capabilities of the Internet as a platform

for customer engagement, including interactivity, enhanced reach, persis-

tence, speed, and flexibility, and suggest that firms can use these capabilities

to engage customers in collaborative product innovation through a variety of

Internet-based mechanisms. We discuss how these mechanisms can facilitate

collaborative innovation at different stages of the New Product Development

process (back end vs. front end stages) and for differing levels of customer

involvement (high reach vs. high richness).We present two detailed explorato-

ry case studies to illustrate the integrated and systematic usage of Internet-

based collaborative innovation mechanisms—Ducati from the motorbike

industry and Eli Lilly from the pharmaceutical industry.We derive implications

for managerial practice and academic research on collaborative innovation.

I MOHANBIR SAWHNEYis the McCormick Tribune Professor

Technology at the Kellogg School of

Management, Northwestern

University; e-mail: mohans@kellogg.

northwestern.edu

GINAMARIO VERONAis an Associate Professor of

Management at Bocconi University

and Senior Lecturer at SDA Bocconi

School of Management, Milan, Italy;

e-mail: gianmario.verona

@sdabocconi.it

EMANUELA PRANDELLIis an Associate Professor of

Management at Bocconi University

and Senior Lecturer at SDA Bocconi

School of Management, Milan, Italy;

e-mail: emanuela.prandelli@

sdabocconi.it

COLLABORATING TO CREATE:

THE INTERNET AS A PLATFORM

FOR CUSTOMER ENGAGEMENT

IN PRODUCT INNOVATION

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2 JOURNAL OF INTERACTIVE MARKETING

INTRODUCTION

In an increasingly dynamic business environment,firms are realizing the importance of collaboration forcreating and sustaining competitive advantage.Collaboration with partners and even competitors hasbecome a strategic imperative for firms in the net-worked world of business (Brandeburger & Nalebuff,1996; Gulati, Nohria, & Zahere, 2000; Iansiti &Levien, 2004). More recently, scholars in strategy andmarketing have focused on collaboration with cus-tomers to co-create value (Prahalad & Ramaswamy,2004; Thomke & von Hippel, 2002). While collabora-tion with customers can span several businessprocesses, one of the most important is collaboratingto create value through product innovation.

In this paper, we examine how the Internet can serveas a powerful platform for enabling collaborative inno-vation with customers. While customer interaction hasalways been important in new product development(von Hippel, 1988), the widespread deployment of theInternet has greatly enhanced the ability of firms toengage with customers in the product innovationprocess (Dahan & Hauser, 2002). By creating virtualcustomer environments (Nambisan, 2002), firms cantap into customer knowledge through an ongoing dia-logue (Sawhney & Prandelli, 2000). The Internetenhances the ability of firms to engage customers incollaborative innovation in several ways. It allowsfirms to transform episodic and one-way customerinteractions into a persistent dialogue with customers.Through the creation of virtual customer communi-ties, it allows firms to tap into the social dimension ofcustomer knowledge shared among groups of cus-tomers with shared interests. And it extends the reachand the scope of the firm’s customer interactionsthrough the use of independent third-parties to reachnon-customers—competitors’ customers or prospectivecustomers.

Firms can use a variety of Internet-based mecha-nisms to facilitate collaborative innovation. Thesemechanisms differ in terms of the stage of the newproduct development process that they are most use-ful for, and the nature of the customer interactionsthey enable. While optimistic claims abound on howbest practice firms are leveraging the Internet to con-nect with customers, there is little formal research oncollaborative innovation. We take a first step in thisarea by identifying several Internet-based mecha-

nisms for collaborative innovation. We presentdetailed case studies to show how best-practice firmsare using these mechanisms to improve the speed,cost, and quality of their new product developmentprocess. Through these in-depth case studies, wederive lessons for organization and strategy, as wellas the implications for academics and managers.

The paper is organized as follows. We begin by con-trasting traditional perspectives on customer involve-ment in the new product development process withthe emerging perspective on customer collaborationin virtual environments. Next, we describe a numberof Internet-based mechanisms for engaging cus-tomers in product innovation, and highlight the rele-vance of these mechanisms at different stages of theproduct innovation process, and for different levels ofcustomer involvement. We then present two casestudies of best practice firms that have implementedsome of these mechanisms—Ducati Motor from themotorcycle industry, and Eli Lilly from the pharma-ceutical industry. We conclude by summarizing impli-cations for academics and managers.

CUSTOMER ENGAGEMENT IN PRODUCT INNOVATION:THE TRADITIONAL PERSPECTIVE

In literature and in practice, product innovation isgenerally conceptualized as a five-stage New ProductDevelopment (NPD) process—ideation, concept devel-opment, product design, product testing, and productintroduction (e.g., Ulrich & Eppinger, 2003; Urban &Hauser, 1993). Firms use varied techniques to solicitcustomer input in order to create better new productsfaster. In the front-end stages of the NPD process(ideation and concept development), firms use marketresearch techniques like focus groups, customersurveys and quantitative techniques like conjointanalysis to create, test, and refine new productconcepts. At later stages in the NPD process, firmsuse quality function deployment, prototyping, producttesting, and test marketing to design and improveproducts and marketing strategies for new productintroduction (Urban & Hauser 1993).

While firms have always sought to hear the “voice ofthe customer,” customers have traditionally tended toplay a passive role as recipients of the firm’s innovationactivities. Firms seek to improve fit between their

Journal of Interactive Marketing DOI 10.1002/dir

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offerings and customer needs by surveying customersand importing knowledge from leading-edge customersinto the firm (von Hippel, 1988). Drivers of the firm’sinnovation success include the firm’s market sensingability (Day, 1994), effective R&D and manufacturingroutines (Hayes, Wheelwright, & Clark, 1988) and theright balance of organizational competences (Verona,1999). The traditional perspective on customer engage-ment implicitly views value creation and innovation asa firm-centric activity, with most information flowingin a one direction from the customer to the firm(Prahalad & Ramaswamy, 2004). When customers areviewed as passive recipients of innovation, the firm hasa limited understanding of customer knowledge devel-oped within their specific contexts of experience; andthere is little emphasis on iterative dialogue to refineand enhance ideas. Further, if one excludes costly toolslike participant observation (Leonard & Rayport,1997), there is little opportunity to engage communi-ties of customers to tap into the social aspects of knowl-edge. Finally, the firm tends to be biased towards lis-tening to its current customers, and even among these,to its most important customers.

CUSTOMER ENGAGEMENT IN VIRTUAL ENVIRONMENTS:THE CO-CREATION PERSPECTIVE

The Internet is an open, cost-effective and ubiquitousnetwork (Afuha, 2003). These attributes make it aglobal medium with unprecedented reach, contribut-ing to reduce constraints of geography and distance(Cairncross, 1997). Further, the Internet potentiallyallows firms to overcome the trade-off between rich-ness and reach because it is interactive in nature(Evans & Wurster, 1999). In the physical world, com-municating (and absorbing) rich information requiresphysical proximity or personal interactions with cus-tomers. These constraints limit the number of cus-tomers that the firm can dialogue with. On the otherhand, the firm can interact with a large number ofcustomers through customer surveys, but this type ofinteraction does not allow for a rich dialogue.However, Internet-based virtual environments allowthe firm to engage a much larger number of cus-tomers without significant compromises on the rich-ness of the interaction.

Virtual environments also increase the speed and thepersistence of customer engagement. Due to cost and

effort limitations, traditional market research tech-niques like focus groups and surveys are limited interms of the frequency with which firms can engagewith customers, and the time taken to solicit cus-tomer input. In virtual environments, customer inter-actions can happen in real-time, and with a muchhigher frequency. The physical and cognitive effortneeded for the firm as well as customers is far lowerin virtual environments, so the interactions can bemore frequent and more persistent. The key con-straint is the willingness of customers to participatein interactions and privacy concerns that may limitthe depth of information that customers may be will-ing to share with the firm.

Virtual environments also enhance the firm’s capaci-ty to tap into the social dimension of customer knowl-edge, by enabling the creation of virtual communitiesof consumption (Kozinets, 1999). Customers self-select themselves and participate in spontaneous con-versations. This makes them highly involved in ajoint experience of co-creation. Finally, the Internetincreases the flexibility of customer interactions: cus-tomers can vary their level of involvement over timeand across sessions. For instance, customers partici-pating in a discussion group or a community canchoose their level of involvement (Hagel & Singer,1999; Hoffman & Novak, 1996). Firms can allow cus-tomers to interact with them at different levels ofcommitment based on their interests and perceivedpayoffs from interaction, and they can modify theirlevel of participation as their commitment increasesover time.

The extended reach, enhanced interactivity, greaterpersistence, increased speed, and higher flexibility ofvirtual environments combine to produce three keybenefits for collaborative innovation with customers:(a) the direction of communication; (b) the intensityand richness of the interaction; and (c) the size andscope of the audience (Table 1).

The direction of interaction evolves from one-wayknowledge import to an interactive dialogue. Thistwo-way dialogue helps firms to progressively learnabout and learn from individual customers andgroups of customers. The richness of the interactionincreases because virtual communities of customershelp firms to tap into social knowledge in addition toindividual customer knowledge. Virtual customercommunities allow the firm to immerse itself into the

COLLABORATING TO CREATE: THE INTERNET AS A PLATFORM FOR CUSTOMER ENGAGEMENT IN PRODUCT INNOVATION 3


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experiential contexts of customer consumption on anongoing basis, rather than on an episodic basis thatcharacterizes traditional ethnographic customerresearch. Further, the size and scope of the audienceincreases because the firm can participate in interac-tions mediated by third parties that are able to reachnon-customers or prospective customers who may nothave any relationship with the firm, or may perceivethe firm as having a biased point of view. In summary,virtual environments augment customer collaborationby helping firms to engage customers in conversationsrather than knowledge import, to gather individual aswell as social knowledge, and to involve customersdirectly as well as through third-party mediators.

MAPPING INTERNET-BASEDCOLLABORATION MECHANISMS TO THE NPD PROCESS

Internet-based collaboration mechanisms can bemapped to the NPD process based on two importantdimensions—the nature of customer involvement thatis needed, and the stage of the NPD process at whichthe customer involvement is desired. In terms of thenature of customer involvement, Internet-based col-laboration mechanisms can be classified into mecha-nisms that emphasize reach versus mechanisms thatemphasize richness of the interaction. While the

reach-versus-richness trade-off is not as severe on theInternet as it is in the physical world, it still is a deci-sion that the firm needs to make. The firm may wantto emphasize richness over reach if it is interested ingenerating ideas and insights, while it may valuereach over richness if it is interested in validatinghypotheses with a representative sample of customers.Internet-based collaboration mechanisms may also beclassified in terms of their usefulness at differentstages of the NPD process: some mechanisms are morerelevant at the front-end stages of the process (ideageneration and concept development stages), whileothers are better applied to enhance the back-endstages of the process (product design and testing).Figure 1 shows a variety of Internet-based mecha-nisms classified on these two dimensions.

Mechanisms that are useful at the early stages of theNPD process include suggestion boxes where cus-tomers can contribute their own innovative ideas. Forinstance, Ben & Jerry allows customers to contributeideas for new products (prepackaged ice cream) aswell as services (especially packaging and distribu-tion) in a dedicated area called “Suggest-a-Flavor” onits Web site. Firms can also engage customers throughcustomer advisory panels to solicit customers’ feed-back on a systematic basis, such as those created byHallmark (the Hallmark Idea Exchange) and byProcter & Gamble (the P&G Advisors program). To


THE TRADITIONAL PERSPECTIVE— THE CO-CREATION PERSPECTIVE—

CUSTOMER ENGAGEMENT IN CUSTOMER ENGAGEMENT IN

PHYSICAL ENVIRONMENTS VIRTUAL ENVIRONMENTS

Innovation Perspective Firm-centric Customer-centric

Role of the Customer Passive—customer voice as an input to Active—customer as a partner

create and test products in the innovation process

Direction of Interaction One way—firm to customers Two way—dialogue with customers

Intensity of Interaction Spot—on contingent basis Continuous—back-and-forth dialogue

Richness of Interaction Focus on individual knowledge Focus on social and experiential knowledge

Size and Scope of Audiences Direct interaction with current customers Direct as well as mediated interactions

with prospects and potential customers

TABLE 1 Key Differences Between Customer Collaboration in Physical and Virtual Environments

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ooffmake suggestion boxes and customer advisory panelseffective, it is essential for the firm to establish clearrules regarding intellectual property rights, so thatthe company can use the innovative ideas suggestedby customers, while customers can benefit throughfinancial or non-monetary incentives. Well-designedincentives have been found to remarkably improvecollaborative idea generation (Toubia, 2004).

New product development at the early stages can alsobenefit from online virtual communities, which bringtogether users who have common interests andengage in online conversations to share their experi-ences with like-minded people (Hagel & Armstrong,1997; Kozinets, 1999). Virtual communities are a richsource of socially generated knowledge. This sociallygenerated knowledge provides insights that comple-ment the knowledge generated from individual cus-tomer interactions. These insights cannot be gleanedfrom one-on-one interactions with customers. To facil-itate customer participation in virtual communities,the firm may rely on intangible incentives like recog-nition and opinion leadership in consumer-orientedmarkets, while it may need to provide economic incen-tives in business-to-business market settings.

Members of virtual communities often show a highdegree of involvement and often even specific techni-cal competence—as in the case of communities of

video game enthusiasts (e.g., www.Idsoftware.com)and networking engineers (e.g., Cisco NetworkingProfessionals Forum). Reward mechanisms can alsobe introduced to encourage the most competent usersto compete in Internet-based innovation market-places to solve specific problems (Nalebuff & Ayres,2003). These marketplaces are typically hosted bythird parties, because of their ability to aggregatecommunities of experts. Examples of such innovationmarketplaces include HelloBrain (www.hellobrain.com), Experts Exchange (www.experts-exchange.com), NineSigma (www.ninesigma.com) and Yet2.com(www.yet2.com).

Turning to mechanisms that provide validation at thefront end of the NPD process, online surveys—thesimplest and most traditional use of the Internet forcollaborative innovation—are a popular tool (Burke,Rangaswamy, & Gupta, 2001). In the search for suc-cessful new product ideas, firms seek to reduce uncer-tainty by interacting directly with customers tounderstand their needs and preferences. Online sur-veys are most useful for understanding articulated orexplicit customer needs and in situations where thefirm can accurately identify target audiences for itsofferings. Firms can create online concept labs to testcustomer reactions to new products that are current-ly under development, as Volvo has done with itsVolvo Concept Lab (www.conceptlabvolvo.com). Andfirms can harness online market intelligence servicesthat monitor millions of blogs, Web sites, and bulletinboards to identify trends in customer behavior. Forinstance, firms like IntelliSeek (www.intelliseek.com)allow firms to monitor customer sentiment and cus-tomer buzz for specific product categories and brandsto uncover trends that may be useful for productdevelopment. Another technique that is useful at theearly stages is the technique of listening in (Urban &Hauser, 2004), which involves recording and analyz-ing information exchanged between individual usersand virtual experts who provide advice to help cus-tomers identify product concepts that best meet theirneeds. To the same end and with a higher degree ofaccuracy, consumers can be asked to make trade-offsamong attributes of new product concepts using Web-based implementations of conjoint analysis, as hasbeen done in industries ranging from cameras totoys (Dahan & Hauser, 2002). For instance, GeneralMotors has created a Web-based tool (www.autochoiceadvisor.com) that helps customers to



Mass customization of theproduct

Web-based prototyping

Virtual product testing

Virtual market testing

On line survey

Market intelligence services

Web-based conjoint analysis

Listening in techniques

Toolkits for users innovation

Open-source mechanisms

Web-based patent markets

Suggestion Box

Advisory panels

Virtual communities

Web-based idea markets

Information Pump

Applicability to Stage of New Product Development Process

Front-end(Ideation and Concept)

Back-end(Product Design and Testing)

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FIGURE 1Mapping Internet-Based Collaboration Mechanisms Based on Nature of Collaboration and Stage of NPD Process

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choose the right automobile for them, based on theirpreferences. This tool allows GM to collect quantita-tive data on customer preferences from hundreds ofthousands of customers on an ongoing basis, at verylow incremental cost. This data helps product develop-ers to understand how customer preferences are evolv-ing with changing market conditions, and can guidethe development and refinement of new concepts.

Moving to the later stages of the NPD process, virtualenvironments allow customers to directly participatein designing and developing new products. Toolkits foruser innovation can be created to exploit new technolo-gies such as computer simulation in order to makeNPD faster and less costly (Thomke & von Hippel,2002). For example, National Semiconductor offers anonline toolkit called Webench (webench.national.com),an online design environment for circuit designers.Using tools from the Webench site, circuit designerscan design and test new circuits, and can have proto-type power supply kits delivered anywhere in the worldin 48 hours. Customer toolkits can be expanded toallow customers to customize products and even devel-op them through mechanisms of repeated trial anderror. They can even be used to get customer sugges-tions on patents for finished products. And customertoolkits can be used by communities of customers tobuild upon designs that have been created by other cus-tomers, as in the case of designing new games formobile phones (Piller, Ihl, Fuller, & Stotko, 2004). Theconcept of peer-to-peer customer collaboration to devel-op new products concept has found its most significantexpression in the form of open-source mechanisms—communities run by and for the users that allow hun-dreds and even thousands of individual contributorsto collaboratively develop new products and services(von Krogh & von Hippel, 2003). In these systems,individual users do not develop the product by them-selves—as in the application of customer toolkits atthe individual level. Rather, they make small individ-ual contributions to a community-based developmenteffort.

Moving to mechanisms that facilitate validation atthe back-end stages of the NPD process, firms haveseveral options to engage customers to support prod-uct and market testing. The most advanced applica-tions involve mass customization of products(Randall, Terwiesch, & Ulrich, 2004), such as the per-sonalized sneakers that can be purchased on Nike’s

Web site. Digital environments can also significantlycontribute to simplifying and making the new producttesting stage more efficient before launching a prod-uct on the market, as Google does by beta testing newideas in the Google Labs section of its Web site. Web-based beta testing is very common in the software,e-commerce, and video game industries. New tech-nologies such as rapid prototyping, simulation, andcombinatorial methods make it possible to generateand test different product versions quickly and cheap-ly (Thomke, 1998). The Internet makes it possible tosimultaneously test different product configurations(virtual product testing) as well as different market-ing mixes to complement the supply (virtual markettesting) in order to choose the best solution withdirect collaboration of the end-customers (Dahan &Srinivasan, 2000).

CASE STUDIES ON INTERNET-ENABLED CUSTOMERCOLLABORATION IN PRODUCT INNOVATION

There is a paucity of academic literature on the expe-riences of firms that have successfully used theInternet as a platform for collaborative innovation.Hence, we adopt an exploratory approach to derivepatterns and implications. We follow the logic ofgrounded theory (Glaser & Strauss, 1967), by employ-ing a multiple-case-study methodology (Eisenhardt,1989; Miles & Huberman, 1994). In the tradition ofother qualitative approaches used in businessresearch, we rely on a small number of highly visibleexamples of the object of our inquiry to develop ourinsights (Pettigrew, 1990). The two companies westudy are a European firm in the automotive industryand a U.S. firm in the pharmaceutical industry. Weselected these companies because they are leading-edge practitioners of Internet-based collaborativeinnovation. The case studies were informed by in-depth interviews with senior managers and a detailedsearch of publicly available information from finan-cial statements, internal documents and industrypublications. Interviewees within each firm were cho-sen on the basis of their specialized knowledge andexperience, following a key informant approach(Kumar, Stern, & Anderson, 1993; Philipps, 1981). In-depth interviews with executives and managers wereconducted during 2003 and early 2004 at Ducati and


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Eli Lilly. The approach was nondirective, based onindividual semi-structured interviews (McCracken,1990) that are flexible yet are controlled (Burgess,1982). We used an open-ended approach to question-ing so that we could identify emergent themes in col-laborative innovation.

Ducati MotorIn the motorcycle industry, companies create compet-itive advantage not only based on technical productsuperiority, but also on their ability to interact withtheir customers and create deep customer relation-ships across the entire lifecycle of ownership.Motorcycles are a lifestyle-intensive product, somotorcycle companies need to foster a sense of com-munity among their customers in addition to offeringinnovative product features.

Ducati Motor, a manufacturer of motorcycles head-quartered in Italy, was quick to realize the potential forusing the Internet to engage customers in its new prod-uct development efforts. The company set up a Webdivision and a dedicated Web site, www.ducati. com, inearly 2000, inspired by the Internet sales of theMH900evolution, a limited-production motorcycle.Within 30 minutes, the entire year’s productionwas sold out, making Ducati a leading internationale-commerce player. Since then, Ducati has evolved itssite to create a robust virtual customer communitythat had 160,000 registered users as of July 2004.Community management has become so central atDucati that management has replaced the words “mar-keting” and “customer” with the words “community”and “fan.” Ducati considers the community of fans tobe a major asset of the company and it strives to usethe Internet to enhance the “fan experience.” Ducatiinvolves its fans on a systematic basis to reinforce theplaces, the events, and the people that express theDucati life style and Ducati’s desired brand image. Thecommunity function is tightly connected with the prod-uct development and the fan involvement in the com-munity directly influences product development.Ducati uses Web-based mechanisms to support rich aswell as broad customer engagement, at the front-endas well as at the back-end stages of its product devel-opment process (Figure 2).

Virtual communities play a key role in helping Ducatito explore new product concepts. Ducati has promoted

and managed ad-hoc online forum and chats for overthree years to harness to strong sense of communityamong Ducati fans. Over 200 messages are postedevery day on Ducati forums. The most popular discus-sion is about products and the biking experience.These conversations are highly relevant for Ducati tobetter understand customer needs and gain insightsinto new products and services. Ducati also realizedthat a significant number of its fans spend theirleisure time not only riding their bikes, but also main-taining and personalizing their bikes. As a result,Ducati fans have deep technical knowledge that theyare eager to share with other fans. To support suchknowledge sharing, the company has created the “TechCafè,” a forum for exchanging technical knowledge. Inthis virtual environment, fans can share their projectsfor customizing motorcycles, provide suggestions toimprove Ducati’s next generation products, and evenpost their own mechanical and technical designs, withsuggestions for innovations in aesthetic attributes aswell as mechanical functions. To support their ideas,they can attach text or graphics files. In the customerservice area of the Web site, individual bikers can self-signal their technical competencies and solve mechan-ical problems posted by other Ducati fans. Thesetechnical forums help Ducati to benefit from sponta-neous customer knowledge sharing, and help the com-pany to glean suggestions for improving its marketing,engineering, and customer support. They have alsosignificantly reduced the number of calls coming into



Mass customization of theproduct

Web-based product testing

Design Your Dream Ducati

Focalized contest

Ducati Garage Challenge

Virtual Teams

On line survey to improve theWebsite

Polls & feedback sessions

My Ducati

Virtual scenarios

Tech Café

Advisory programs supportedby product engineers

Ducati Service

Technical Forum & Chat




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FIGURE 2Ducati’s Internet-Based Collaborative Innovation Initiatives

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the company’s call centre, resulting in significant sav-ings on customer support.

While not all fans participate in the online forums,those who do participate provide rich inputs forexploring new product concepts and technical solu-tions. These forums also help Ducati to enhance cus-tomer loyalty, because its fans are more motivated tobuy products they helped to create. Ducati’s CEO hasmandated the involvement of all the company’s prod-uct engineers in customer relationship managementactivities. They are required to periodically interviewselected Ducati owners from the company’s onlinedatabase of registered fans—adding a physicaldimension to the online interaction. Ducati alsoattempts to go beyond its customer base in an effortgather ideas from as broad an audience as possible.Ducati community managers monitor relevant forumsand bulletin boards hosted on independent Web sites,such as the community of American Ducati fans host-ed on Yahoo!. Ducati community managers take partin these forums, sometimes identifying themselvesand remaining anonymous at other times, based onthe nature of the topics and the sensitivity of the audi-ence to privacy concerns. Ducati managers also moni-tor vertical portals created for bikers, includingMotorcyclist.com and Motoride.com; micro-sites thataggregate specific segments of interest to Ducati’s.These include sites that aggregate women bikers—the fastest growing demographic group in motorcy-cling—as well as “girlfriends, wives, and mothers ofDucati fans.” And Ducati monitors other virtual com-munities that have lifestyle associations with theDucati brand. For instance, Ducati has entered into apartnership with the apparel fashion company DKNYto tap into their community and interact with theirmembers. Through these diverse “listening posts,”Ducati tries to ensure that it expands its peripheralvision beyond its own customers, and beyond the cus-tomers it can reach directly by itself.

The ideas and insights that emerge from the mecha-nisms we describe are rich and creative, but they donot necessarily represent the preferences of thebroader market for Ducati products. To validate itsinsights, Ducati uses online customer surveys to testproduct concepts and to quantify customer prefer-ences. As a testimony to the ability of Ducati to createan ongoing customer dialogue and create a sense ofengagement with its fans, Ducati gets extraordinary

response rates, often in excess of 25% when it surveysits customers. Ducati uses customer feedback foractivities that go beyond product development. Thelayout and functions of Ducati’s Web site are shapedby customer feedback, and the guests for live chats onthe Web site are also chosen based on customer input.

To encourage customers to participate in online sur-veys, Ducati has created a sophisticated incentivesystem based on both tangible and intangible payoffs.For instance, every week Ducati launches a competi-tion called “Name the picture”: participants have toguess what part of the bike an image shows to enterthe “Hall of Desmohead-Fame.” In these events, tech-nical knowledge becomes a passport to enter a highlyqualified virtual community of fans. Ad-hoc surveysare also created to get feedback about specific prod-ucts and strategic directions for marketing activitieslike new product concept selection. For instance,three concepts for the new Ducati Sport Classic werepresented on October 2003 simultaneously at theInternational Exhibition of Tokyo as well as onDucati’s Web site. No engineering components hadbeen developed yet at that time. Fans were asked toprovide their feedback about the opportunity to pro-duce the new Sport Classic. Almost 15,000 answerswere collected in five days, with more than 96% rec-ommending the production of all the three models.Ducati’s new Web site, which went online inSeptember 2004, features a new registration formwhere fans can share personal information abouttheir experience with Ducati motorbikes and allowsthem to provide suggestions for accessories that cancomplement the biking experience. Similar featuresare also featured on the customized MyDucati pagesthat each fan can create and personalize.

Ducati also pursues Internet-based customer collabo-ration at the back end of its NPD process. Virtual com-munities play an important role at the product designand market testing stages. For instance, in early 2001,the community managers of Ducati.com identified agroup of customers on its Web site that had particular-ly strong relationships with the company. They decid-ed to transform such customers into active partners,involving them in virtual teams that cooperate withprofessionals from R&D, Product Management, andDesign of Ducati Motors. These virtual teams of cus-tomer work with the company’s engineers to defineattributes and technical features for the “next bike.”


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Through this mechanism, Ducati recognizes opinionleadership and provides recognition for members with-in its customer community. Contests are also used inorder to enhance and reward customer involvement.For instance, the company created a competition called“Design Your Dream Ducati,” where fans were chal-lenged to interpret in any form their “Dream Ducati,”by offering artistic as well as technical ideas. The win-ning ideas were selected by a team that included theCEO, the chief manager of the Design Department,and the Creative Director.

Future contests will focus on specific areas of interestfor the company, to solicit solutions to specific mechan-ical and aesthetic problems—a form of Web-based ideamarket. The company also plans to integrate its onlineand offline mechanisms for customer engagement. Forinstance, during the World Ducati Week (WDW), anannual gathering of Ducati fans from all over the worldin Italy, the company organizes the Ducati GarageChallenge. The purpose of this gathering is to allowbike owners to show how they transformed theirDucati based on their skills and creativity. In the 2004gathering, more than 20 motorcycles constructed byDucati were remodelled by the imagination of cus-tomers who worked in their workshops to transformtheir dreams into reality. The winners are selectedthrough votes cast by official Ducati riders, as well asby the company’s technical and styling directors.

Notwithstanding the origin of the “next bike,” all newproduct designs are reviewed and tested with a broad-er sample of customers. Ducati’s fans can surf thou-sands of pages illustrating the mechanical features ofDucati motorbikes. Within the virtual community,current and future Ducati bike owners discuss andreview proposed product modifications that can betested online in the form of virtual prototypes. Theycan even vote to reject proposed modifications. Theycan also personalize products to their preferences,and can ask Ducati technicians for suggestions onpersonalizing their bikes to their preferences. Toanswer such questions, the Internet division relies ontechnical experts within the company.

Eli LillyThe pharmaceutical industry relies heavily on innova-tion to sustain competitive advantage. The averagecost to discover and develop a new drug is more than

$500 million, and the average length of time fromdiscovery to patent is 15 years. Eli Lilly, anIndianapolis-based pharmaceutical firm, has createdan Internet-based platform to support collaborativeinnovation involving its customers—patients, doctors,clinicians, researchers, and health care providers. Thecompany employs more than 35,000 people worldwide,and markets medicines to treat depression, schizo-phrenia, diabetes, cancer, osteoporosis, and many otherdiseases in almost 140 countries. Like its competitors,Eli Lilly invests heavily in R&D, consistent with thephilosophy of its founder, who referred to research as“the heart of the business, the soul of the enterprise.”

In recent years, the company has sought to make itsinnovation processes more widely distributed byleveraging the Internet. In the late 1990s, the compa-ny created a new division, e.Lilly, dedicated to usingthe Internet to manage customer interactions withthe explicit purpose of supporting R&D activities.e.Lilly focused on engaging potential creative part-ners, including customers, in a dialogue to explorenew ideas and strategies for growth. e.Lilly aimed tocreate new and unanticipated connections amongpatients, doctors, and employees, because these con-nections facilitate creative solutions to innovationproblems. e.Lilly is responsible for two main streamsof Web-based activities—generation of new drugs andcreation of new patient solutions. Each stream ofactivities is pursued through a specific Web site andad-hoc mechanisms of customer engagement, selec-tively applied at the early stages and later stages ofthe innovation process (Figure 3).



Customization of treatmentsOn line polls & surveys

Feedback sessions with patients and doctors

Educational programs

Advisory programs withselected doctors

Supplier Diversity Development

Specialized customerforums

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FIGURE 3Eli Lilly’s Internet-Based Collaborative Innovation Initiatives

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In order to collaboratively explore new solutions toproblems of patients suffering from diseases, the com-pany invites them to participate in specialized forumswhere they can socialize their experiences and shareadvice. Ad-hoc forums allow the medical communityand patients affected by the same pathologies toengage in a shared experience of learning about a spe-cific health condition, while providing useful insightsto the company in order to creatively drive its ideageneration process.

To enhance its validation activities at the front end,Lilly educates and involves patients on a broaderbasis, through the corporate Web site (www.elililly.com) and its direct links to related Web sites,such as the Lilly Center for Women’s Health (www.lillywom enshealth.com). Patient involvement in ther-apy is enhanced through customized informationoffered on the Web and feedback sessions. The purposeis to empower patients to choose their personal treat-ment options by providing them with informationabout diseases as well as potential therapies. At thesame time, Lilly is able to generate valuable feedbackabout new product concepts from a representativesample of customers through online polls and surveys.

Eli Lilly also uses the Internet as a platform forinvolving scientists in the innovation process, bydirectly engaging them in innovation-related problemsolving. The company has created a venture calledInnoCentive (Innovation � Incentive) that functionsas a Web-based market where solutions to problemsare traded and participation is enhanced throughcompetitive problem solving. The purpose ofInnoCentive is to enable collaboration with lead usersand communities of experts who have expertise tosolve innovation related problems. InnoCentive postsscientific problems for solution by qualified scientists,without regard to geography, time zones, or back-ground. The InnoCentive.com Web site encouragesscientists to find problems that match their qualifica-tions and then work independently or collaborate tofind the best solution. InnoCentive allows Eli Lilly toengage experts from around the world on a contingentbasis to facilitate its R&D efforts. InnoCentive hasbeen spun off as an independent company, and it hasbroadened its mission to acting as an independentthird party that connects “solvers” with “seeker” com-panies in a variety of industries including biotechnol-ogy, agribusiness and consumer products.

A key issue in facilitating customer involvement ininnovation is the design of appropriate reward mecha-nisms for customers. In the case of InnoCentive, scien-tists are offered cash rewards that are explicitlydefined on the Web site. Scientists work and submitsolutions with the understanding that only the bestsolution will receive the financial award. InnoCentiveis a cost-effective, convenient, and speedy mechanismfor Eli Lilly to tap into the broad and rich base of dis-tributed knowledge among the world’s scientists. Itallows Lilly to expand its scientific research and devel-opment capacity, without adding to its employee costs.

To understand the power of this Internet-based dis-tributed innovation platform, consider an example ofan innovation challenge—to improve the manufactur-ing process of a chemical called 4-(4-hydroxyphenyl)butanoic acid. After Eli Lilly’s internal R&D organi-zation had spent 12 person-months of work on thisproblem, the result was a five-step process that need-ed expensive starting materials and produced lowyields. The goal was to devise a two-step process thathad a starting cost of less than $100 per kilogram andproduced a better yield. The problem was posted onInnoCentive’s site in June 2003. It soon received sev-eral submissions, including a promising approachsuggested by Werner Mueller, a retired senior scien-tist from Hoechst Celanese. At the end of November2003, Mueller’s fifth submission was accepted and hewas awarded $25,000 by InnoCentive. In less thanfive months, one scientist had solved a problem thathad eluded a team of researchers at Eli Lilly. By theend of 2004, more than 70,000 leading scientists andscientific organizations in more than 165 countrieshad registered to solve problems on InnoCentive’sWeb site. InnoCentive has also signed up several com-panies including BASF, Dow Chemical, and Procter &Gamble to post scientific problems confidentially onthe InnoCentive Web site.

Eli Lilly also engages its customers at later stages inthe NPD process. Doctors are engaged through advi-sory programs aimed at supporting continuous feed-back on specific solutions to selected pathologies, inorder to better anticipate market evolution and iden-tify the most appropriate period to launch a newtreatment on the market. An extension of these pro-grams has driven to the Supplier DiversityDevelopment (SDD), aimed at broadening participa-tion of minority and women-owned businesses—often


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managed by the same company’s clients, such asresearchers and clinicians—in the Lilly supplier baseto levels more reflective of the diverse business com-munity. And patients are involved in customizing thetreatments and therapies the company providesthem, based on their preferences and the specifics oftheir disease conditions. The basic drugs can be thesame, but the therapy is personalized case by case toreflect the individual history and experience.

DISCUSSION

The purpose of this paper was to highlight how theInternet can serve as a powerful platform for collabo-rative innovation with customers. While customerknowledge has always played a key role in managingproduct innovation, today’s competitive environmentdemands going beyond merely importing the “voice ofthe customer” through traditional market researchmechanisms. The Internet allows firms to engage cus-tomers more broadly, more richly, and more speedily.It allows firms to create ongoing customer dialogue,absorb social customer knowledge, and scan knowl-edge of potential or competitors’ customers. By estab-lishing direct, persistent, and interactive dialogue,the firm can access knowledge at low cost from indi-vidual customers as well as from communities of com-munities. In virtual environments, it can better selectlead users or, better, let them self select. In addition,the firm is neither constrained by geographicalboundaries nor by the boundaries of its served mar-kets in the selection of lead users.

While this exploratory inquiry needs to be followed upwith further empirical analysis, our study contraststhe traditional perspective on customer involvementin innovation against the emerging perspective of co-creation facilitated by the Internet. We illustrate howthe characteristics of the medium—interactivity,reach, speed, persistence, and flexibility—permitfirms to explore new frontiers in co-creation of value.We also outline a variety of Web-based mechanismsfor customer collaboration, and provide a frameworkfor classifying the mechanisms in terms of the natureof the collaboration (deep versus broad) and theapplicability to stages in the NPD process (front endversus back end).

Our case studies reveal three themes in Internet-based collaboration with customers to support new

product development, relating to (a) the absorptionand integration of complementary forms of knowledgethrough different mechanisms; (b) organizationaltransformation as a prerequisite for the success of col-laborative innovation and; (c) the emergence of medi-ators who facilitate collaborative innovation.

The first theme we observe is that the Internet shouldbe used as an integrated platform for engagingcustomers in multiple ways for different purposes.Both Ducati and Eli Lilly selectively use a diverseportfolio of Internet-based mechanisms to support dif-ferent stages of the NPD process, and to acquire dif-ferent types of knowledge. For instance, Ducati usesits virtual communities to enhance idea generationand tap into the competencies of lead users, but thenrelies on specific polls to verify the soundness of theseideas by involving larger numbers of customers to gen-erate successful “next bikes.” These polls achieveextraordinary response rates, because the sense ofbelonging to the community increases individual com-mitment and brand loyalty. A similar virtuous cycleenacts within the Eli Lilly Web site, where patientsdevelop trust and commitment towards the companybecause it provides them with information on theirspecific diseases, and committed customers, in turn,help the company to improve its treatments and,hence, further increase their loyalty. Eli Lilly’s abilityto integrate patients’ experiences shared in the forumshosted in its corporate Web site with the scientists’contributions through the InnoCentive venture playsan important role in defining new treatments and thebest approaches to marketing the treatments.

Internet-based mechanisms positively impact boththe content and process dimensions of knowledge tosupport new product development. On the contentdimension, knowledge-sharing processes at a sociallevel generate knowledge that is rooted in specificexperiential contexts. These virtual contexts allowthe firm to gain insights into socially generatedknowledge that would not be possible to glean usingtraditional research techniques. On the processdimension, there is a resonance among differentforms of customer participation in the company’sactivities. A strong sense of belonging to virtual com-munities enables strong social relationships, whichincreases individual customers’ willingness to sharetheir knowledge with the company. Conversely, theability to develop personalized relationships with



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individual customers has a positive impact on theirtrust and involvement with the firm. The higherinvolvement in turn enhances customers’ intention toparticipate in communities managed by the companyor even by independent third parties.

The various Internet-based collaboration mechanismsare synergistic, and therefore can be employed simul-taneously as part of an integrated innovation strate-gy, and not as independent “silos” for customerdialogue. Firms should strive to integrate all thesechannels to create an integrated portfolio of mecha-nisms that they can use to pursue different forms ofknowledge, for different purposes, to support differentstages of the NPD process. More specifically, the toolsfor front-end stages and deep customer engagement(suggestion boxes, advisory panels, virtual communi-ties, Web-based idea markets) are more relevant tothe ideation and concept development stages.Consider, for example, the Tech Cafè, technicalforums, Ducati service area, and customer advisoryprograms run by Ducati; and the specialized customerforums and the InnoCentive Web site managed by EliLilly. The tools in the front-end stages and broad cus-tomer engagement (online surveys, market intelli-gence services, Web-based conjoint analysis,listening-in techniques) are more useful at theconcept-testing phase, while the tools in the back-endstages and broad customer engagement (toolkits forusers innovation, open-source mechanisms, Web-based patent markets) are better suited to improvethe product design phase (e.g., contests like “DesignYour Dream Ducati” and virtual teams organized byDucati; as well as the advisory programs with select-ed doctors run by Eli Lilly). Finally, the tools relatedto the back-end stages and broad customer engage-ment (mass customization, Web-based prototyping,virtual product testing and virtual market testing)are most relevant at the product and market testingstages in the NPD process. In summary, the synergis-tic usage of different tools supporting different phas-es of the new product development is an importantfactor in enabling successful Internet-based collabo-rative innovation with customers.

The second theme we observe from the case studiesrelates to the organizational changes that need toaccompany the adoption of collaborative innovationwith customers. While customer engagement in prod-uct development has received a lot of attention in

recent years, there is little academic research on theorganizational adoption of such mechanisms. Aninteresting finding in our case studies is that bothcompanies we studied underwent significant organi-zational transformation as they embraced collabora-tive innovation. Ducati reorganized its entire mar-keting department around the community function,and also tightly linked the community managementfunction with the division in charge of the NPDprocess. Specific organizational roles have been cre-ated to support continuous customer knowledgesharing within the company, selectively distributingthe knowledge garnered through the Internet to spe-cific departments that can benefit from the informa-tion. Eli Lilly had to create e-Lilly as a new hybridorganization to manage its collaborative innovationefforts. And it created the InnoCentive spin-off toencourage innovative thinking and to allowInnoCentive to become an independent Web-basedinnovation marketplace serving other companies. Webelieve that true co-creation will require a funda-mental redesign of marketing processes and the mar-keting organization to support continuous dialoguewith customers, as well as to systematically sharethe knowledge generated through this dialogue with-in the firm in a way.

The final theme that we find is the emergence ofautonomous Web-based innovation marketplaces.Third parties like InnoCentive and NineSigma playan important role as intermediaries in facilitating col-laborative innovation, allowing the firm to expand itsperipheral vision beyond its own customers and itsown Web site. Similarly, vertical portals for bikersprovide Ducati with knowledge it could not gatherfrom its loyal and enthusiastic fans on its own Website. These intermediaries allow firms to accessprospects and competitors’ customers, who are unlike-ly to interact directly with the firm in conversations.Third party Web-based innovation marketplaces actas knowledge brokers (Hargadon & Sutton, 1997)allowing firms to access unbiased customer knowl-edge, and to gain insights into opportunities that liebeyond the firm’s immediate field of view (Sawhney,Prandelli, & Verona, 2003). This mediated processcomplements the traditional processes of direct inno-vation controlled by the individual firm. Mediatedactivities of innovation represent an interesting andprofitable extension of the traditional business ofinformation intermediaries.


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In conclusion, co-creation of value is an importantsource of competitive advantage in the network econo-my (Prahalad & Ramaswamy, 2004). While co-creationis a compelling notion, it needs to be described andanalyzed for every specific marketing process, includ-ing customer relationship management, new productdevelopment, customer support, sales, marketing com-munications, and brand building. We hope that thispaper provided useful insights into co-creation in vir-tual environments to support one key marketingprocess—developing new products. We also hope thatour work stimulates further investigation into otherprocesses for collaboration, including collaboratingwith customers to define value propositions, delivervalue, share value, and communicate value.

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