Find the sweet spot between what technologies can deliver and what your customers need.

Digital technologies are forcing companies to reimagine their customer value propositions. That’s because new social and mobile applications, analytics, the internet of things, artificial intelligence, biometrics, blockchain, cloud and edge computing, and many other advances allow them to deliver value in ways that simply were not possible in the past.

But given all that potential, how does any company figure out which offerings are viable? Digital technologies are game-changing — they provide ubiquitous data, unlimited connectivity, and massive processing power. Savvy companies are converting all this capacity into digital offerings: information-enriched solutions wrapped in seamless, personalized customer experiences. Think of Lyft: By using mobile and cloud computing to connect people seeking a ride with drivers who will get them to their destination, it is addressing pain points customers experience when they take cabs, like not knowing where the cab is and when it will arrive, how much the ride is going to cost, or what payment options they will have.

Successful digital offerings are created at the intersection of what technologies can deliver and what customers want and will pay for. That point of intersection, however, has proved to be elusive. To find it, companies must experiment repeatedly, cocreate with customers, and assemble cross-functional development teams — and the insights gleaned along the way must be shared internally.

In this article, we discuss how several of the nearly 200 companies we’ve studied have built and exercised these capabilities.1 We also take a close look at how one company, Schneider Electric, is using them to acquire and share customer insights.

A Constant Flow of Experiments

In our research, we have found that most big, established companies are not designed to deliver a continually evolving, innovative set of digital products and services. Their internal processes limit their ability to continually experiment with, learn from, discard, enhance, reconfigure, and scale up new ideas to provide new value propositions. Because developing that competence is difficult, it has become a differentiator for companies that figure it out.

Digital offerings are well suited to rapid test-and-learn iteration because they are software based: Software coders can develop a minimum viable product, release it to customers or a test group, and get immediate feedback. Based on the feedback, a company can quickly enhance or discard the product.

Companies taking this approach to develop viable digital offerings tend to encourage widespread experimentation through hackathons, special funding opportunities, and new organizational units like innovation centers dedicated to digital experiments. Or they partner senior leaders with young technology staff in a kind of reverse mentoring arrangement to share knowledge of new technological capabilities. No company has unlimited capacity for experiments, but conducting more experiments generally leads to more learning.

Toyota Motor North America (TMNA) has fostered such experimentation in a variety of ways.2 When Zack Hicks, now the company’s chief digital officer, was CIO, he launched an innovation fair at which employees shared their ideas with others in the company and competed for funding and the opportunity to move their ideas forward. Losing teams could still apply for funding from other sources. This concept has been replicated in global innovation fairs at Toyota Motor Corp.

But that’s only the start. TMNA’s IT department developed a Kickstarter-type application where individuals can post ideas for innovations and receive feedback. This app is particularly good for ideas that are creative but too raw for testing: Participants can respond with a thumbs-up or thumbs-down and with suggestions that might help advance the concept. Members of Toyota iCouncil who have director-level business positions (and budgets) help people who have ideas develop a business case, authorize funding, and team up innovators with IT people. TMNA provides up to 30 hours of IT developer time and equipment (such as server space), circumventing the typical processes for securing those resources so that innovators can more easily create prototypes to demonstrate their concepts’ viability. Promising ideas can be shopped around to specific business units or entered into the innovation fair.

Most of the experiments that emerge from TMNA’s initiatives target the customer experience. Some are relatively simple and quickly developed, such as an app that allows customers to interact efficiently with dealers after they have started to configure their preferred vehicle online. Others have led to changes in products, such as improvements in the application of telecommunications and satellite systems for in-car safety, GPS, and entertainment services. Some have kicked off entirely new digital offerings.

Like TMNA, Singapore-based DBS Bank has dispersed digital innovation and idea testing throughout the company.3 DBS is the biggest bank in Southeast Asia in terms of assets under management and provides a full range of financial services to 9 million customers in 18 markets. In 2015, DBS’s 22,000 employees were concurrently running 1,000 small experiments. Some of these experiments were quickly abandoned, while others evolved into new digital offerings or features for customers.

A major source of ideas worth testing at DBS is customer journey mapping, an examination of the full experience of customers as they interact with the company. Designers attempt to feel like the customer at key moments in the journey — for instance, deciding whether to sign up for a credit card or a mortgage. They sometimes create a pretend customer, giving the person a name, an age, and an occupation, and take this customer through, say, an application process. They consider what the customer is thinking, what emotions the customer is experiencing, and what his or her concerns are. Those insights inspire experiments they can test with real customers.

DBS’s pursuit of customer insights through a constant flow of experiments appears to be paying off: In 2016 and again in 2018, DBS was named the World’s Best Digital Bank by Euromoney. In 2018, Global Finance magazine also named DBS Best Bank in the World.4

Cocreation With Customers

Companies that don’t identify new business possibilities will find themselves playing catch-up to some collection of startups, digital giants, savvy competitors, and aggressive outsiders that will redefine their industries. But every company, feeling that pressure to lead the way, has made false assumptions about what customers might want. A number of business leaders in our research (particularly in B2B contexts) noted that customers were slow to warm up to what the companies had assumed would be compelling value propositions. Companies that coinnovate with key customers to build customer insights can quickly identify and correct those false assumptions.

In B2C settings, customer cocreation often involves launching a minimum viable product online and analyzing in detail how thousands of customers react. In B2B settings, individual customers can be engaged to identify pain points and assess the potential value of a solution.

That’s been the experience at Royal Philips, a diversified Dutch technology company previously known for its lighting and audio products. Five years ago, it sold many of those businesses to focus on its health care products, such as X-ray machines, electrocardiographs, and CT scanners, and to reposition itself as a health care solutions provider.5 But these efforts are heavily dependent on what Philips’s customers — many of whom are health care providers — are ready to buy and use. Health care providers have habits that they are not always willing to change, even when the benefits of doing so seem obvious to others. For instance, while sending some patients home using remote monitoring might help them recover faster and is more efficient, it also reduces hospitals’ immediate revenues by freeing up a bed early. Philips’s efforts are further hampered by the complexity of an industry in which providers (hospitals and health care practitioners), payers (insurance companies and government agencies), patients, and policy makers have divergent agendas.

These challenges led Philips to invest substantial resources into customer cocreation workshops. The intention of the multisession workshops, which operate under the name HealthSuite Labs, is to learn about customers’ most pressing problems and figure out how to solve them — in other words, to learn what customers are likely willing to pay for. Manu Varma, business leader for Wellcentive and Hospital to Home at Philips, told us, “We don’t always know what customers’ challenges are. They don’t know what they want.” HealthSuite Labs is a consultative process designed to enlighten both sides.

Workshops typically bring together providers, payers, and patients from the same facility or medical group — 12 to 40 people who are not usually in a position to talk together about their respective needs. “In the past, we had talked a lot about patients, but I never actually met a patient until we started pioneering HealthSuite Labs,” said Mark van Meggelen, business leader of Healthcare Information and Connected Care for Philips in Benelux. “The way they are supported is far from optimal.” The multidisciplinary and collaborative approach of the workshops helps groups come up with ideas to improve the overall health care system rather than just the outcomes of a single stakeholder.

Cross-Functional Development Teams

Many ideas fail because product development teams follow traditional routines, relying on their own perspectives, data, and insights to create the best product and then expecting salespeople to pursue customers and counting on support teams to keep them. But invariably, a new solution can solve a need only if the customer is willing to act differently — change purchase decision-making patterns, disrupt power structures, and act on new data.

Because of uncertainty around how customers want to be engaged and how they view their needs, the development of digital offerings involves constantly identifying new ideas and testing their viability quickly with customers. Companies that do this most effectively assemble cross-functional development teams. Teams of design, product management, technology, sales, and service experts can pool their accumulated customer knowledge, anticipate customer issues, and deliver more targeted solutions than single-function teams.

ING Direct Spain, a financial services subsidiary of Dutch-based ING Group, relies on cross-functional teams to ensure that new offerings address a customer’s needs end to end.6 Roles such as product management, marketing, operations, IT, credit risk, and operational risk work together at a very early stage of product definition. The teams bring together different perspectives, which encourages members to challenge one another’s assumptions. This mutual challenging mitigates the risk of designing offerings that the company cannot afford to support or that create unanticipated customer hassles rather than a great experience.

It also helps ING Direct Spain limit unnecessary business complexity: “Any idea that survives that sort of challenging has a certain guarantee that it’s well thought through in terms of how you actually handle the operational complexity later, because you have operations and IT people contributing in the definition,” Werner Zippold, former COO of ING Direct Spain, told us. Exposing potential offerings to both front- and back-office experts helps the company keep its solutions simple but powerful and focused on what customers want.

Shared Insights at Schneider Electric

Schneider Electric, a $26 billion French company founded in 1836, has produced iron and steel and electrical equipment for much of its life but now offers intelligent energy management solutions. A large part of its sweeping digital transformation journey has come from creating mechanisms to acquire and then share customer insights drawn from experimentation, cocreation with customers, and cross-functional development teams.

It wasn’t a skill that came easy. Early on, Schneider’s leaders recognized that putting sensors on major electrical equipment and connecting that equipment to the internet would allow them to give customers information about their energy needs and consumption patterns.7 Product development staff in the company’s 48 business units worked with customers to understand their expectations, needs, and challenges. Individual lines of business funded these early efforts and ideas proliferated, but the initiatives lacked coordination and big-picture awareness. “At the start, the businesses owned their product road maps and therefore determined their needs: local initiatives, local success, and failures sometimes,” said Michael MacKenzie, vice president of Schneider’s IoT Technology Platform. “They were making decisions and learning in a microcosm.”

These early experiments generated some successes, but in general, Schneider’s business-unit-driven approach did not deliver the expected results. The proliferation of local offerings was not building significant new revenue streams nor reusable strategic capabilities. “Everyone across the company [was] trying to reinvent digital for our products, so everybody [was] establishing partnerships with different startups offering all types of technology innovations,” said Cyril Perducat, Schneider’s executive vice president of IoT & Digital Offers. “But this [resulted] in multiplication of partnerships, multiplication of cloud providers, multiplication of connectivity protocols — anything you can imagine in digital.”

To move forward, Schneider needed to integrate product development and share learning across the company. Perducat created an internal Digital Services Factory (DSF) to take responsibility for seeking business opportunities to create offerings that leverage the capabilities of a new shared digital platform.

Schneider’s DSF team escorts concepts for digital offerings through four stages: ideation, incubation, industrialization, and run and scale. In the ideation phase, the team reviews new ideas to identify recurring and similar concepts, because those ideas, if applied by multiple business units, are likely to deliver greater value. Product teams engage key customers early in the ideation phase to learn the viability of a concept. The DSF team quickly stops ideas that do not appear to have a viable business case, and the company assigns business product owners to the most promising ideas. If a concept moves to the industrialization stage, Schneider typically requires that a customer fund a pilot, thus increasing the likelihood that initial customer enthusiasm will convert into revenues. In this phase, cross-functional teams work jointly with the customer to ensure that the offering delivers on the customer value proposition and that the customer sees it. “In several cases, we have received very positive customer feedback, but that’s not necessarily enough for them to spend money on it,” said Carlos Javaroni, Schneider’s vice president for IoT Strategy & Business Design.

Schneider has sometimes found that its old customer contact isn’t the right person to make the purchasing decision for more strategic energy management solutions. For these so-called C-level offerings, Schneider developed a small team of more experienced and highly specialized salespeople. These specialized salespeople become valued members of product development teams, helping to incrementally develop offerings customers want at the pace they want them.

All this has resulted in accelerated product development. Schneider’s traditional product development process involved lengthy, rigorous research and development followed by prolonged rollouts of important innovations. In contrast, the digital offering product life cycle now starts with an identified customer need, proceeds through development of a minimum viable product that customers test and use, and then enters a stage of continuous improvement, expansion, and development of related offerings. By using iterative development approaches and coinnovation — and by abandoning legacy IT methodologies and predigital product R&D practices — Schneider has collapsed the time from ideation to industrialization from two or three years to just a year.

By the end of 2018, Schneider had around 40 digital offerings, including services for asset management (that is, predictive maintenance), energy resource management for C-level business forecasting and budgeting, and consolidated remote monitoring of specialized machine fleets. Another 20 offerings were nearing rollout.

As is true at other big, old companies in the midst of digital transformations, Schneider’s digital offerings garner just a small percentage of the company’s total revenues and profits. But digital offerings are growing faster than traditional products and services, and they promise greater profitability over time. Perhaps more important, Schneider did not wait for competitors to usurp the company’s digital opportunities. It is embracing disruption profitably by identifying what’s possible and what customers are inclined to fund.

In large organizations, learning does not naturally flow across the enterprise. People with an idea want it to succeed and are often tempted to tweak an unsuccessful idea rather than abandon it. But learning from experiments depends on recognizing what isn’t working and shifting resources to something that might be more successful. And as companies discover what customers do and don’t want, they need to design processes and teams to ensure shared customer insights.

Building insights on both the capabilities of digital technologies and the interests of customers involves upending established management practices and individual habits and forcing a change in corporate culture. Taking an iterative test-and-learn approach to developing offerings will be a foreign concept to almost anyone who has risen to the top of an established company. Pharmaceutical companies have 10-year development cycles; auto manufacturers often take five years to develop, test, and roll out new products. These long cycles involve huge allocations of resources. They are “big bet” strategic initiatives.

Most digital innovations are much smaller bets. A few of those smaller bets could become very big deals, but most will be discarded. Conducting digital experiments is like betting a tiny amount on all the horses in a race and then having the option to increase any bet at various points during the race. There is no need to make a big bet until the winner is almost certain. Learning how to accumulate and share customer insights allows companies to place their bets in this way — on those digital offerings that customers are actually willing to pay for.

References

1. The authors’ case studies and survey reports on this topic are available as working papers from the MIT Sloan School of Management's Center for Information Systems Research (CISR), http://cisr.mit.edu.

2. P. Betancourt, J. Mooney, and J.W. Ross, “Digital Innovation at Toyota Motor North America: Revamping the Role of IT,” working paper 403, MIT CISR, Cambridge, Massachusetts, September 2015.

3. S.K. Sia, C. Soh, and P. Weill, “How DBS Bank Pursued a Digital Business Strategy,” MIS Quarterly Executive 15, no. 2 (June 2016): 105-121.

4. G. Platt, “World’s Best Bank Awards 2018: DBS Named Best Bank in the World,” Global Finance 32, no. 9 (October 2018).

5. L. Lorenzetti, “Royal Philips Is Headed for a Breakup,” Sept. 23, 2014, www.fortune.com.

6. M. Mocker and J.W. Ross, “ING Direct Spain: Managing Increasing Complexity While Offering Simplicity,” working paper 390, MIT CISR, Cambridge, Massachusetts, June 2013.

7. J.W. Ross, C.M. Beath, and K. Moloney, “Schneider Electric: Connectivity Inspires a Digital Transformation,” working paper 417, MIT CISR, Cambridge, Massachusetts, May 2017.