2016/08/31

«Constructing an experience-based innovation framework»



Richard Hawkins and Charles H. Davis. «Innovation and experience goods: a critical appraisal of a missing dimension in innovation theory». Prometheus. Critical Studies in Innovation, vol. 30, n.º 3, September 2012. See the references in the original publication of the article.




«Although the progression of innovation theory illustrated in Figure 1 does not deal explicitly with experience goods as such, plenty of resonance with the dynamics of experience goods can be found in the concepts of path dependence, increasing returns to adoption and learning. The difficulty is that innovation theory has tended to explore these concepts mainly or only from the perspective that technology is the primary source of innovation. For example, in exploring the role of social factors in technology adoption, Nelson et al. (2004) argue that innovation is linked to how users learn about new technologies and how, or to what degree, this knowledge generates dynamic increasing returns. They propose that some technologies have obvious merits; thus, in accordance with rational choice models, decisions to adopt will be based upon search criteria similar to those articulated by Stigler and Becker (1977). However, the merits of other technologies are either less obvious or non-obvious, their adoption determined by networking effects and feedbacks associated with the social construction of technology, which can involve many non-rational criteria.

»Such arguments are very persuasive as concerns the adoption of technology, provided social factors are assumed to contribute to shaping the actual characteristics of the technology. But what about innovations that do not involve technology or in which technology plays a subordinate role? In particular, how do consumers perceive or construct value in an experience good which, by definition, has primarily non-rational characteristics, many of them likely to be perceived differently by each user? How do these value constructions generate the learning effects, feedbacks, increasing returns and lock-ins normally associated with innovations?

»The extensive literature on customer value perception makes a key distinction between customer value (the value of the customer to the firm) and customer-perceived value (the value the customer perceives in the firm’s offering). Customer-perceived value was originally construed as the customer’s assessment of the trade-off between benefits and costs. For most consumers, however, this is a very complex calculation. Search, opportunity and learning costs are not always reflected in price, which may be inflated or deflated strategically in order to segment the market. As Swann (2009) argues, this operation is, in itself, a significant form of innovation. It is now generally accepted that customer-perceived value involves much more than rational assessment of net benefits (see Sanchez-Fernandez and Iniesta-Bonillo, 2007; Sanchez-Fernandez et al., 2009; Gallarza et al., 2011).

»The convention has been to classify non-rational factors as hedonic and the challenge has been to unpack hedonic value in order to yield a multidimensional set of value constructs that would encompass utilitarian as well as other kinds of perceived value, to relate these kinds of value to the consumer’s sense of satisfaction and quality, and to tie the consumer’s overall assessment of the consumption experience to intentions for future consumption (Gallarza et al., 2011).

»Investigating how innovation occurs with regard to experiences requires a framework in which types of innovation can be mapped onto types of value for which specific experiential attributes can be articulated. To illustrate how this might work, we have compared Schumpeter’s well-known typology of innovations with a typology of customer value creation adapted from a strategic marketing framework originally developed by Smith and Colgate (2007) from a comprehensive critical synthesis of current literature in customer value research. Our justification for defining innovation in Schumpeter’s exact terms is simply that the current OECD definition for purposes of obtaining data on innovation performance has adopted Schumpeter’s typology in its entirety (OECD/Eurostat, 2005). Schumpeter proposed five broad but individually distinct types of innovation – new products, new processes, new markets, new sources of supply and new organizational forms – which he perceived to be driven by entrepreneurs and actualized primarily by supply-side forces. His typology is not hierarchical and serves only to illustrate that new combinations may spring from many different sources. As Schumpeter disclaimed any role for the consumer in innovation, he did not imbue his types with any consumer-oriented characteristics.

»Solely for purposes of discussion, we have ordered his typology according to the degree of probable immediacy with the consumer. Thus, arguably, most consumers would encounter innovation most directly in the form of new products and services. Second, many consumers would likely encounter complementary innovations in organization; for instance, in logistics and retailing (indeed, these may be inseparable from the good itself). Third, consumers may notice innovation in where products are made (e.g. a Japanese-branded product manufactured in Thailand) or in the materials used and where they are sourced (e.g. free trade coffee). Market and process innovations may be less apparent to consumers, who may be unaware of innovations in business models or marketing techniques and could well be oblivious to innovations in how the goods they consume are produced.

»Put another way, innovation types towards the top of this order engage the consumer immediately in some degree of learning in order to realize any of the value contained in a new good. Those towards the bottom generally do not, or do so to a lesser extent – unless, of course, they are brought specifically to the attention of the consumer as a source of additional or even primary value (e.g. environmentally sustainable production or recycling methods). Indeed, as Schumpeter did not imply exclusivity to any of his five types, we could propose that making consumers aware of actions at any of these levels would in itself constitute an innovation. Probably the most topical example would be green products, whose commercial strategy is precisely to engage consumers with the product at every possible level, from raw materials, through manufacturing and consumption, to decommissioning. At each level, innovations not only become strategic marketing tools, but also social signals as to how consumers should engage with goods and, crucially, what should guide their future consumption decisions.

»A consumer value typology provides a rich counterpoint to Schumpeter’s innovation typology. Essentially, by juxtaposing them, the subjective dimensions that Schumpeter chose explicitly to exclude are explicitly included. Very usefully, Smith and Colgate (2007) outline four distinctive types of consumer value as discernible in a broad swathe of the marketing and consumer research literature, defined in terms of how consumers perceive the value producing relationship between themselves and the products and services they procure.

»In this scheme, functional value corresponds most closely to utility models that are already defined in the minds of consumers. These models embody expectations of the utility of routine price commodities (e.g. a liter of milk or gasoline) which most closely conform to Stigler’s definition of search goods. Functional value is produced to the extent that goods conform to such models (i.e. they deliver exactly what the consumer has already learned to expect). Hedonic value is produced when the inherent experiential dimensions of goods are enhanced (e.g. through design, branding or retailing environments) such that emotions and feelings internal to the consumer are summoned. These tend to generate new learning routines, feedbacks and expectations. Symbolic value is created as consumers make associations between the functional and/or hedonic values of goods and various sociologically, culturally and psychologically generated meanings and references external to the consumer (e.g. associations with family members, significant events or with celebrities). Smith and Colgate (2007) also propose a cost/sacrifice category, which in their definition refers mainly to the intermediation of retailing models designed to lower transactions costs.

»We have retained this basic idea as transactional value, but we interpret it more broadly to refer to any form of consumer value that is produced by the transaction process itself (e.g. convenience, information provision, security, and so forth; see also Bakos, 1997; Hawkins and Verhoest, 2002; Bouwman et al., 2003).

»Otherwise, our adaptation differs from Smith and Colgate (2007) mainly in that they associate experience exclusively with hedonic value types. Instead, based upon our arguments above, we propose that from the standpoint of generating opportunities to innovate, consumer value is related to the intensity of experience provided by a good as determined by the degree of engagement it elicits from the consumer, potentially at several levels. In our framework, functional and to some extent transactional value has a pronounced search bias in that value expectations are already established and to some extent normative. Towards the other extreme, hedonic and symbolic values have the most pronounced engagement bias in that the consumer is fully involved with the good at a social and/or personal level.

»Figure 2 expresses these relationships in a matrix on which examples of experience goods can be parsed and mapped to show how different perceptions of value have been, or could be, mobilized in producing innovations. In some cases, innovations may be confined to only one or two of Schumpeter’s types and in others may involve all of them. Likewise, consumer value in different innovations may be widely spread over the matrix or tightly clustered. Gaps may indicate innovation opportunities.

»To show how various innovation-value narratives could be constructed in this framework, we produce just two of many possible examples. Figure 3 maps out such a narrative with regard to a cinematic motion picture. We could consider this a pure experience good in that it conforms in virtually every way to Nelson’s original experience goods concept and to its subsequent evolution. It also embodies examples of all three types of experience innovation, beginning with its origins as an entirely new experience for which consumers had no a priori model or set of expectations. Figure 4 extends this operation to what we could call a mixed good, one whose value determination is subject to pronounced experience characteristics, but that otherwise is a conventional manufactured product that also fits very comfortably into the established TPP framework. In this case, we refer to a motor vehicle that utilizes alternative energy.








»By comparing Figures 3 and 4, however, it becomes clear that the primary difference in the value structure of each good is the nature of the good itself, one being essentially intangible and the other essentially tangible. Otherwise, a full and very similar spectrum of value perception or construction is evident in both examples. Reading from left to right, it is clear that each of Schumpeter’s innovation types can be expressed in an example of each type of consumer value creation. Likewise, reading from top to bottom, every value type can be expressed at each level of the innovation typology.

»More importantly, each adjacent segment can be linked to a specific innovation or set of innovations. Some of these are doubtless technological, conforming in some degree to existing and emerging theories of innovation as technological change. Others are non-technological or ‘soft’ innovations. Still others are innovations by consumers or co-creations involving actors at several stages of the value chain. Moreover, the demonstrations show that in order for product innovations that deliver functional value to emerge, many other forms of innovation may have to occur concurrently, or even first, in order for the product to gain traction. As Cassidy (1933) noted in the very first published economic study of Hollywood, the most significant innovation that created this industry was that of combining moving pictures with dramatic narratives and performer personalities. For the success of the motion picture as a wealth-producing innovation, the symbolism of the movie star is as important an innovation as cinematography. Arguably, in the same way, the future potential of the green car will depend as much on innovations that inflect the attitudes and social status of drivers as on innovations in battery technology and materials.»





Innovation Typologies
Thematic Readings

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