Lead users in product development: a case study about incorporation of lead users in business to business new product development

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2007:020

M A S T E R ' S T H E S I S

Lead Users in Product Development

A case study about incorporation of lead users in business to business new product development

Mårten Dignell Daniel Mattila

Luleå University of Technology D Master thesis

Business Administration

Department of Business Administration and Social Sciences Division of Industrial marketing and e-commerce

2007:020 - ISSN: 1402-1552 - ISRN: LTU-DUPP--07/020--SE

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Abstract

The purpose of this thesis was to study strategies that companies can use to incorporate business lead users into the new product development process and in this way improve the performance of new product development. We approached this problem by executing two interviews at a company that we knew had a strong customer focus. We interviewed the president and the R&D coordinator of the company. We hoped to be able to draw some conclusions about the usage of lead users in the different stages of the new product development process. However we came to the conclusion that the lead user concept is much more complex than we initially anticipated. Limiting the concept down to only comprise the end user of a product is a vast simplification. We came to the conclusion that the lead user can be a great resource for companies but that this individual may not exist or may not be possible to identify among the users in every field of business. The lead user becomes interesting for market developers because of their product knowledge, knowledge of customer demand and problem solving skills. However we came to the conclusion that these capabilities can be found among others then the end users of the product. Therefore we would like to stretch the lead user concept to be able to include others than the end users or to give the concept a more appropriate name like lead knowledge individuals.

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1 Introduction ... 1

1.1 Background ... 1

1.2 Discussion of problem area ... 2

1.3 Overall purpose ... 3

2 Literature review... 4

2.1 The lead user opportunity... 4

2.1.1 Lead users in product development... 4

2.1.2 Sticky information... 5

2.1.3 Characteristics of business to business lead users... 6

2.2 The NPD-decision process model ... 8

2.3 The value of incorporating lead users in the product development process ... 11

2.3.1 Generate new ideas... 11

2.3.2 Screening of ideas ... 11

2.3.3 Develop concept and perform tests ... 12

2.3.4 Market strategy and business analysis ... 12

2.3.5 Develop the product ... 12

2.3.6 Product launch and Market testing... 12

2.4 Problems with incorporating lead users in the NPD-process. ... 13

2.5 Organization and lead user incorporation in the NPD-process ... 13

2.5.1 “The organisation” ... 13

2.5.2 The Boundary spanning team... 14

2.5.3 How to realize the boundary spanning team. ... 14

3 Conceptual framework ... 16

3.1 Research Question 1... 16

4 Methodology ... 19

4.1 Research purpose... 19

4.2 Literature ... 19

4.3 Research approach... 20

4.4 Research Strategy ... 20

4.5 Case selection ... 21

4.6 Data Collection... 21

4.7 Methodology problems ... 22

5 Data presentation ... 23

6 Data Analysis ... 27

7 Final thoughts ... 31

References: ... 32 Appendix 1 - Interview Guide

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1 Introduction

This chapter will give a brief background to consumer based new product development and narrow the research area down to deal specifically with the implementation of lead users in business to business product development. Finally this chapter will contain a problem discussion and an overall purpose.

1.1 Background

The idea of this thesis started with the conclusions made by us in our bachelor thesis about Internet forums as a marketing tool (Dignell & Mattila, 2006). In this thesis we came to the conclusion that a person called lead user exists on internet forums and is considered as a valuable asset for marketing your products. The lead user enables the marketer to have a better communication to the narrow market segment of interest and reduces risk exposure to negative product image. The lead user was a good way of creating an image for the manufacturer’s products and enabled a closer contact with narrow customer segments.

We saw the lead user concept as an interesting approach to marketing since it introduces a new way of exploiting the benefits of using customers as a distribution channel. The thesis also gave us insight in other ways of using customers on internet forums.

Further we found that the opinion of the unsatisfied customer often made its way across internet forums if products did not match expectations. The internet forum seemed to work as a quick problem solving tool for companies failing to launch their products in a way positively adopted by buyer. The greatest opportunity was that companies could collect opinions and thoughts about products by monitoring lead user opinions. If a problem existed companies could realize this in an early stage by monitoring web based discussions and learn about product flaws that the online visitors bring up.

The most important lesson learned from our previous study was the cost issue of developing products. Bruggeman and Everaert (2002) found that the developing of products is a great issue for companies in a competitive environment. The focus on reducing cost for products has many aspects but the authors make it clear that once the product is ready for launch there is little a company can do to reduce cost.

The alternative view of market communication and the focus on cost seemed to be connected in a way that aroused questions about companies having different orientations towards achieving success. A key aspect of achieving success is having a good product and based on what has previously been stated about reducing cost and the internet phenomenon of adopting an alternative approach we became interested in further investigating the issue of developing new products.

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1.2 Discussion of problem area

Lagrosen (2005) states that success for international industrial companies is heavily dependent on companies’ ability to develop new products, as a result of innovation and the launching of new products, growth possibilities can be created. He further writes that the increasing international competition emphasizes the importance of developing new products that meet the needs of the customer. The importance of accurate product development to meet customer needs is vital for success (ibid).

Lindman (2002) write that most firms are expected to incorporate the latest sources of innovation and technology in new products, the lack of competitive skill and resources for product development is considered as weakness when developing new products. Lindman further states that a company’s ability to take advantage of new technology is a matter of utilizing management skills available in order to successfully develop new products. When the matter of industrial product development is considered from this point of view of how to build and sustain competitive advantage companies face the dilemma of management orientation (ibid). Lindman (2002) further claim that this dilemma can be approached by utilizing a closed internal or an open external strategy when developing ideas for new products. The author defines as a closed strategy as when companies seek to generate knowledge from within the organization.

Pitta and Franzak (1997) discuss the issue of organizational learning as a task of acquiring managerial competences to support organizational goals and to respond to market needs. The writers describe that the main task is to focus on core capabilities within the organization and maintain the focus on core capabilities. When analyzing the market and keeping the focus on core capabilities the issue of letting core capabilities dominate the direction of the firm becomes eminent (ibid). Pitta and Franzak (1997) state that companies using the internal strategy for product development believe that they know best what the market needs and there by what products to make. According to the authors this makes the company vulnerable to fundamental changes in a dynamic market, risking that the company provides products not demanded by the market.

Lindman (2002) explains that the more open strategy implies that companies seek knowledge for new product development outside the organization, to gain a more flexible approach by seeking all external information available instead of relying solely on their own competences.

The writer further claims that companies following an open product development strategy support the fundamental understanding that one can basically learn from others. According to Pitta and Franzak (1997) external information can be acquired trough experience from organizational memory or trough the experience of others. The writers further describe the openness to external learning partners such as customers, distributors, alliance partners and universities as an important success factor for companies. Chen and Hsieh (2005) found that market information about user needs for new products can be acquired trough market research activities such as meetings, discussion sessions and online customer communities. Several writers like Chen and Hesieh (2005), Lagrosen (2005), Pitta and Franzak (1997), Pitta, Franzak and Katsanis (1996) describe customer involvement from the beginning of the new product development process (NPD-process) as a crucial success factor for companies.

Chen and Hsieh (2005) describe that the companies can gain the access to development capabilities and resources that the firm lacks by listening to the user. The authors write that the concept of listening to the user can be seen as a company’s quest of gaining a better 2 | P a g e

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understanding of customer needs and integrating the voice of the customer. Von Hippel (2005) explains that the customers often have a completely different perspective of a company and its products than the companies believe that they have and that this often is a result of a company’s poor self image and market knowledge. Johnson, Scholes and Whittington (2005, p. 27) write that this may lead to strategic drift in the long run meaning that the company’s assumptions about the surrounding market gradually start to differ from the real world.

Chen and Hsieh (2005) emphase that the traditional consumer involvement takes place prior to the NPD process and typically consists of gathering information from different types of market research activities. Further they claim that this information is typically given to an internal team responsible for the NPD process which then evaluates the information and starts the development process. However the authors state that this approach has shown insufficient results compared to customer interaction that integrates the consumer directly in the NPD team from the beginning of the NPD process.

Pita and Fowler (2005) describe that companies that devote resources and seek customer interaction soon discover that customers often have problems articulating key features in product development. A common problem is the uninvolved customer with little product knowledge that is inadequate as source of information for product developers. Further the writers claim that evidence suggests that if certain customers are matched to specific segments the value of information increases significantly. Therefore it is a big challenge for the organization to separate and extract the information usable from the information unusable for product development.

Authors like Pitta, Franzak and Katsanis (1996) and Lagrosen (2005) describe a certain type of user which characteristics may be able to solve the problem of customers unable to give credible and usable input. The authors describe that these users have considerable experience from the product area, high education and great ability to forecast problems and to give problem solving aid that their value to product developers far superior compared to the randomly selected user. Pitta, Franzak and Katsanis (1996) refer to these as lead users and advocates the identification, selection and usage of these users throughout the entire NPD process. The authors the reason for this is their ability to identify describe and solve problems that make interaction with these users more reliable and valuable to product developers’ than other randomly selected users.

Furthermore the authors describe the usage of customer interaction is significantly more wide spread in the business to business markets than it is in the business to consumer markets.

Many of the authors do not make any distinction between consumer lead users and business to business lead users and the existing specific articles tend to describe lead users as a consumer.

Chen and Hsieh (2005) stated that more detailed studies are needed on how customers can interact in the NPD-process. Because of this we will study the development of a new products and how a lead users can be integrated into this process.

1.3 Overall purpose

The purpose of this thesis is to illuminate strategies that companies can use to identify lead users and integrate lead user input in order to improve development of new products. We refer to a new product as a product that starts its development in the idea generation stage of the NPD-process.

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2 Literature review

Section 2.1 of the thesis will start by presenting theory about lead users and the potential benefits of using lead users in product development. Section 2.2 of the literature will give a step by step description of the framework chosen for describing the product development process. In section 2.3 we will try to match the theory about lead user interaction and try to implement these theories into the NPD-process. In some of the steps of the NPD-process the benefits of lead user interaction will be more obvious than in others. In section 2.4 we will discuss some problems that can occur when trying to implement lead users in the NPD- process. Finally section 2.5 will describe the demands on organization and structure when implementing lead users in the NPD-process.

2.1 The lead user opportunity

The definition of a lead user is given by Pita and Franzak (1997) and Hippel (2005, p. 66-67) is as follows:

An employee with extensive knowledge of a vendor’s products. A lead user exercises the vendor’s products extensively and has a wide-ranging knowledge of what problems and potentials a product might have. The lead user is the one knowing what is wrong with a vendor’s product and how it can be corrected.

2.1.1 Lead users in product development

Lagrosen (2005) explains that the success of an industrial company is dependent on the ability to develop new products. The source of innovation success can often be traced back to customer satisfaction. Achieving marketing knowledge is often the issue of understanding customers’ needs and wants. Successful new product development requires full understanding of what criteria that make a product reach customer expectations. Lagrosen further explains that effective new product development lowers costs as it helps reducing product defects. This in turn means that companies can offer their products at a lower price than competitors.

Lagrosen (2005) also explain that this is why successful new product development needs customer integration in the product development process. Lagrosen´s work concentrated on the issue of understanding what part of the product development process customers might interact with in order to derive the best of external input. Lagrosen writes that a good solution is to develop cooperation with a few customers that actively participate in the new product development and let other customers act as information support trough market research.

Industrial customers in general differ from regular customers in their experience as well as job involvement. Industrial users in general seem to be able to identify product problems because of the fact that they test products to the very limit of their capabilities. Such extreme testing is a rich source of market testing information. Lead users can not only distinguish what products that works and which do not, they can often provide the answer of why the product does not meet expectations. The most important point of this is the lead user opinion of whether this problem is significant to customers or not Pitta and Franzak (1997)

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Von Hippel (2005, p.63-66) explains the lead user work according to a “trial and error”

process similar to the new product development process. Lead users refine products and develop solutions to satisfy their own needs. The main difference is the continuous real test environment lead users use when testing own solutions. This is not attainable for a company since cost becomes an issue. Another valuable asset is taking the product out of the simulated environment and into a real environment. The lead user finds problems that a company might face later in the new product development process which make them a valuable asset to incorporate in the product testing.

Pitta Franzak and Katsanis (1996) explain that industrial lead users can see minor product flaws as great issues since it might result in hampering the productivity. This is why minor product features and benefits can mean the difference between good and bad market acceptance. The authors clearly state that there is no substitute for user input that reflects the complex dynamics of the marketing environment found in industrial marketing.

2.1.2 Sticky information

According to von Hippel (2005, p. 67) one of the main reasons that makes the traditional way of customer involvement less functional then the integration of the consumer into the teams is that it addresses an issue that von Hippel defines as sticky information. Sticky information is characterized by the amount of cost required to transfer the information from customers or users to the company and transfer the information to a form usable for the company in the NPD process.

Von Hippel (2005, p.66-67) has identified the basic principles that make sticky information so important as the fact that if information input to the NPD process is faulty the output will also become faulty, meaning that the company can end up producing a product that is not demanded by the market. Many companies try to reach full understanding about customer needs but they will not be able to obtain that goal on their own without involving the consumer no matter what resources. Von Hippel also states that product developers are trying to develop new products suitable for real users with real needs. This implies that the closer the input used for new product comes to simulate the real context of product use the more accurate features a prototype can acquire. Von Hippel found that this task is easier said than done. If information transfer about desired product features was easily obtainable and costless to move the physical location of information would appear as a small obstacle of retrieving it, but when information is costly to move and hard to retrieve managers face other circumstances. In this case lead users have the upper hand when it comes to information about user needs. The lead user exists in full fidelity of this information and the manufacturer will only be able to retrieve this information to a cost to be able to innovate (ibid).

Lagrosen (2005) emphasize the closeness to the customer as one of the most fundamental keystones to success in business to business marketing, simply understanding the customer is not enough. Von Hippel (2005, p. 66-69) coined the predicament “sticky information”

describing the transfer of information between lead user and producer. Von Hippel determines the stickiness of information as the cost associated with transferring the information. This means that if information stickiness is low the retrieving of important information for new product development is a minor issue. However Von Hippel’s research on the subject shows that information stickiness is often high, especially in the field of technology. By this he implies that the cost of receiving the right information is costly. Von Hippel’s empirical

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evidence from previous studies showed that information exchange costs associated with product development was up to 59% of total project cost.

Reasons for information stickiness are many and Von Hippel (2005, p.68-70) demonstrates the range of causes for information stickiness. The tacit nature of information is a common reason for information stickiness. Tacit information is often very hard to duplicate. Person embedded skills are often tacit in the context that performance success is unknown to the person following them. The stickiness can also be as simple as a fee of gaining access to the information. A common feature associated with information stickiness is a company’s inability to absorb information. A company’s ability to absorb important information can significantly increase if related knowledge exists within the organization.

Hippel (2005, p.68-70) explains that the issue regarding sticky information is that it creates information asymmetry between producer and user that can be hard to erase. The new product developer might consider the sticky information needed for successful product development to expensive to retrieve and instead chose to develop the product based on the sticky information already existing within the organisation. This means that companies will tend to develop new products based on their own knowledge and utilize solutions they specialize in.

2.1.3 Characteristics of business to business lead users

Pitta Franzak and Katsanis (1996) categorize the lead user as a user at the customer company with extensive knowledge and interest in a vendor’s product. A lead user often has an extensive technological background and additional experience in his field of work. The lead user uses products extensively and by doing this has gained an insight in product features such as advantages and disadvantages. The authors also explain that the skilled sales force identify decision makers among customers and can therefore pursue intelligent user input.

Lüthje and Herstatt (2004) states that when identifying the lead user manufacturers must make certain that the user has already identified key success factors for the product. The authors also states that the lead user that can be seen as a potential innovator often perceives a mismatch of user needs and current product specifications. This fact motivates him to innovate in order to satisfy his personal perceived flaws regarding a product.

Pitta and Franzak (1997) explain that the first step towards identifying an interesting lead user is the interaction process between customer and producer. Customers may consult companies in order to attain problem solving advice regarding products. When consulting the company about product use they instantly become identified as users.

Lüthje and Letti (2003) identified the lead user in their study by sourcing for extreme product users in the medical sector. The authors were able to distinguish the lead user from the ordinary user by evaluating the quality and the relevance of their opinions on new market trends. They also made it clear that the lead user is a person with extensive practice of vendor’s products. The authors concluded that the extreme usage makes him familiar with problems undiscovered during traditional usage.

Pitta and Franzak (1997) addressed the issue of distinguishing a user from a lead user. They saw it as a matter of information. They stated that the issue of identifying lead users among ordinary users is paying attention to what questions and what type of information the user requests. The regular user often limits his questions to basic support information about

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product usage and maintenance. As a contrast to this the lead user has a more refined and advanced need for product information. Pita and Franzak (1997) describe that the information needed to support a lead users questions or considerations is often so advanced that it needs to be referred back to product engineers in order to attain an answer sufficient to the lead user’s requests. Further it is a common procedure that the questions asked by the lead user is advanced enough to force a company to assemble a team of engineers or consult the head of the technical support division in order to provide an answer.

According to Pitta and Franzak (1997) the technological aspect of the product in question is dependent on technical support activities and might become a mean of communication initiation between the lead user and the company. If a lead user initiates contact with a company the probability that the lead user will be interested in an exchange of information increases significantly. Lüthje and Herstatt (2004) found that the expert area of a lead user is so narrow and complex that the information derived from it must be addressed by special members of in-house development teams. Lilien et al. (2002) explained in their empirical response company the in-house members of the product development team typically consisted of three to five expert members of the technology and marketing department. These individuals are gate keepers facilitating the interaction with lead users.

According to Pitta and Franzak (1997) the mutual exchange between product support and lead user input in new product development processing can facilitate a relation. The formal exchange may lead to deeper involvement in for example helping the company develop new products and product prototype testing.

Pitta, Franzak and Katsanis (1996) explains that the identification of lead users input is a source of information often neglected by companies. Quite often the focus can be short-term problem solving in order to achieve temporary customer satisfaction. Depending on the organization, most companies recognize this source of user experience and try to utilize the information available from lead users.

Lüthje Letti and Herstatt (2003) explain that when trying to utilize lead user input in innovation projects companies must understand how knowledge of interested among experts.

Not all experts have the same opinion and companies need to critically assess how many expert opinions need to support new product development. The main issue is whether expert knowledge is heterogeneous or homogenously distributed among experts. The authors also states that companies need to perform a detailed analysis of how many experts within a field they need.

Pitta, Franzak and Katsanis (1996) explain this as the main reason which gives manufacturing firms a near-sighted focus and ignore the value of intelligent user input. Companies aiming to utilize intelligent user knowledge must recognize the potential benefits of a long-term relationship with lead users. The organization trying to learn from lead users would need to expend additional resources in order to facilitate company-customer interaction activities.

Pitta, Franzak and Katsanis (1996) further remark that if the company decides to exploit intelligent user knowledge, the product support team and the customer satisfaction personnel inside the company must learn to identify intelligent sources of customer input and first reporters of problems.

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2.2 The NPD-decision process model

Keller and Kotler (2005, p. 639-658) use this model to describe the different stages in the new product development process, from the idea generation to product launch and idea output to future projects. The model also gives an overview of the choices possible to make when evaluating each step in the process. Often companies have many ideas running through this process at the same time and the company often set goals at each stage that the “new-product”

will have to fulfil to be able to move on to the next stage. (Keller and Kotler 2005, p. 639- 658) In an example given by Keller and Kotler (2005, p. 638) the process start with 64 ideas generated at a cost of $1000 each, by the time development reached product development 8 products where left a cost of $200.000 each and when the development finally reached product launch two products where left at a cost of $5.000.000 each. This example clearly shows the importance of identifying and eliminating ideas without potential early in the new development process since the cost increases exponentially for each step that is taken. (Keller and Kotler 2005, p. 638)

Please note that stage four in the model below differs from the original model created by Keller and Kotler. In their model stage four consist of two different stages market strategy and business analysis we chose to merge the steps since they describe internal strategy decisions rather than the actual development of a product.

Figure 2:1 The new product development decision process

2.

Screen idea.

5.

Develop product

7.

Product- launch.

Modify the product

or market.

program

? Send

idea back to product develop?

6.

Market testing 4.

Market strategy and business analysis 3.

Develop concept and test.

Lay future

plans

1.

Generate new ideas.

Disapproved for next stage Approved for next stage

Terminate the product

From: Marketing Management 12th edition. Written by Keller and Kotler (2005), p.640

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Observe that all the rest of the information presented in chapter 2.2.1 origin from Keller and Kotler (2005, p. 638-658)

1. Generate new ideas – Is the idea worth considering?

Ideas for new products origin from different categories of customers, scientists, competitors, employees, channel members.

Keller and Kotler describe customers as the natural place to search for information. They also write that companies that rely heavily on technology can benefit from studying the customers that use the company’s products in the most advanced way. This category of users often addresses needs and possible improvements before other customers do.

Companies can find great usage of its employees an often unused resource for improvement. Keller and Kotler mentions an example from Toyota who claims that the annually get close to 2 million tips a year regarding product improvements from their employees, of these over 85% are implemented. Several studies suggest that the giving employee’s rewards for successful ideas have a positive impact of the learning process in the company and on the quality of the final product.

Studying competitors is another way that companies can use in order to gain information, by dismantling competitors’ products and look at their solutions and try to make them even better.

2. Screening of ideas – Is the product idea compatible with company objectives strategies, and resources?

In this stage the company creates an idea committee that select promising ideas from other ideas. Each member individually researches a promising idea during the week then the group meets and discusses what ideas that should be approved for full-scale screening.

During the screening the company must try to avoid two kinds of pitfalls.

The Drop-error it when the company terminate a good idea that had market potential. This has a lot to do with the company’s culture and attitude towards new ideas; it is easy to be critical towards other people’s ideas.

The Go-error is when an idea without potential is approved to move on to the development stage, this will inevitability lower the return of money on the product or even make it a total failure with huge losses as a result.

The point of screening is to terminate the poor ideas as soon as possible in the NPD process, since costs with each stage taken in the NPD process significantly increases costs.

The comity will meet and discuss the pro and cons with each product such as, does the product meet needs, can it stand out from the market, can a distinguishing marketing campaign be created, expected sales volume, profit, sales growth and do the company have the funds. All these factors are considered when approving or disapproving the idea for the next stage.

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3. Develop concepts and perform tests – Can we find a good concept that consumers say that they would try?

A good idea can develop into several concepts depending on what category of customers the finished product will address. This will result in the development of a category concept that is compared with the competition within that segment of the market to see what potential it has. Then a market position and pricing strategy have to be chosen.

Testing of concepts means that visual prototypes are made and then presented to the customers to see the customers’ reactions. Can the customer see the benefits of the product, is the product filling a need, is the price reasonable, would the customers buy this product and how often. Did the respondents’ answers indicate a strong consumer demand?

Based on the answer to this question the idea is either terminated or approved for the next stage.

4. Market strategy and business analysis – Can an affordable marketing strategy be found? Will the product meet profit goals?

When the product passed on to his stage the NPD manager will develop a preliminary marketing plan including for example planed price, distribution strategy, marketing budget, product positioning, sales, market share, profit goals and long-run goals.

The market strategy will be followed up by a business analysis where the management needs to decide if sales, costs and profit estimations is up to company standards. If this is the case the idea will be approved for product development.

5. Develop the product – Have we got a technically and commercially sound product?

Until this stage is reached the product only existed as an idea or a prototype, now it is time to create the actual product. In this stage the company needs to decide if the product idea can be transformed in to a real product that will reach acceptable profit. It should be noticed that if this stage is completed the costs will increase greatly; in the calculation example given by Keller and Kotler the costs per unit increased ten times if the idea was turned into a actual product.

At this stage the engineers need to get hold of the wishes of the consumer to be able to adapt product specification to these wishes. The R&D division will start by creating a real working prototype containing the key elements that the customers’ require and which can be produced at budgeted costs. When this prototype is developed it will go through extensive testing and within the company so called Alpha-testing. When these tests are completed and problems discovered under the Alpha-testing are corrected the product moves on to Beta-testing, which means testing the product on a selected number of real customers and evaluating their opinion about the product.

6. Market testing – Have the product met sales expectations?

When product successfully passes product development it is time for market testing, not all products undergo this type of test. It basically consist of different ways to test the product on customers and distribution in order to see how large the market is and how

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they react to handling, buying and using the product. If the product shows for example low repurchase rates the product need to be redesigned or terminated.

7. Product launch – Are product sales meeting expectations?

If the product is approved for this stage it means that the company is ready to launch the product in full scale which will involve the biggest investment so far mostly consisting of arranging full scale production of the product. The most critical factors in this part of the NPD process are the choice of size of the manufacturing and the marketing cost. As an example Keller and Kotler mentions that new food products typically invest an amount corresponding to 57% of total sales of the product during the first year.

The company also have to decide when, where and how to introduce the product to the market before it is ready for a full scale market introduction.

2.3 The value of incorporating lead users in the product development process

2.3.1 Generate new ideas

Pitta and Franzak (1997) discovered that lead users in the industrial sector have several potential benefits when exploring the concept of new products. Chen and Hsieh (2005) claim that interaction of the lead user from the idea generation stage is a crucial success factor for companies. This early interaction described by the authors gives the company the possibility to acquire correct information about customer needs and demands earlier in the NPD-process than possible without interaction. Pitta and Franzak (1997) describe that lead users have considerable knowledge about product problems, they might already have figured out a solution to satisfy user needs themselves or in some cases even attempted to solve the problem themselves. The detailed understanding of ideas for new product development described by the writers provides a complex understanding of product ideas that internal product development engineers can only hope to duplicate.

Pitta and Franzak (1997) explain that gaining access to the idea generation information created by lead users can save companies considerable development costs and complement internal sources of new product ideas. The authors highlight the importance of early involvement of lead users in the NPD process since the idea stage is a key aspect of staying ahead of competition.

Von Hippel (2005, p. 108-109) explains that lead users explore product ideas based on their own need which later will be adopted by commercial users. He states that companies exploiting lead user knowledge complement their ideas rather than replace them in favour of user friendly solutions. Von Hippel further explains that the theories about information stickiness come into context when addressing this problem it is therefore the task of commercial actors to successfully transfer and implement sticky knowledge of new product ideas in a manner that will maximize product accuracy derived from users.

2.3.2 Screening of ideas

The literature does not give any specific information of how the lead users can be used during this stage of the NPD-process. But authors like Chen and Hsieh (2005) conclude that lead user interaction boosts performance throughout the entire NPD-process. As a consequence of this 11 | P a g e

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statement we draw the conclusion that lead users can be integrated in the idea screening stage and preferably as a part of the idea committee that evaluate ideas to eliminate Drop- and Go- errors.

2.3.3 Develop concept and perform tests

Von Hippel (2005, p.22-23) states that lead users are at the very edge of product development and work in an environment where products used have not yet been introduced for the commercial market it is therefore important to consider lead user opinions when exploring concepts since they experience needs not yet identified by the ordinary user. The dynamics of needs are rarely static and are often propelled by underlying trends within markets. This implies that the commercial intent for the company turning the concept of a prototype to a functional product addresses the intent of a lead position within the market. The success of staying ahead is managing the needs of tomorrow or next year. (Von Hippel 2005, p.22-23).

&In this stage the lead user can be very valuable to the company providing essential information to the company about what is good and what is bad about the visual prototype.

2.3.4 Market strategy and business analysis

We have not been able to determine any gains of implementing lead users in this stage of the NPD-process. This stage consists mostly of managerial decisions such as financing, strategy and setting of sales goals.

2.3.5 Develop the product

In this stage the company develops a prototype which is tested both in internal alpha- and then in external beta- testing. In both these tests the lead user may be a great asset for the companies in order to acquire the best possible information. The clearest most obvious benefit can be seen within the alpha-testing where the lead user can interact to adjust the final flaws and give feedback more representative for the market than traditional internal product testers like engineers.

A common user integration effort by companies during this stage of the NPD process is the Beta test. Beta testing has its origin in the high-tech industry and is an early stage of consumer product testing. Beta tests has three major objectives to serve, evaluate the function of a product, classify product support and incorporate customer opinions about suitable market message of the developed product. Beta testing often involves guidelines for product usage but still offer the possibility to play around with the product (Pita & Franzak, (1997).

Pitta Franzak and Katsanis (1996) found that industrial lead users often test products in idiosyncratic ways that companies often does not anticipate. Not all features discovered will have significance but critical errors can be eliminated when designing the final product, which will save companies considerable costs.

2.3.6 Product launch and Market testing

Pitta and Franzak (1997) describe that when developing new products, managers often see the concept of a product as a bundle of benefits. The idea is to make these benefits appeal to the majority of customers in order to attain product success. This implies that in the concept testing stage of product development companies design their offerings as a list of component benefits. So even if companies have identified key benefits to incorporate in their new product the chance of customer ever recognizing them all is low without lead user involvement. Most customers value benefits that are especially important to them and pay little notice to other features regarding the product. Lead users represent others customers like them and will 12 | P a g e

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recognize product benefits important to themselves and to other customers. This is how lead user input can be used as a tool for increasing market acceptance when launching new products. User developed products decrease the probability of launching a product not fully adopted by customers since the approach of developing the product was executed by users and designed to appeal to users. The specific use of the lead user in this stage can be to observe and interpret consumer feedback and help the management to adjust the product or the marketing if necessary.

2.4 Problems with incorporating lead users in the NPD-process.

Chen and Hsieh (2005) write that not all studies show that lead users are successful; some studies show that conflicts can arise from issues like partner selection, time and intensity of customer involvement and the will to give representative feedback. However the authors determine that the success of user involvement is dependent of the intensity of interaction.

The writers state that the intensity of interaction is in direct proportion to the performance output from the NPD-process. The authors continue buy stating that evidence show that customer interaction have proven to be of great value during idea generation, product concept development, prototype testing and product launch in the machinery industry. On the other hand the writers explain that user interaction in small and medium sized software companies were found most successful when applied in the prototype testing stage (Beta-test). Chen and Hsieh (2005) explain that this mostly because of the high costs connected with customers throughout the entire NPD-process.

2.5 Organization and lead user incorporation in the NPD-process 2.5.1 “The organisation”

Pitta, Franzak and Katsanis (1996) explain that when notified of the information or the issue discovered regarding the product, companies should develop a structuring system and procedures to handle user information. The greatest organizational task is to understand the significance of the information obtained. The significant and relevant information is vital for the new product development process for industrial companies. The authors’ write that it is the task of the organization to follow up and make the intelligence gained from user input available to all members involved in the new product development team.

Chen and Hsieh (2005) explained that the generation of organizational learning is determined by two factors. Infrastructure as well as the process capability of a firm is crucial elements for generating and integrating user knowledge for new product development. The process capability of a firm is the issue of acquiring information when interacting with users outside the company and transforming it to something useful for the firm. Information transformed can be used for new product development and form a part of the organizational memory within a company.

The authors continue by explaining that the infrastructure capability to support the learning organization can be further divided into three important aspects of organizational features.

The technology aspect of a firm is one of these components that form the platform for organizational learning. This aspect plays a crucial role in communicating information among units within the firm. Information technology acts as a link between units and eliminates barriers existing between parts of the company. Sufficient technology also enables customers to efficiently communicate with the organization. The second component of the platform is 13 | P a g e

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the structure that enables information flow within the organization. An important aspect of the organizational structure is the encouraging and sharing of information across unit boundaries within the organization. Unit boundaries are often described as functional processes within the organization. The third important criterion is the organizational culture. This aspect of fostering organizational learning deals with cognitive obstacles that a company needs to overcome in order to create organizational learning. The organization must learn to integrate the information into the firm in an effective manner (ibid).

2.5.2 The Boundary spanning team

As previously described in this chapter the lead user can be a great resource for companies in the NPD process, however Pitta, Franzak and Katsanis (1996) describe that there are a few problems with implementing the lead user into the organisation. First of all lead users are ultimately not customers they have their own interests which may not be in-line with the interests of the company. The lead users can not expect to be rewarded in terms of payment for their work; instead the reward may be to get equipment that is better suited for their business. Another huge problem illuminated by Pitta, Franzak and Katsanis (1996) is that different parts of an organisation with hierarchies of their own traditionally have a hard time to cooperate and act as one, not because lack of intelligence or resources, but because of the separated control structures. This demands a lot of the internal structure of the company. As Pitta, Franzak and Katsanis (1996) mentions the organisation needs to use a boundary spanning cross-functional structure in order to successfully incorporate lead users in the NPD- process, since such a structure has a high grade of self control and decentralised decision making. The problem with the cross-functional team is that this type of team only breaks barriers between R&D, finance, market research, marketing, engineering and sales internally in the company. The trick to do this successfully is to meld internal cross-functional teams with external members as lead users to create boundary-spanning teams (ibid).

Pitta, Franzak and Katsanis (1996) describe that cross functional teams should not only turn to consumers through lead users to gather information they shall also include retailers and wholesalers in the NPD-process. When creating a team factors as structure, communications and learning processes must be addressed according to the writers. If an organisation can manage to exploit the learning potential of the boundary-spanning team it will give the organisation the capability to greatly increase the quality of new products. The main reason is that the internal and external interactive learning process reduces the risk of misinterpretation of information caused by different values found inside or outside of the organisation. One other great capability of a boundary-spanning team is its capability to identify problem areas early in the NPD-process saving a lot of resources by getting it right from the beginning. One of the crucial factors in order to make the boundary-spanning team to work properly is the ability to secure the quality of customer input. According to Pitta, Franzak and Katsanis (1996) this problem can be decreased significantly by the usage of lead users.

2.5.3 How to realize the boundary spanning team.

Pitta, Franzak and Katsanis (1996) write that learning within an organisation can be divided into three different stages, collection of information, and dissemination of information within the organisation and finally the shared interpretation of the information.

It is important that the company use these multiple internal sources together with multiple external reliable sources for data collection, such as lead users, to further refine information enabling quick and correct decisions. This way of handling lead user input further increases 14 | P a g e

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the ability for the company to hit trends and to be on-spot regarding customer needs. Failing to get a different view than the one inside of the organisation can lead to a false image of reality and cause failure on the market.

Information dissemination is a must in order to maximize the amount of views internally in the company. This is essential since the different parts of the organisation need to have free flow of information and ability to work effortlessly between the different departments in order to be able to exploit the potential of the lead user.

It is crucial for the company to be able to interpret the information given by the lead user to make it usable for the company in the NPD-process. To interpret the input in the most efficient way all levels of intelligence in the company needs to be involved in the interpretation process (ibid). To make it possible to execute this process swiftly and efficiently Pitta and Franzak (1997) writes that the company need to apply a modern organisational structure based on cross-functional teams. This is important since involving R&D, finance, market research, marketing, engineering and sales in the organisation minimizes the risk of lead user input being incorrectly interpreted by forcing a self-critical process.

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3 Conceptual framework

This section will present the edge of the theory interesting for answering the research questions. The information is divided into three parts based on each research question. Each part will be followed by a research question. It will form a framework that we will compare to empirical data in chapter 6.

3.1 Research Question 1

Lagrosen (2005) explained that in order to extract lead user input valuable for implementation in new product development companies might chose a certain category of users in order to fully understand users needs and wants. The author also states that that cooperation with a few users helps the company cut costs, gain market knowledge and reduces product defects. Pita and Franzak (1997) explain the individual features categorizing the interesting lead user. The authors states that the lead user as an employee with extensive knowledge of a vendor’s products. The interesting lead user is an experienced user of the vendor’s products and has a wide-ranging knowledge of what problems and potentials a product might have.

Categorical features of the lead user interesting for new product development is what Von Hippel (2005, p. 66-67) described as the lead user provides information about customer needs and preferences that the company was unable to retrieve due to information stickiness. Von Hippel also stated that the lead user interesting for product development is the one knowing what is wrong with a vendor’s product and how it can be corrected. Von Hippel (2005, p.66- 69) also stated that the interesting lead user has access to the sticky information since he exists in the full fidelity of information considered sticky by manufacturers. The lead user interesting for new product development can retrieve the costly sticky information in a way that a company cannot due to the reasons that makes the information sticky, such as the tacit nature of user knowledge.

Pita and Franzak (1997) describe that the lead user interesting for a company initiates contact with the company and has a more refined way of searching for information than the regular user. The interesting lead user is categorized by the quality of questions that he is asking the company manufacturing the product. Questions asked by the lead user are often so advanced that they often need special support and additional efforts to be answered. Pitta, Franzak and Katsanis (1996) writes that the additional interest by the lead user for vendor’s products combined with an interest in forming a long-term relationship is what categorizes the lead user interesting for new product development.

The lead users extensive knowledge, experience and ability to fully incorporate the voice of the ordinary user’s preferences into intelligent user input for a company to make sense of are key characteristics that make him attractive to use when developing new products. The physical identity of the lead user interesting for product development in this field of business is up to empirical data to answer given these facts.

RQ1: How can business to business lead users interesting for product development be characterized?

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Theory from Pitta and Franzak (1997) and Chen and Hsieh (2005) clearly describes the significance of lead user interaction as early as possible in the NPD-process. The authors describe the benefits of such an approach as a significantly shorter development times, cuts in costs and significantly increase product success. In an example Keller and Kotler (2005, p.

640) describe that the costs in the idea screening phase is about $1000 per idea and that the cost in the product development phase is $200.000 per idea. In the same example the authors describe that the amount of ideas typically where 64 ideas in the idea screening phase which was cut down to 8 in the product development phase. Based on the authors example is not hard to realize that companies can reduce costs greatly by getting accurate information about customer demands and needs as early as possible in the NPD-process. Chen and Hsieh (2005) write that incorporating lead users early in the NPD-process will increase cost compared to internal product development only making it possible for large companies to use lead user interaction. Further Keller and Kotler (2005, p. 640) describe that this could be interpreted as that the lead user interaction may result in a higher cost per idea on each single step of the NPD-process compared to internal product development. But if enabled in a correct way it will decrease the amount of ideas ran through each stage of the NPD-process cutting total costs drastically. The key of this is making it right from the beginning of the NPD-process which requires trustworthy information input preferably given by lead users.

The theory describing the different stages of the NPD-process does not give obvious answers to how the lead user can be implemented specifically in all the stages of the NPD-process. We will compare the theory about implementing the lead user found in chapter 2.3. Chen and Hsieh (2005) states that lead user involvement early in the NPD-process and throughout the entire process significantly boosts performance. The gain of lead user integration is quite obvious in the idea generation stage, concept development and product development but remains more uncertain in the other stages. Chen and Hsieh (2005) states that more specific studies regarding user interaction in the NPD-process is needed since existing studies have not been specific enough.

RQ2: How can companies use business to business lead users as a part of the new product development process?

Pitta, Franzak and Katsanis (1996) divide the learning within an organisation into three different stages, collection of information, dissemination of information and interpretation information.

The authors describe that the collection of data consists of both internal and external sources.

Pitta, Franzak and Katsanis (1996) further describe that internal sources can be feedback from indirect customer opinions gathered from customer support and complaints as well as opinions gathered from different departments within the organisation. According to the authors information from these sources needs to be compared with external information from distributors and lead users to provide an as accurate image as possible of customers’ needs.

Further the writers’ emphases the importance of getting reliable input from multiple internal and external sources is essential for companies in order to create an accurate image of the surrounding world and the customers in it.

In order to get as many views and opinions as possible Chen and Hsieh (2005) write that it is important that the company’s organisational structure allows information to be spread to

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management of all departments of the company enabling all levels of intelligence can be included in the interpretation process. Pitta, Franzak and Katsanis (1996) write that this is where companies gather all data collected internally and externally and distributes it to management in the organisation making it possible for all internal resources to give their point of view.

To get all the steps described above to work properly the authors describe that it is crucial that the organisational structure of the company is shaped to maximize utilization of the internal and external resources. In order to make these three stages viable Pitta and Franzak (1997) describe that the organisation must use a boundary spanning cross-functional structure in order to allow free flow of information and good cooperation between departments. Further the writers describe this as absolutely essential in order to secure the correctness of the internal and external input creating the best possible input to implement in the NPD-process.

RQ3: How can companies handle the organizational difficulties connected to integration of business to business lead users in product development?

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