GIC Discussion Paper

Center for Global Innovation Studies, Toyo University

8

No.

November 2018
［ Working Paper ］

Innovation and Society’s Orientation around Value Co-Creation
Building Partnerships between Companies and Customers

Akira ICHIKAWA

Researcher, Center for Global Innovation Studies, Toyo University
Associate Professor, Department of Global Innovation Studies, Faculty of Global and Regional Studies, Toyo University

Innovation and Society’s Orientation around Value
Co-Creation
Building Partnerships between Companies and Customers
Akira ICHIKAWA
Associate Professor, Department of Global Innovation Studies, Faculty of Global
and Regional Studies, Toyo University
Steering Committee Member and Researcher, Center for Global Innovation
Studies, Toyo University［Keywords］
Innovation, value, value co-creation, companies, customers, partnership
1.

Introduction
Rarely is a word used as prevalently as “innovation” is. As a result, the definitionof this word has also become more multifaceted, making it difficult to haveaccurate discussions.
The purpose of this study is to review the various meanings implied by the word
"innovation" and by the word “innovation” preceded by a descriptor. In addition, we
address value co-creation, which has often been discussed in recent years as a way
to enhance innovation, and we investigate the implications of the democratizationof innovation and the co-creation of value.1
2. What is Innovation?
2-1. The Prevailing Image of Innovation
Undoubtedly, the term “innovation” has been used often since the early days ofthe study of business administration. In this context, new combinations, newtechnologies, new approaches, new usage methods, new ideas, and new values areemphasized (Sato, 2017:200), and the term signifies “changes in what satisfaction
and values consumers can obtain from resources” through these means (Drucker,
2007a:13). The concept describes the series of events during the process frominvention to commercialization (Asakawa, 2003:177); innovation signifies drastic

This study is based on the contents of a lecture entitled "Innovation and Society’s
Orientation around Value Co-Creation: Building Partnerships between Companies andCustomers," which took place at an event sponsored by the Committee on Small andMedium-sized Enterprises of the Kansai Association of Corporate Executives on
August 20, 2018. Thus, the referenced literature is in Japanese in consideration of its
availability to the general audience, and the lecture is closer to an outline than athesis.
11changes in economic and social activities. Thus, in this section, we review thecharacteristics of innovation, as described below.
2-2. Discontinuity
Innovation is creating the future by producing something did not exist
previously (Nonaka and Katsumi, 2009:250-251). In addition, it signifies a
disruption of unnatural or inconvenient processes in today’s world (Nonaka and
Katsumi, 2009:219). Under this definition, the significance of innovation must
extend beyond the traditional categories of existing markets and products rather
than being considered “a projection of past experiences" (Ikeda, 2011:112). In otherwords, we can say that the first characteristic of innovation is discontinuity.
2-3. ProgressivenessIf innovation serves “to greatly alter humanity’s social life” (Itami, 2009:2), thischange (rather, progress) strives to provide customers and society with great profit,
great potential to multiply wealth, great value, and great satisfaction (Drucker,
2007a:308). Ikeda (2011:17) clearly articulates that the term “innovation” was firsttranslated into Japanese as “technological progress (underline added)” in a 1956
White Paper (METI’s economic report), arguing that “the English word ‘innovative’simply refers to the process of modification and does not refer to technology.” In
this sense, the second characteristic of innovation is progressiveness.
2-4. Creation of New Markets
If new products are created through innovation via accumulated technologies insociety (Itami, 2009:185), and if these products bring about discontinuous progressin people's lives, then innovation signifies “a spread in the demand for a product orservice at an unprecedented scale and range” (Itami, 2009:133). In other words,
this process entails the birth of a new market, and, thus, the third characteristic ofinnovation is the creation of such a market.
2-5. Importance of Knowledge
The fourth characteristic of innovation is the importance of knowledge. It goes
without saying that knowledge is necessary for innovation.
According to the well-known management consultant Peter Drucker (2007b:56),
the definition of “management” is to “know how to effectively apply existingknowledge to produce results,” and, at the same time, the term is applied to theclarification of “what new knowledge is necessary,” “whether the knowledge can berealized,” and “what is needed to make the knowledge more effective.” Thus,“knowledge is also applied to systematic innovation.” In other words, knowledge isat the core of innovation. From another angle, Prahalad and Krishnan (2009:13)
also touch on the importance of knowledge. Given that the innovation process must2

constantly respond to changes in consumer demand, behavior, and experience,
Prahalad and Krishnan (2009:13) argue that “[companies] must find the besttalent and management resources in the world to achieve this.” In other words,
innovation is a product of a knowledge-driven society, and knowledge is an
important resource for generating innovation.
2-6. Communication between Technology and Market
In Section 2-1, we mention that “new combinations” are emphasized during
innovation. Determining the entities to be combined to yield innovation is an
important part of the process. Von Hippel (2006:124) provides an example ofinnovation yielded by a “new combination,” as follows:“For example, a mountain biker who specializes in jumping from high platforms
and who is also an orthopedic surgeon will tend to develop innovations that draw
on both of these types of information: he might create a seat suspension that
reduces shock to bikers' spines upon landing from a jump.”
This example represents the possibility for innovation when combining theknowledge of users in the market with a mountain bike manufacturer or
technology through communication. Such communication is the fifth characteristicof innovation.
The method of combining market knowledge with manufacturing technology isimportant here, and, thus, as Itami (2009:83) says, “In the end, innovation is bornout of communication between a market and technology.”
2-7. Risk and Uncertainty
The sixth characteristic of innovation pertains to risk and uncertainty.
Tidd et al. (2004:20) point out that innovation was originally a dangerous
business, entails a large degree of uncertainty, requires appropriate management,
and has a low outlook for success unless given conditions are met. However,
Drucker (1996:96) argues that, as a risk taker, one should pursue innovation, as“the risks associated with pursuing innovation are much smaller than the risks ofnot pursuing innovation.” In addition, Nonaka and Katsumi (2004:113) show thatnew knowledge always remains even if technological development fails andstresses the importance of “not stopping the flow of knowledge, continuously
consuming knowledge, and proactively utilizing knowledge.”
Innovation entails risks and uncertainties because it cannot be assessed throughlogical analysis. Nonaka and Katsumi (2004:68) summarize this idea as follows:"How easy things would be if we could achieve innovation through logicalanalysis … Creative and innovative technology developments and productdevelopments are not born out of logical analysis where the truth is a prerequisite
but by dialectically combining conflicting items.”

32-8. Source of Competitive Advantage
The seventh characteristic of innovation is that it is closely related tocompetitive advantage.
Companies pursue innovation even if it requires risks or involves uncertainty
because innovation is greatly tied to a company’s competitiveness. Tidd et al.
(2004:85) describe innovation as “a major internal source of competitive advantage,”
and Prahalad and Ramaswamy (2004:305) describe the increase incompetitiveness through innovation as “[companies] co-create value with
consumers by accumulating numerous changes and adaptations. If such changes
continue at new frontiers, this will not only reveal new business opportunities but
the market equilibrium will also shift.”2-9. Summary
In this section, we aimed to review the characteristics of the multifaceted word
“innovation.” As a result, we found that innovation is often discussed in the contextof (1) discontinuity, (2) progressiveness, (3) market creation, (4) importance ofknowledge, (5) communication between technology and markets, (6) risk anduncertainty, and (7) the source of competitive advantage. In the next section, we
examine the process that innovation follows and the situations in which it may
succeed or fail.
3. The Process of Innovation
3-1.
The Process of Innovation
In general, innovation is said to be a three-step process: (1) invention (ideacreation), (2) development (idea realization), and (3) the introduction of products tothe market (commercialization) (Kanter et al., 1998:26-27). In other words, theprocess of innovation covers the “birth of new products and services fromtechnological innovation, their large-scale acceptance by real-world markets, andcoming to fruition by changing the lives of people (Itami, 2009:2).”
Two forces control this process (Govindarajan and Trimble, 2012:151). The firstis the technology push, which refers to technological innovation by companies thatcatalyze a series of innovation processes. The other is the market pull, which refers
to market demand triggering technological innovation with the help of policy,
economic, and political efforts by interested parties. The decarbonization of society
is a good example.
3-2. Success Factors of Innovation
Given the importance of innovation, it is only natural to discuss how it can be
successful. Here, we introduce a few relevant points.
The first success factor for innovation is an entrepreneurial spirit. This factor isdescribed by the idea that “innovation is done by people.” (Drucker, 2007a:188).
4

The second factor is the interaction between technology and organizations.
Kusunoki and Chesbrough (2001:263) state, “The organization of the firm also
conditions its ability to profit from its innovation activities. [Thus] the firm'sorganizational strategy must align with the technology that they are pursuing.”
The third factor is the attitude of the management. The important issues are“whether management can make new evaluations of personnel who contributed to
the growth and management of the company" and "whether management cancontinue to evolve and learn/adapt from a business environment increasing inseverity.” (Utterback, 1998:265)
The fourth factor is corporate culture. Kanter et al. (1998:21) point out theimportance of "an open corporate culture" and argue that "companies with such aculture have windows facing all directions; internally they have no barriers
between departments and functions, and externally they strive to maintain thebest relationships possible.”On the contrary, the fifth factor highlights the importance of design. “Design isthe portion of the product that appeals to sensibility. This can refer to aspects thatappeal to the five senses (ex. visual or tactile) such as product design or ease of use
and comfort. The impact from the design is not only short-term when viewing the
traproduct or during use, but can have a lasting impact in one's memory …
Designs that appeal to the senses tend to have a larger overall impact … Design
can become the driving force behind innovation as it could inspire, create a buzz,
and create a big wave of demand” (Itami, 2009:149-150). Although Japanesecompanies have lately started to recognize the importance of design, they should
learn from the sensibility of using design to pioneer new markets, as in the case of
Northern European, Italian, and French products becoming widely accepted by
Japanese consumers.
3-3. Efforts after Successful Innovation
A company is not guaranteed long-term financial security just because its
innovation is successful. Eastman Kodak and Fujifilm, two makers of film products,
provide a good example of this issue. Whereas Eastman Kodak, which boasted the
top market share in silver halide photographic film, went out of business in 2012as a result of its failure to develop new businesses, Fujifilm continues to maintainits position as a frontrunner in the industry owing to its developing new businesses,
such as digital cameras, medical equipment, and even cosmetics, by utilizing its
accumulated technologies (Yamamoto, 2013:105). This example highlights thenecessity of continued efforts following successful innovation. As Drucker(2007a:258) points out, “Companies must increase their development costs
especially after they have had success in innovation. They will need to develop new
ways to use the product, discover new customers, and have them try new
products.”
53-4. Inhibiting Factors of Innovation
Tidd et al. (2004:397) briefly summarize the environmental factors that inhibit
innovation. We reviewed these factors and present those that are relevant within
the context of this study, as follows.
Tidd et al. (2004) believe that innovation is more likely to occur in anenvironment with horizontal relationships rather than in hierarchical or verticalenvironments. As we pointed out in Section 2-9, the characteristics of innovation
include the importance of knowledge, communication between technologies andmarkets, and risks and uncertainties. It is believed that a flatter organizational
structure encourages the spread of knowledge within the organization, promotes
smoother communication with the market, and enhances the recognition of risks
and uncertainty.
In addition, Tidd et al. (2004) believe that substantial and expansive change ismore likely to encourage innovation than perfunctory, limited change is. The
former type limits progressiveness (the second characteristic of innovation), and,thus, limits innovation that could become a source of competitive advantage (theseventh characteristic of innovation).
Furthermore, Tidd et al. (2004) warn about innovation activities with no focus.
Regardless of whether innovation is driven by technology push or market pull, acompany must activate its core competencies to achieve discontinuity (the firstcharacteristic of innovation) and generate innovation narrowed to a set focal point
or objective. Unfocused innovation activities struggle to produce results as
globalization advances and companies compete across borders and as
modularization increases and companies focus on specialized technologies.
4. Types of Innovation
4-1 Large and Small Innovation
We examined the concept of innovation in Sections 2 and 3; however, as the term
“innovation” became well-known to the greater population, a series of new concepts
with attached descriptors began to emerge. We address a few of them in thissection to deepen our understanding of the concept of innovation.
We first introduce “large innovation” and “small innovation,” concepts discussed
by Masato Sato. Sato (2017:200) states, "When we consider innovation design,certainly there can be small, medium, or large ways of creating innovation.” Sato(2017:200) anticipates that “in particular, the regional, ‘small innovations’ arediverse and effective in remedying the social paradox.” He offers the perspective
that, if people pursue innovation to solve global problems, then, at the same time,
innovation is needed to solve local problems. On this basis, Sato (2017:201) seeks(1) the need to re-energize local small and medium businesses to revitalize regional
economies and promote industry, (2) the development of an environment in which
6many people from a broad base can participate in activities to spur innovation andform an invigorated Japanese society, and (3) the formation of a society in which
local people can make "small" innovations from diverse positions and perspectives.
This discussion point is particularly notable for Japan, where regional
revitalization is heavily emphasized and innovation activities are encouraged inregions and by rural small or mid-sized companies.
4-2. Product and Process Innovation
The focal points of innovation activities can be largely defined as either productinnovation, such as the development of new products and markets, and process
innovation, such as the modification of manufacturing (service) processes (Ohashi,
2005:8).
Product innovation is influenced by the strategic goals for the market (Nakano
and Managi, 2006:117) and is based on the belief that new products are the fruitsof cutting-edge innovation (Tidd et al., 2004:5). In other words, according to Tidd etal. (2004:5), "We can say the development of new products is an important ability
in companies. Shifts in the socio-economic environment as to what people believe,
expect, desire, and earn will create new opportunities and constraints … Productinnovation will require companies to develop capabilities to handle theinnovation.”
In contrast, process innovation involves "creating something other companies
can’t" and "creating something through a better method than other companies"(Tidd et al., 2004:5). Process innovation was the most common feature among
Japanese companies from the end of the period of rapid economic growth to thestart of the 21st century. Process innovation supported the growth of Japanesecompanies in the automobile, motorcycle, shipbuilding, and home appliance sectors
into global top brands.
Compared to product innovation, process innovation may appear to have asmaller impact, but it is extremely important for future development. Economist
Lester Thurow (1992:67) argues that, "in the 21st century, process technology,
which develops new production methods, will become more important than producttechnology, which develops new products, in maintaining an economic competitive
advantage." The reason is that similar products may emerge quickly following theinvention of a new product, whereas the ability to invent and improve a new
production method is more difficult to imitate.
Prahalad and Krishnan (2009:223), who study the co-creation of unique value
with customers, point out the importance of process innovation as follows: “Inorder to personalize the customer experience and make it highly unique … acompany must have a flexible operational process to handle constant innovation.
Diversity, flexibility, adaptability, and constant progress in operational processes
hold the key to success.”7

4-3.
Sustaining and Disruptive Innovation
Perhaps the most famous discussion around types of innovation is thatregarding sustaining and disruptive innovation, as asserted by Christensen andRaynor (2003:36-37). They demonstrate that “in the context of sustaining
innovation, or a situation where companies compete by catering to their mostprofitable customers with expensive, higher-quality products, incumbents will
always outperform," whereas "in a disruptive innovation, where typically cheaper,
simpler-to-use versions of existing products that target low-end or entirely new
customers emerge, it is highly probable that new entrants will outperform
established companies.”
A characteristic of sustaining technology is the “innovation to further enhance
product performance along the mainstream-value dimension” (Shibata, 2008:34); amajority of these technologies focus on “enhancing product performance”(Christensen, 2001:9). In other words, products created through sustaining
innovation are characterized by higher performance than conventional products
are, and established companies with sufficient resources to dominate the market
and meet the stringent demands of high-end customers gradually modify theseproducts (Christensen and Raynor, 2003:39-40).
Products resulting from disruptive innovation, however, are characterized by low
prices, simplicity, compactness, and ease of use (Christensen, 2001:9). Good
examples of such products include the mini blast furnace, which did away withvertically integrated steel mills; digital photographs, which replaced silver halide
photographs; smartphones, which integrated the functions of phones and PCs;
semiconductors, which eliminated vacuum tubes (Kotler, 2015:189-190); Japanese
automobiles, which took market share from large vehicles with poor fuel economy
during the oil crisis (Ikeda, 2011:48); and the Honda Super Cub, which took market
share from large motorcycles, such as Harley Davidsons. (Ikeda, 2011:45). In thisway, new entrants often bring about disruptive innovation; their products are
simple, easy-to-use, and cheap but supply a "new dimension of value" (Shibata,2008:34) during the process of overtaking mainstream products in the market.
Christensen refer to this scenario as the “innovator’s dilemma.” That is, it is asituation in which “disruptive technology puts innovators into … a dilemma.
Making efforts, being sharply aware, investing actively, and listening carefully tocustomers' opinions are all effective in solving the problems caused by new
sustaining technology,” but “these paradigms for stable management not only are
ineffective for disruptive technology … but [are] often counterproductive”(Christensen, 2011:115).
The cause of this dilemma is the main point of discussion of Christensen (2001),
who focus on the relationship between customers and companies. Christensen(2001:84) asserts that “customers direct manufacturers to sustaining innovation,
8

make them lose their leadership in disruptive innovation, and, to put it frankly,
can lead them in the wrong direction.” That is, if companies obey the golden rule tolisten to the voice of the customer, then “depending on circumstances, it canbecome a powerful concept for success, but in other situations it can also be ashortcut to failure” (Utterback, 1998:251). To further elaborate, we quote Hamel
and Prahalad (2001:161), who went on to study value co-creation, as follows:"Customers cannot foresee the future, this is obvious. How many people 10 or 15
years ago wished for a mobile phone or personal fax, copy machine, 24-hour
securities trading, multi-valve engine, videophone, CD Player, car equipped with anavigation system, portable, international satellite-based position measuring
device, automatic cash dispensing machine, MTV, or a network for home
shopping?”
In other words, it is the relationship between the customer and the company
that causes innovator’s dilemma, and when a company “adapts excessively tocurrent customer needs, they have a harder time developing products to meet theneeds of tomorrow’s customers” (Takai, 2008:87). Thus, it is important to “grasp
beyond customers’ needs, to customers’ wants” (underline added) (Nonaka and
Katsumi, 2004:138-139). If a company can identify the customers’ wants,“customers will come to view the final product placed in front of them … andrealize ‘This is what I wanted.’” (Nonaka and Katsumi, 2004:317-318).
Many readers may feel that these principles are paradoxical, because, withrespect to the innovator’s dilemma, Christensen argue that mainstream companies
are so entrenched in catering to established customers that they miss nichemarkets and allow new market entrants to create and develop disruptive
innovations. The early-2000s discussion on innovation centered on whether tolisten to customers’ opinions.
4-4. Open and Closed Innovation
The next type of innovation that we introduce is open innovation. The premise of
the discussion around open innovation is that advancements in globalization andspecialization and rapid developments in IT have caused “a dispersion of usefulknowledge; even the largest and most powerful companies will not be able toproprietarily develop all necessary technologies” (Christensen, 2008:88). In thatsense, open innovation is along the same contextual lines as open architecture, aconcept actively discussed since the late 1990's. Open architecture is architecture“whose inter-module interface is made widely public to society” (Kokuryo, 1999:49).
The products are characterized as being “basically modular products with aninterface standardized on an industry level, beyond just companies” (Fujimoto,2001:6).
On that basis, open innovation is defined as “systematically promoting andpursuing the broad incorporation of internal and external ideas that can create
9opportunities for innovation, then consciously combining those innovations withinternal capabilities and resources, and broadly outputting those opportunities tothe market through various sales channels” (West and Gallagher, 2008:117). In
other words, this type of innovation signifies that “ideas are generated, whether
internally or externally, and those ideas are sent to the market, whether internallyor externally” (Chesbrough, 2004:58). To describe this idea further, “companies arecompelled to form teams with other companies in order to develop or absorb newtechnologies, or to absorb new products, commercialize new products, or simply not
fall behind in the latest technological developments” (Vanhaverbeke, 2008:271).
This way of thinking is the opposite of closed innovation, which had previously
been embraced. With closed innovation, companies had honed their technology bydeveloping ideas, marketing, and raising capital on their own. Moreover, asChesbrough (2004:5) indicates, companies have long generated innovation in theircentral research labs on the following beliefs: “(1) a company must hire the mosttalented personnel in the industry, (2) to bring a new product to market, a company
must develop it on its own, (3) the company that most quickly develops a new
product can most quickly put it on the market, (4) usually, the company who is thefirst to place an innovative product on the market will win, (5) the company who
makes the highest investment in research and development in the industry candevelop the best new products and lead the industry, and (6) a company should
protect intellectual property and prevent others from imitating.”
However, situations have changed. The pool of quality talent and liquidity haveboth increased. The knowledge needed for innovation has also started toaccumulate in “suppliers, customers, universities, venture companies, andconsultants” (Chesbrough, 2004:49).
From there, discussions around open innovation inevitably blossomed, and theconcept of co-creation became more powerful. Before we explain the concept of
co-creation, we need to touch on the concept of commodity traps.
Commodity traps signify a phenomenon in which differentiation between rival
companies become difficult as companies worldwide conduct more research todevelop new products (Chesbrough, 2012:39). To escape the commodity trap, that is,
to regain a competitive edge through differentiation from other companies, acompany must “build a much deeper relationship with customers that cannot be
imitated by rivals" (Chesbrough, 2012:102). In other words, we observe a similar
shift away from the previous flow of discussion to that in the discussion ofsustaining and disruptive innovation, which emphasized not excessively listening
to customers’ voices to avoid the pitfalls of the innovator’s dilemma. Chesbrough(2012:43) states, “Service innovation advances when the role of the customer
changes during the process of innovation. A growing number of companies
incorporate customers into their innovation processes rather than treat them as
passive entities. In many cases, companies collaborate with customers to come up
10with new products and services.”
4-5. Reverse Innovation
Given the growing importance of co-creating with customers, we introduce
another type of innovation. The activities of multinational corporations easilytranscend borders; the age when companies could sell existing products to the
middle and upper classes in emerging markets is coming to an end. Similar to Baseof Pyramid businesses, a movement aims to create new future markets by creatingproducts to meet the needs of the poorest citizens (with low purchasing power) indeveloping countries.
The concept of reverse innovation was proposed under such circumstances.
Nomura Research Institute (2010:47) defines reverse innovation as “a way of
thinking in which the products and services developed for emerging markets arecompetitive not only in emerging markets but also in developed markets.”
Govindarajan and Trimble (2012:6) explain reverse innovation as “the case where
the innovation is adopted first in poor (emerging) economies before ‘trickling up’ torich countries.” In other words, reverse innovation describes the assessment oflocal needs in developing and emerging markets, the development of affordable
products that satisfy these needs through innovation, and the readjustment ofthese products to the markets of developed countries. As many multinational
companies have experienced, this concept is based on the idea that“[products/services] that are effective in rich countries are not necessarily
automatically accepted in emerging markets with completely different customer
needs” (Govindarajan and Trimble, 2012:7). For multinational companies, reverse
innovation can serve as (1) an opportunity to bring about new innovation, (2) apotential means to gain new future markets, and (3) part of their corporate social
responsibility activities to allow citizens of emerging and developing countries toflourish economically, improve their living standards, and obtain better
educational standards.
In determining the best way to bring about reverse innovation, the focus again is
co-creation with the local community. Here, we introduce the concept of"unlearning.” We previously showed that products with high customer needs indeveloped countries may not necessarily generate demand in emerging anddeveloping countries. If that is the case, then the most important task isunderstanding local needs. To this end, companies must “unlearn” the experiencesthat brought them success in developed countries. For example, General Electricuses only human resources from emerging and developing countries to advance thedesign and development of affordable products suited to local needs (Konomoto,2010:x). In addition, Govindarajan and Trimble (2012:23), proponents of reverse
innovation, state, “Reverse innovation does not come from inventing but fromforgetting. One must abandon what he’s learned, what he’s seen, and what has
11

previously brought about the greatest success, and let go of the dominant logic thathas worked in industrialized countries.” They also state that “one of the mostdifficult tasks in attempting reverse innovation is to forget history” (Govindarajan
and Trimble, 2012:191) and that “global corporations with lots of history areaccustomed to innovation in rich/industrialized countries, but the needs andsolutions of emerging countries differ significantly … and thus reverse innovationmust start from a blank slate” (Govindarajan and Trimble, 2012:96).
Then, from this initial state, companies may ask with whom they should start
brainstorming. Surely the answer to this question is the customers who
understand the needs of the local area (future users of the product or service).
Reverse innovation simply cannot begin without co-creation.
5. Value Co-Creation
5-1.
Democratizing Innovation
The previous discussions have highlighted the importance of innovation and theco-creation of value (in other words, the creation of a partnership between
companies and customers with respect to innovation). To support this idea,
discussions related to the democratization of innovation have emerged,
spearheaded by Eric von Hippel.
The democratization of innovation is defined as "the state in which the users of
products and services—both firms and individual consumers—are increasingly
able to innovate for themselves owing to improved environment and capabilities,
rather than a reliance on manufacturers of products and services" (von Hippel,
2006:14).
Eric von Hippel (2006:40) explains which types of users are capable ofinformation using the concept of the lead user. In other words, “(1) since lead users
are at the leading edge of the market with respect to important market trends, one
can guess that many of the novel products they develop for their own use willappeal to other users too, and (2) they expect to gain relatively high benefits from asolution to the needs they have encountered there, and thus many are likely to
become innovating users (develop new or modify products).” Lead users combine
existing products with the developments of others to obtain “exactly right products”(von Hippel, 2006:14). In other words, such users are viewed as entities that areahead of commercial needs and create innovation themselves.
Such innovations by lead users never replace innovations by companies but
rather complement them. In other words, a complementary relationship in which
demand-oriented innovation is done by lead users and solution-oriented innovation
is done by manufacturers is established (von Hippel, 2006:96). As a result of theinteractions within this complementary relationship, lead user innovation supplies
manufacturers with beneficial information that cannot be obtained by othermethods (von Hippel, 2006:143). Thus, manufacturers may wish to actively seek
12

innovating lead users to commercialize innovative products more quickly than everbefore (von Hippel, 2006:186).
5-2. Value Co-Creation
In parallel with discussions on the democratization of innovation, Prahalad andKrishnan (2009:11) study value co-creation, stating “In the future there will be anincreased tendency for consumers to co-create value with companies and their
suppliers, business partners, and communities of consumers. Personal experiences
will be customized for each consumer during this process.” Businesses should
strive for such "personalization of customer experience" (Prahalad and Krishnan,
2009:187) when managing the multiple points of interaction with their customers
and co-creating value.
Similar to von Hippel’s focus on lead users, Prahalad and Ramaswamy(2004:188-189) focus on value co-creation based on the strong conviction that, in amodern era with advanced globalization and technology, “consumers will gain
power and proactiveness, connect with each other, and will increase their
inclination to talk with other companies as well as other consumers.” They showthat with value co-creation as an axis, “management resources dramaticallyincrease when using a broad range of resources – competence, knowledge,
infrastructure, investment area – in suppliers, business partners, andcommunities of consumers” (Prahalad and Ramaswamy, 2004:292-293).
The following quote is an easy-to-understand example of value co-creation using
Lego blocks.
“What does a young child value here? The Lego bricks? Or the ability to construct avariety of experiences using the bricks? The Lego brick serves as an artifact
around which individuals have experiences. The same consumer can use those
Lego bricks to create a new experience every time, and different consumers canhave different experiences with the same bricks. Thus, Lego consumers co-create
value by interacting with the Lego company through its experience environment.”(Prahalad and Ramaswamy, 2004:90) .
Given the spread of social networking services, companies are able tounderstand the values customers create for their products and the relevant
experience environments. In addition, consumers can use a company's products tocommunicate the personalizations of the customer experience that they attempted.
The surrounding environment for value co-creation is in place both online andoffline.
5-3. Experience Innovation
We now discuss experience innovation, which is brought about by value
co-creation, along with its characteristics.
Prahalad and Ramaswamy (2004:118) summarize the differences between
13

traditional and experience innovation in. First, traditional innovation targets
products and operational processes (i.e., product and process innovation), whereas
experience innovation targets an experience environment that generates anappealing co-creation experience (Prahalad and Ramaswamy, 2004:94). The basisof value in traditional innovation is products and services, whereas that inexperience innovation is companies and co-creation experiences with customers.
Under firm-centric traditional innovation, companies create value regardless ofmarket pull or technology push, whereas, under experience innovation, companies
and customers co-create value; the method stresses value co-creation centered oneach individual customer. The developmental focus in traditional innovation
involves keywords such as cost, quality, speed, and modularization, whereas ofexperience innovation has the following focuses: granularity (i.e., giving theconsumer the ability to interact with experience environments at any desired levelof specificity, immersing herself in experiences over time in whatever way shechooses (Prahalad and Ramaswamy, 2004:104)), extensibility (i.e., exploring how
technologies, channels, or modes of delivery can allow consumers to experienceestablished functions in new ways or create entirely new functionalities (Prahaladand Ramaswamy, 2004:107)), linkage (i.e., the recognition that events connect inmultiple ways from a consumer’s perspective (Prahalad and Ramaswamy,
2004:109-110)), and evolvability (i.e., capturing the learning from co-creation
experiences and using it to develop experience environments that shapethemselves to consumers’ needs and preferences and not vice versa (Prahalad andRamaswamy, 2004:111)). With respect to the technological focus, traditionalinnovation focuses on the integration of functions, technology, and systems,
whereas experience innovation focuses on the integration of factors that advanceexperiences or the experiences themselves. The aim of infrastructure in traditionalinnovation is to encourage the completion of products and services, whereas
experience innovation encourages the personalization and co-creation ofexperiences.
Thus, innovation in a society that stresses the co-creation of value places
customers in the leading role of the value co-creation process. “Informed,
networked, empowered, and active consumers are increasingly co-creating value
with the firm. Companies that had previously pursued customers like hunters are
now in a position to be pursued back” (Prahalad and Ramaswamy, 2004:184).
5-4. Value Co-Creation and Markets
As discussed above, the bundled co-creation experiences of customers generated
from the experience environment become important in value co-creation. Theseexperiences become the aforementioned characteristics of granularity, extensibility,
linkage, and evolvability. This evolution is a major paradigm shift in theemergence of innovation and has the potential to positively change the commercial
14

relationship between companies and customers.
This study addresses the theme of a society oriented around value co-creationand innovation. In this context, we must understand what value signifies and how
is it created. Prahalad and Ramaswamy (2004:185-186) argue that “value
strengthens the link between each co-creation experience,” that “the co-creation
experience determines … how much money each consumer will pay,” and that“neither product nor service forms the basis of value. Rather, value is said to becreated by the co-creation of experiences in an experience environment jointly built
by companies and consumers.”
If that is the case, we need to modify the previous image of the market as a place
where companies (supply-side) trade goods and services with customers(demand-side). We explain this concept again using the discussion of Prahalad andRamaswamy (2004:187), as follows: “With value co-creation (as value shifts toexperiences), the market is becoming a forum for conversation and interactions
between consumers, consumer communities, and firms. We must regard themarket as a place to nurture co-creation experiences.” Moreover, given theemerging concept of the market as a forum to nurture co-creation experiences, the“interaction between the firm and the consumer or consumer community is
becoming the locus of value creation and value extraction. Changes among
consumer sentiment cannot be understood without being in close proximity andjointly creating value. The company should get to know the consumer as deeply as
possible through productive dialogue; the content of the dialogue is also likely toincrease sophistication in accordance with the knowledge and skills of consumers.
One must build an information system with consumers as the nucleus, and use it
to proactively involve consumers in every aspect of the co-creation experience, frominformation gathering to the planning, completion, and delivery of products andservices.”
If that is the case, the products and services developed by companies may change
in the future. Until now, companies unilaterally presented information tocustomers about products built using the their innovative technologies or new
services based on new ideas. However, in a society centered on value co-creation,commercial products and services will change to adopt specifications that can
flexibly respond to customer-company interactions and personalized co-creation
experiences.
Another challenge is how to create opportunities online (the utilization of bigdata) and offline (various events, including exhibitions) to promote experienceinnovation between companies and customers. The emerging knowledge-driven
society prevents the supply-side (i.e., companies) from monopolizing knowledge.
Governance capabilities centered on innovation-driving interactions withstakeholders that surround companies providing products and services will become
key.
15

6.

Conclusion
In this study, we centered our discussion on the topic of a society ordered aroundvalue co-creation and innovation. In Section 2, we summarized the characteristics
implied by the word, “innovation” into the following seven categories: (1)discontinuity, (2) progressiveness, (3) market creation, (4) importance of knowledge,(5) communication between technology and markets, (6) risk and uncertainty, and(7) the source of competitive advantage. In Section 3, we confirmed that the processof innovation spans from technological innovation to commercialization and foundthe success factors of innovation to be (1) entrepreneurial spirit, (2) interactions
between technology and organizations, (3) attitude of the management, (4)corporate culture, and (5) the importance of design. Furthermore, we pointed out
the importance of efforts after successful innovation and then listed the inhibiting
factors of innovation as (1) vertical relationship; (2) perfunctory, limited changes;
and (3) innovation activities with no focus. In Section 4, we introduced andreviewed several different types of innovations. With respect to large and small
innovations, we highlighted the need not only for global-scale innovation but also
for innovation on a local level, which could lead to regional revitalization. With
respect to product and process innovation, we noted that both are important,although process innovation is important for future innovation that takes
customers’ experiences into account. In other words, we noted that diversity,
flexibility, adaptability, and constant progress in operational processes hold the
key to success. For sustaining and disruptive innovation, we emphasized the use of
disruptive innovation by new market entrants and introduced the discussion ofwhether placing too much focus on the sophistication of products to cater toestablished customers' voices, as in the case of sustaining innovation, may cause
companies to lose their leadership to disruptive innovation (i.e., the innovator's
dilemma). However, in discussing open and closed innovation, we explained thecurrent landscape that emphasizes the co-creation of unique value with customers.
We explained that to escape the commodity trap, that is, to regain a competitiveedge through differentiation from other companies, a growing number ofcompanies incorporate customers into their innovation processes. Finally, in
discussing reverse innovation, we pointed out the need to "unlearn" experiencesthat had brought companies success in the past, identify customer needs, and comeup with affordable products or services to satisfy those needs.
The subtitle of this paper is “Building a Partnership between Companies andCustomers.” As previously stated, a review of the various concepts of innovation
showed that the relationship between companies and customers has steadilychanged over time. In Section 5, we reviewed and introduced concepts such as vonHippel's “democratization of innovation” and Prahalad and Ramaswamy's “value
co-creation.” We summarized the discussion that, given the current landscape of16

advanced globalization, empowered consumers, knowledge dispersion, anddeveloped IT, companies should have points of interaction with customers,
understand their experience values, and aim for experience innovation, whichallows for assessments that are not possible with traditional innovation.
Finally, we conclude by mentioning several points that we did not discuss as partof this study.
First, we should expand our perspective of companies and customers from that ofbusiness management to that of public policy, and we should discuss innovation
inclusive of aspects regarding public services and social actors. We should pay
attention to public policy innovation, with consideration for public-private
partnerships, private finance initiatives, concession methods, and the treatment of
non-governmental and non-profit organizations that enter the public sector.
Second, it is essential for the discussion to include questions aroundderegulation in areas in which information and communication technology
developments conflict with current regulations. A good example is the discussions
around changing road and transport laws to introduce Uber in Japan. Perhaps
such issues can be referred to as “deregulation innovation.”
Third, we need educational innovation to foster entrepreneurs, the sources ofinnovation, as well as policy innovation to support these endeavors. Many changes
are necessary to achieve this end, such as social security reform, corporate financesupport, and high-level human resources training.
Finally, we must deepen discussions around revitalizing corporate culture to
inspire innovation. Advancements in artificial intelligence (AI) and automation aresaid to diminish the number of future jobs to roughly half of today’s figures. Many
areas in which humans are expected to outperform AI in the future involve
creativity. Thus, a corporate culture that relies on precedent, authoritarianism, ora vertical structure may have a hard time flexibly handling these requirements.
More than ever, areas such as creativity, art, and design will become important.
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GIC Discussion Paper

No. 8
Published byCenter for Global Innovation Studies,Toyo University
5-28-20 Hakusan, Bunkyo-ku, Tokyo,112-8606, Japan