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NESTA/TheWorkFoundationWorkingPaper:March2010DemandandinnovationHowcustomerpreferencesshapetheinnovationprocessExecutivesummaryCustomers’ideasandexperiencesareavitalsourceofinnovationforcompanies.Someorganisationsalreadyusecustomerdemandtoinfluencehowtheyinnovate.Inthisreport,wedetailhowthisishappening,andhighlighthowotherorganisationsaremissingoutonopportunitiestoinvolveusersearlyintheinnovationprocess.Bytakingadvantageoftheseopportunities,organisationscangainadvancedinsightfromcustomersandmaximisetheircompetitiveadvantage.Thisreportpresentsthekeyfindingsfromourresearchinvestigatinghowconsumerdemandisinfluencinginnovationwithinorganisations.Ourresearchindicatesthatorganisationsaremissingoutonsuchopportunitiestoinvolveusersearlyintheinnovationprocesstogainadvancedinsightfromcustomersandmaximisetheircompetitiveadvantage.ThisreportThisreportpresentsfindingsandinsightsfromaqualitativestudyexamininghowconsumerneedsandpreferencesinfluenceinnovationinfivecasestudyorganisations.Weexploreanumberofissues:• Wheninaninnovationcycleinformationaboutconsumerpreferencesandneedsisgatheredorreceived.• Howtheinformationissubsequentlyused.• Theparttheinformationplayswithintheinnovationprocess.Ourfindingsprovideanin-depthinsightintotheprocesseswithinorganisationsthatbringaboutinnovation.Wefocusonsectorswhereweknowtheleastaboutinnovation,whereinnovationis‘hidden’fromtraditionalmetrics,butiseconomicallyimportant.Thisisafirststeptoabetterunderstandingoftherelationshipbetweenconsumerpreferencesandinnovation.Thereportisdividedintofoursections.Inthefirst,welookattheimportanceofinnovationtotheeconomyandbusiness.Inthesecond,weconsidertheevidencethatconsumersandusersplayanimportantroleininnovation.Inthethird,weusecasestudiesfromfiveorganisationstodevelopaframeworkforconsumerengagementininnovation.Ourfinalsectiondrawssomeconclusionsandmakesthreerecommendationsforpolicymakers,business,governmentandotherorganisations.Section1:ScenesettingInnovationisimportanttothegrowthofaneconomy,andsuccessfulinnovationrequiresabalancebetweendemandandsupply.Intoday’sknowledgeeconomy,intangibleassetssuchasskillsandknowledgeareincreasinglyimportant.Innovationisnolongerseenpurelyasaproductofscientificresearchanddevelopment.Instead,itcancomefromchangesinprocessesorproceduresthatcanbedrivenbyconsumersintheirquestformorepersonalisedproductsandservicesUntiltherecenteconomicdownturn,therewasanassumptionthatdemandforinnovationwouldgrowautomatically.Now,politiciansarebecomingmoreawareoftheneedtoengageconsumersanduserstostimulateinnovation.Forthistobeeffective,particularly2inrecoveringfromtherecession,weneedabetterunderstandingof(i)howconsumerneedsandpreferencesinfluenceinnovationinorganisations,and(ii)thedemand-sideleversthatgovernmentcanusetodrivegrowth.Section2:TheconnectionbetweendemandandinnovationisfundamentalInnovationreferstothe‘successfulexploitationofnewideas’.1Demandinthiscontextreferstothedesireorpreferencetopurchaseanaffordablegoodorservice.Demandcanbefrommassconsumerstobusiness,businesstobusiness,governmenttobusinessorcitizentogovernment.Innovationiscentraltogovernment’spolicyeffortstoclosetheproductivitygap.ThereisalsoagreementacrosstheOECDcountriesthatinnovationisessentialtoensuringourcompetitivenessinaglobaleconomy.Therecognitionbypolicymakersoftheroleofdemandininnovationisreflectedinattemptstoincludeappropriatedemand-sidemeasuresinEuropeaninnovationmetrics.Aggregatemeasuresofinnovationnowincludemarketingspendasaproxyindicatorfordemand.Butthesemeasuresgivelimitedinsightintoconsumerinvolvementintheinnovationprocess.Thereisbothanabsenceofgooddataandalackofunderstandingofwhatorganisationsdowithinformationaboutconsumerneedsandpreferences.Butitisalsodifficulttogathersuchdatabecauseitisnoteasytomeasure.Yetweneedtoknowmoreabouthoworganisationsaddressconsumerpreferencesandengageusersininnovation.Focusingpolicyinterventionsonthedemandside,aswellasthesupplyside,isnecessaryforsuccessfulinnovation.Previousresearchhassuggestedthattheinteractionsbetweensuppliersanduserscanhappeninthreeways:• Market-mediatedthroughconsumerandbusinessmarkets,whichrewardsinnovativeactivitiesbyfirms.• Co-ordinatedandarticulatedthroughthepolitical(governmental)ornon-profitarenas.• Directlythroughusermodificationandengagement–agrowingtrendthathasbeendescribedas‘democraticinnovation’2oruser-ledinnovation.Section3:FrameworkOurframeworksetsouttheinfluenceofconsumerneedsandpreferencesonorganisations’abilityandwillingnesstoinnovate.Wefocusonboth(abilityandwillingnesstoinnovate)asthetwoareinextricablylinked.Theabilitytoinnovatedoesnotpresupposeaculturemotivatedtoinnovate,andwillingnesscanexistwithoutthemeans.Ourframeworkisbasedondatawecollectedabout18innovations,includingfivefailedinnovations,withinourfiveorganisations.Wefoundfivewaysthatinteractionwithconsumersoccurs:daysontheshopfloor;bespokeclientinteraction;customerfeedback;marketscanning;blue-skythinking.(SeeFigure1)Buttheinnovationswefoundwerenotdirectfromtheconsumers.Theyallcamefromemployees,althoughtheyoftenconsideredmarketcondition