Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP

 
Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP
SPECIAL
COLLECTION

             FROM THE LEADERSHIP ARCHIVE

             Designing
             Digital
             Experiences
             Business leaders are rightly looking
             to digital technologies to reach new
             and existing customers. But a solid
             strategy is necessary when utilizing
             these innovative technologies.
Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP
CONTENTS
                                                                            SPECIAL
                                                                            COLLECTION

Designing Digital Experiences

i		Introduction

1		 Architect Your Company for Agility
		By Jeanne Ross

4		 Why Design Thinking in Business Needs a Rethink
		 By Martin Kupp, Jamie Anderson, and Jörg Reckhenrich

7		 Do You Have a Conversational Interface?
		By Bala Iyer, Andrew Burgert, and Gerald C. Kane

10		 Rethinking the Value of Customers in a Digital Economy
		 By Michael Schrage

14 When Customers Become Fans
		 By Jielin Dong and Yanli Zhang

16 Which Features Increase Customer Retention?
		 By Rebecca W. Hamilton, Roland T. Rust, and Chekitan S. Dev

22 A Data-Driven Approach to Customer Relationships
		 By Laura Winig
Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP
INTRODUCTION
    Most companies are still learning how to design their digital selves for efficiency. This
    collection of articles from MIT Sloan Management Review examines how organizations
    are thinking about designing their processes, systems, and data in ways that discipline
    their core operations.

    From “Architect Your Company for Agility”:

•   ​In the digital economy, speed matters.
•   To keep pace with customer demands and competitor moves, companies must be able to quickly
    experiment with a potential offering and, depending on customer response, continually enrich
    and scale that offering, or discard it and move on to the next experiment.
•   Innovating at speed means utilizing empowered teams that are aligned to achieve company-wide
    objectives. Growing numbers of companies are creating cross-functional, agile teams that each
    own delivery of a digital offering or a set of services contributing to an offering. Typically, teams
    clarify their own objectives and define their own metrics for success.
•   Spotify, the digital music service, is a model for many companies’ forays into empowered teams.
    Spotify’s small teams, called squads, release new digital features and offerings as quickly as they
    become viable rather than following a timeline with regularly scheduled release dates. Rapid
    innovation depends on teams learning quickly what does and doesn’t work. Empowered teams
    experiment, and the best teams learn how to rapidly respond to the outcomes of their experiments.

    From “Why Design Thinking in Business Needs a Rethink”:

•   “Design thinking” has become popular in many industries as established companies try to apply
    designers’ problem-solving techniques to corporate innovation processes.
•   Key elements of the design thinking methodology include fast iterations, early and frequent
    interaction with customers, agile process design with minimal hierarchy, and a learn-by-doing
    approach that involves building prototypes and creating mock-ups of any kind as early as possible
    in the process.
•   But design thinking initiatives rarely proceed according to the textbook model. Innovation is an
    inherently messy process, and it often conflicts with established processes, structures, and
    corporate cultures.
•   To avoid the most common pitfalls, companies need to encourage top managers to champion
    design thinking initiatives with egalitarian, self-organized teams, and to empower those teams
    to act without getting permission for every tiny step.

    From “Do You Have a Conversational Interface?”:

•   Customer interactions with brands will soon become managed by artificial intelligence via
    messaging platforms — and companies need to be ready.
•   Conversational interfaces within messaging platforms such as Facebook Messenger, Slack,

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Designing Digital Experiences - SPECIAL COLLECTION - MIT ILP
Skype, WeChat, Kik, and Telegram allow companies to chat with their users.
•   The arrival of AI-powered bots has turned mobile chat platforms into powerful tools for sense-
    making and commerce. Bots use machine learning techniques to understand text-based
    communications and provide better responses to user queries.
•   For example, imagine discussing a visit to Boston in a chat with a business partner via Messenger.
    Using machine earning algorithms, a bot could recognize that you are talking about travel and
    initiate a transaction with your favorite travel app, such as Expedia, or offer a link for a ride
    through Lyft. The messaging platform becomes a distribution channel for software and services
    — without leaving the conversation.

    From “Rethinking the Value of Customers in a Digital Economy”:

•   Network effects are the “secret sauce” for platform companies like Apple, Facebook, Amazon,
    Airbnb, and LinkedIn, where the value of a product or service to users increases as the number of
    users grows.
•   ​For example, as media “infopreneur” Tim O’Reilly has noted, “Google gets smarter every time
    someone makes a link on the web. Google gets smarter every time someone makes a search. It
    gets smarter every time someone clicks on an ad. And it immediately acts on that information to
    improve the experience for everyone else.”
•   The economic and business insight should be obvious: Network effects turn users/customers
    into assets.
•   Businesses can give customers new capabilities and skills that collectively create virtuous cycles
    of value creation. This Triple-S framework — segment, socialize, and skill-ify — has had
    enormous impact in helping traditional marketing and innovation people create and capture the
    benefits of network effects.

    From “When Customers Become Fans”:

•   The Chinese technology company Xiaomi cultivates a close connection with its customers
    through a product development process that invites user participation.
•   Xiaomi’s Android-based user interface, MIUI, was tested by volunteer fans.
•   Customer involvement in the product development life cycle reduced R&D costs and cultivated a
    sense of participation and pride among tech-savvy lead users. Because of such enthusiasm, when
    Xiaomi unveiled a mobile phone in 2011, there were already 300,000 MIUI users.
•   Xiaomi has continued to cultivate its most enthusiastic customers — known as “Mi Fans” —
    through social media and fan clubs. In 2014, the company had more than 10 million registered
    users, generating more than 1 million visits and more than 250,000 posts every day.

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From “Which Features Increase Customer Retention?”:

•   Customer lifetime value is the net profit a company earns over the course of its relationship with
    a customer. To maximize customer lifetime value, a company must first convince people to buy
    its product or service once — and then retain them as long-term customers.
•   Businesses often invest in expensive features without adequately understanding that the features
    that attract new customers may differ from those that will retain existing ones.
•   ​ dding too many features can actually decrease customer satisfaction. In one study, participants
    A
    were initially more inclined to choose a digital video player that had 21 features over one that had
    seven. However, those who picked the 21-feature video player ended up less satisfied than those
    who used the seven-feature model. Although having more features increased initial choice,
    “feature fatigue” had the opposite effect on customer retention.
•   Companies should consider how to measure the effect that adding a new feature will have on
    customer retention.

    From “A Data-Driven Approach to Customer Relationships”:

•   South African bank Nedbank leverages its access to a rich trove of transactional data from credit
    card use to help merchants make strategic decisions to better serve those customers.
•   A case study of Nedbank by MIT Sloan Management Review found that, by looking at details such
    as the time of transactions, the size of purchases, retailer locations, and specifics like the age,
    gender, and income bracket of some users, Nedbank could help its merchant clients understand
    their own customers’ shopping patterns.
•   Nedbank moved into this data-crunching business niche after betting that its data could provide
    deep insights that would help its merchant clients understand their own businesses. The bank
    reasoned that its data could be better than the market data those merchants were already
    purchasing on the open market.
•   The case study notes that the bank developed its data analytics tool for competitive differentiation.
    Although it had a 20% share of South Africa’s acquiring market, Nedbank had concluded that it
    would have to enhance its value-added services if it wanted to sustain that business.

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Architect Your Company for Agility
JEANNE ROSS

                                                                                   because so many organizational elements must be
                                                                                   synchronized to deliver an integrated solution. And it’s
                                                                                   not just the number of organizational elements that
                                                                                   makes digital strategy execution difficult. Speed matters.
                                                                                   To keep pace with customer demands and competitor
                                                                                   moves, companies must be able to quickly experiment
                                                                                   with a potential offering and, depending on customer
                                                                                   response, continuously enrich and scale that offering, or
                                                                                   discard it and move on to the next experiment.

                                                                                   In other words, business architecture just became more
                                                                                   important — and more difficult. In the pre-digital
                                                                                   economy, business architecture most often focused on
                                                                                   operational efficiency — designing seamless end-to-end
                                                                                   business processes. That is no longer sufficient. In the
                                                                                   digital economy, business architecture must also focus on
                                                                                   agility — designing rapid reuse of individual business
Recent operational issues at Tesla Inc., the future-forward                        components.
electric-car maker based in California, serve as a
                                                                                   Organizational agility won’t happen by accident. It must
reminder that a great strategy is valuable only if a
                                                                                   be architected.
company is capable of executing that strategy. And
whether or not a company can execute its strategy
depends largely on whether it is designed to do so. In                             Innovating at Speed
other words, it depends on business architecture — the                             Means Utilizing
way a company’s people, processes, systems, and data
interact to deliver goods and services to customers.                               Empowered Teams
                                                                                   To facilitate speed, companies must design themselves to
As companies now develop digital strategies, they are                              minimize the obstacles to getting work done. This
invariably promising integrated customer solutions.                                requires empowering and supporting problem-solvers.
These strategies will be especially difficult to execute

Copyright © Massachusetts Institute of Technology, 2018. All rights reserved.   Reprint #W54574   https://mitsmr.com/2yYAnIq

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To tthi
     hiss en
          endd, ggrrowin
                       ingg n
                            num
                              umbbererss ooff co
                                              commpanies aarre cr
                                                               creeatin
                                                                     ingg           The Critical Role of
sm
smaall, cr
         cros
           oss-f
              s-fun
                  uncctio
                        ion
                          nal, aaggile tteeams. Each team owns
delivery of a digital offering or a set of services                                 Alignment
contributing to an offering. Typically, teams clarify their                         Empowered teams invariably contribute innovation —
own objectives and define their metrics for success.                                and high energy — to companies. The challenge is
                                                                                    ensuring that the efforts of individual teams align to
Spotify AB, the digital music service, serves as a model                            achieve company-wide objectives. Our research at the
for many companies’ forays into empowered teams. The                                MIT Center for Information Systems Research has
Stockholm-based company relies on small teams, called                               identified three mechanisms for achieving alignment: (1)
squads, to deliver product features and related business                            clear missions, (2) common business components, and
components. Squads are assembled into tribes that                                   (3) fruitful knowledge sharing.
provide major offerings and capabilities, such as online
music offerings or services in support of artists or                                Missio
                                                                                        sionns pprrovide dir
                                                                                                           direectio
                                                                                                                  ion,
                                                                                                                     n, bbooth aatt tth
                                                                                                                                      he en
                                                                                                                                         entter
                                                                                                                                             erpprise aan
                                                                                                                                                        nd aatt
advertisers.                                                                        the in
                                                                                        indi
                                                                                           divvid
                                                                                               iduual tteeam le
                                                                                                             levvel. At the enterprise level, a clear
                                                                                    mission or vision statement establishes priorities for the
Th
Thee co
      conncept
          cept ooff cocon
                        ntin
                          inuo
                             uou
                               us rreele
                                       leaase iiss es
                                                   esssen
                                                       enttial ttoo tth
                                                                      he            entire organization. It directs teams’ innovation efforts by
ef
efffectiven
         enes
            esss ooff em
                      emppowerereed tteeams. At Spotify, squads                     clarifying the objectives of the company’s investments in
release new digital features and offerings as quickly as                            resources. At the team level, mission statements define
they become viable rather than conform to scheduled                                 how the team will contribute to the company’s goals.
release dates. Rapid innovation depends on teams
learning quickly what does and doesn’t work. Empowered                              At Spotify, managers told us that the company defines a
teams experiment, and the best teams learn how to                                   small set of “big bets” that establishes enterprise priorities
rapidly respond to the outcomes of their experiments.                               based on beliefs managers derive from their data.
                                                                                    Individual teams then state missions to help achieve the
Th
Thesesee tteeams do
                 donn’t ffeear fa
                               faiilur
                                    uree. In fact, critical to the                  big bets. For example, the mission of a music delivery
concept of empowered teams is that when experiments                                 tribe is “providing fast and reliable access to all the
fail, company managers do not assume responsibility for                             world’s music.” The mission of an infrastructure tribe is
dictating how to fix things. Instead, they act as coaches,                          “enabling high product development speed while
posing questions and eliciting hypotheses and expected                              maintaining a highly available service.” A clear mission
outcomes.                                                                           will guide a team’s choice of metrics, so that the team can
                                                                                    easily track its progress in contributing to the enterprise
Failed experiments are essential to learning. If an entire
                                                                                    mission.
concept is deemed a failure, the team can be disbanded
and reassigned to a new initiative. This helps to keep                              To respond to changes in customer needs or market
team formation fluid. Unlike traditional organizational                             conditions, companies can redefine missions at the
structures, a design built on empowered teams is in a                               enterprise or individual team level. Restating a mission
constant state of change.

 Copyright © Massachusetts Institute of Technology, 2018. All rights reserved.   Reprint #W54574    https://mitsmr.com/2yYAnIq

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enables a company to adjust priorities without necessarily               Guilds bring together people with common interests to
requiring changes in organizational structures.                          share the latest discoveries in their domain and develop
                                                                         specialized skills. Agile coaches, who facilitate team
To en
   enssure
       ure aalig
             lignm
                 nmen
                   entt acros
                        acrosss tteeams, com
                                         companies n
                                                   neeed ttoo            dynamics, can recommend best practices observed in one
em
embbrace rreu
           eusse. Reusable business components such as                   squad to others.
on-boarding processes, dashboarding, and payment
systems, facilitate integration and speed. New business                  Other companies rely on weekly stand-up meetings where
capabilities build on existing capabilities and provide                  teams inform each other — and other people in the
consistency across offerings.                                            company — about their deliverables and learning. And
                                                                         many companies provide collaboration tools for
For example, the Dutch electronics company Philips is                    communicating within and across companies. These tools
building digital offerings to enable seamless health care                are designed to provide transparency and move away
for its hospital clients in accordance with a vision to                  from command-and-control approaches that attempt to
“build a healthier tomorrow.” To support this effort, an                 distribute information only on a need-to-know basis.
internal platform team reviews all propositions for new                  Although initial attempts to provide transparency can
digital offerings to distinguish unique business needs                   lead to concerns of information overload, people on
from common needs. The team then establishes a road                      empowered teams eventually learn which people and
map to ensure that common business components are                        tools are the most valuable — and therefore which to pay
available when needed.                                                   the most attention to.
Technical standards are essential to business component
reuse. Standards for application programming interface                   Learning How to
(API) development, for instance, ensure that teams                       Architect Your Business
approach development of their business components so
                                                                         Most companies are still learning how to architect for
that they are API-enabled and available through the
                                                                         efficiency. To do so, they must design people, processes,
company’s catalogue of internal services.
                                                                         systems, and data that discipline their core operations.
Fina
 inally, em
         emppowere
                 ered tteeams depen
                               depend  d oon
                                           n kkn
                                               nowleledg
                                                      dgee ssh
                                                             harin
                                                                 ingg
                                                                         As they learn to architect for efficiency, however,
to coo
   co ordina
        dinate tth
                 heir act
                      ac tivities aan
                                    nd ssh
                                         hare tth
                                                heir lea
                                                     le arnin
                                                          ningg. It
                                                                         companies must also start learning how to architect for
appears that when it comes to sharing knowledge, the
                                                                         agility. This means designing empowered teams, as well as
more mechanisms a company deploys, the better.
                                                                         the systems, data, and processes that ensure the
Spotify relies on what it calls chapters, guilds, and agile              synchronization of individual teams’ efforts. These
coaches. Every Spotify squad member is assigned to a                     business architecture efforts will ultimately allow for
chapter, which is usually organized around a single                      rapid delivery of integrated customer solutions.
competency, such as graphical design or back-end
                                                                         About the Author
development. Chapter members meet to discuss issues
and ideas specific to their roles, which leads to more                   Jeanne Ross is principal research scientist for MIT’s
coherent technical decisions.                                            Center for Information Systems Research. Follow CISR
                                                                         on @mit_cisr.

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Why Design Thinking in
Business Needs a Rethink
To reach its full potential, the popular innovation methodology must be more
closely aligned with the realities and social dynamics of established businesses.
BY MARTIN KUPP, JAMIE ANDERSON, AND JÖRG RECKHENRICH

IN RECENT YEARS, “design thinking” has become popular in many industries as established companies have tried to apply designers’
problem-solving techniques to corporate innovation processes.1 Key elements of the design thinking methodology include fast iterations;
early and frequent interaction with customers; agile process design with less hierarchy; and a learning-by-doing approach that involves
building prototypes and creating mock-ups of any kind as early as possible in the process.
   Here’s how design thinking initiatives are supposed to unfold in a corporate setting: A clearly defined innovation challenge is pre-
sented to a team trained in design thinking. The team conducts research to better understand the problem. Drawing on their insights,
they propose a variety of solutions, start building prototypes, and in the end, identify a fresh, profitable business opportunity.
   That’s how the process is supposed to work — but it hardly ever does. Over the past seven years, we have helped more than 20 companies
pursue more than 50 design thinking initiatives and have found that such initiatives rarely proceed according to the textbook model.
Innovation is an inherently messy process, made even messier because it conflicts in many ways with established processes, structures,
and corporate cultures. Fortunately, once you understand the challenges, you can avoid the most common pitfalls.
                                 The root of most of the problems is the disconnect     leaders often supervise 12 to 15 design thinking
                             between design thinking and conventional business          projects at a time. This maximizes the leader’s time
                             processes. After all, most companies’ successes are        but reduces the teams’ efficiency, hinders passion
                             built on delivering predictable products by repeatable     and commitment, and slows progress.
                             means. That means organizations almost instinctively          In many companies, four cultural factors tend to
                             resist bringing fuzzy, messy, and abstract vision into     aggravate these structural limitations:
                             the equation. This antipathy toward design thinking
                             runs deep, all the way from the C-suite to line workers.   Specialization Specialization often leads to a tacit
                             We find that employees often try to dodge design           agreement that makes certain tasks the territory of
                             thinking assignments, shying away from the habits          certain departments. This has two effects on design
                             and mindsets the methodology requires.                     thinking. First, participants from different depart-
                                 The organization of the teams themselves leads         ments often have difficulty communicating
                             to a second difficulty. The design thinking method-        because of their very specific viewpoints. Second,
                             ology calls for egalitarian, self-organized teams, but     many people who belong to departments that are
                             this isn’t how most established large companies            traditionally considered less creative, such as ac-
                             work. In fact, the design thinking teams we have           counting or internal audit, suffer from low levels of
                             studied tend to have clear process and project own-        what management thinkers David and Tom Kelley
                             ers, usually senior managers. These managers not           call “creative confidence.” 2 If you’ve never been
                             only supervise the design thinking project but also        encouraged to see innovation as part of your job
                             assign tasks to team members and are responsible           and have been told that you’re no good at it, you’ll
                             for its outcome. To make things worse, these senior        probably take people’s word for it. This may reduce

42 MIT SLOAN MANAGEMENT REVIEW FALL 2017                                                                       SLOANREVIEW.MIT.EDU
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THE LEADING
                                                                                                                                    QUESTION
                                                                                                                                    What chal-
                                                                                                                                    lenges do
                                                                                                                                    design think-
                                                                                                                                    ing initiatives
                                                                                                                                    in big compa-
                                                                                                                                    nies face?
                                                                                                                                    FINDINGS
                                                                                                                                      Organizations
                                                                                                                                      
                                                                                                                                      whose success is
                                                                                                                                      built on predictable
                                                                                                                                      operations instinc-
                                                                                                                                      tively resist fuzzy
                                                                                                                                      and messy innova-
                                                                                                                                      tion processes.
                                                                                                                                      Many established
                                                                                                                                      
                                                                                                                                      companies punish
                                                                                                                                      failure, which
                                                                                                                                      discourages the
                                                                                                                                      risk-taking that
                                                                                                                                      design thinking
                                                                                                                                      requires.
                                                                                                                                      Design thinking
                                                                                                                                      
                                                                                                                                      teams need a lot
                                                                                                                                      of autonomy to
                                                                                                                                      function well.

friction and make the organization function more                     behavior in one product category. Instead of formu-
comfortably, but it also reduces the chance of a cre-                lating useful hypotheses, participants developed
ative spark.                                                         ones that were so broad and unspecific that they
                                                                     would be impossible to test. We soon realized that
Human Speed Bumps Managers in some depart-                           the workshop attendees were avoiding mistakes for
ments (particularly legal, compliance, and regulatory                which they could be held accountable. Unfortu-
affairs) tend to see their role as basically to stop                 nately, reducing their personal risk of failure meant
things from happening. To get the most out of a de-                  reducing their collective chance of success.
sign thinking exercise, people in these departments                      Our research suggests that companies need to
must embrace a can-do attitude and focus their cre-                  take five steps to take full advantage of the potential
ative energies on exploring how else things can be                   of design thinking:
done. It takes a special kind of leadership to enable                    1. Encourage top managers to champion design
this supportive culture in traditionally conservative                thinking initiatives. We find that design thinking
and risk-averse functional domains.                                  teams require two kinds of attention by top manage-
                                                                     ment: proactive and follow-up. Proactive attention
Focus on Monetary Results In projects with a high                    comes in many forms, such as launching an initia-
degree of novelty, the expectation should be around                  tive, taking part in the process, developing and
the amount of learning that takes place, not the result.             submitting ideas, and removing obstacles. Follow-up
Focusing too early on monetary results (or other met-                attention is the energy the leader invests after the de-
rics) can discourage creativity — and ironically,                    sign thinking team does its work, such as pushing
reduce the chances of a profitable long-term result.                 ideas through the organization and sometimes giv-
                                                                     ing explicit feedback when ideas are not pursued.
Failure Phobia Many established companies pun-                       Such behaviors can help embed and sustain design
ish failure, which discourages the risk-taking design                thinking in established organizations.
thinking requires. In a workshop with a large con-                       However, the biggest limiting factor is that man-
sumer goods company, we asked participants to                        agers are spread far too thin. Rather than try to
formulate hypotheses regarding consumers’ buying                     monitor the progress of 12 to 15 design thinking

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                            initiatives, managers are better off pursuing a single   learning. By clearly defining learning outcomes
                            design thinking goal at a time.                          through questions (such as “Why don’t patients
                                2. Balance the teams. Balancing intuitive and        sign the consent form?”), you can then define pre-
                            analytical thinking is one of the biggest challenges     cise hypotheses (such as “because the form is too
                            when establishing an innovative culture. Such            long” or “because the language is incomprehensi-
                            teams are very tricky for established organizations      ble”). Even if the overall project fails, the captured
                            to manage, as it is difficult to allow people freedom    learning will lead you to a better question or an-
                            while at the same time ensuring that they don’t lose     other project.
                            focus on other important business goals.
                                One key is for team members to recognize and         Supporting Design Thinking
                            appreciate the diversity of their experience and         Too many enterprises have naively invested in
                            skills. For example, some members might focus            training employees in design thinking methodolo-
                            more on workshop facilitation, whereas others may        gies, and then been disappointed when they don’t
                            use their personal networks within the company to        see a tangible impact on innovation outcomes. In-
                            identify potential projects. The teams should in-        novation is an inherently social process that
                            clude all pertinent functions, including marketing,      involves not only inventing but also convincing
                            sales, product management, and research and              people to do something in a new way. To be success-
                            development.                                             ful, a design thinking program must be closely
                                3. Set ground rules. Design thinking teams need      linked with the organization’s social dynamics.
                            a lot of autonomy to function well. They should be       Without the right supporting mechanisms, you
                            empowered to act without getting permission for          probably won’t achieve the desired results.
                            every tiny step. A good way to do this is to set mini-
                            mal rules for the team, for example, by writing          Martin Kupp is an associate professor of entrepreneur-
                                                                                     ship and strategy at the Paris campus of ESCP Europe.
                            a list of five things they are not allowed to do, such   Jamie Anderson is an adjunct professor of strategic
                            as endanger brand perception or engage in illegal        management at the Antwerp Management School in
                                                                                     Antwerp, Belgium. Jörg Reckhenrich is an artist based
                            activities. Everything else, by default, they are
                                                                                     in Berlin as well as a faculty member of CEIBS Zurich
                            allowed to do.                                           Institute of Business Education in Switzerland. Com-
                                4. Integrate design thinking into product-           ment on this article at http://sloanreview.mit.edu/59113,
                                                                                     or contact the authors at smrfeedback@mit.edu.
                            development processes. Design thinking is often
                            treated as yet another assignment from headquar-
                                                                                     REFERENCES
                            ters — just one more box to be checked. To change
                            that perception, the teams responsible for design        1. Peter G. Rowe’s book “Design Thinking,” published
                                                                                     in 1987, was the first publication to use the term. The
                            thinking should look more closely at their existing      book described a systematic approach to problem-solving
                            product-development processes. It can be helpful         used by architects and urban planners. The application of
                            to integrate specific design thinking deliverables,      design thinking methodologies beyond architecture
                                                                                     emerged in the 2000s; instrumental in this were works by
                            such as early customer feedback in the problem-          Tim Brown and by Roger L. Martin. See P.G. Rowe, “De-
                            definition phase, larger-scale customer feedback in      sign Thinking” (Cambridge, Massachusetts: MIT Press,
                            the market-solution phase, and prototypes and            1987); T. Brown, “Design Thinking,” Harvard Business
                                                                                     Review 86, no. 6 (June 2008): 84-92; T. Brown, “Change
                            mock-ups throughout the process. Linking design          by Design: How Design Thinking Transforms Organiza-
                            thinking to innovation strategy should make it eas-      tions and Inspires Innovation” (New York: HarperCollins,
                            ier to measure the influence of design thinking on       2009); and R.L. Martin, “The Design of Business: Why
                                                                                     Design Thinking Is the Next Competitive Advantage”
                            the quality and market fit of new products and           (Boston, Massachusetts: Harvard Business Press, 2009).
                            services. More stakeholders will then see it as an       2. T. Kelley and D. Kelley, “Creative Confidence: Unleash-
                            integral part of product development, and not a          ing the Creative Potential Within Us All” (New York:
                            parallel process.                                        Crown Business, 2013).

                                5. Redefine the metrics. Because design think-       Reprint 59113.
                            ing is about the early phase of the innovation           Copyright © Massachusetts Institute of Technology, 2017.
                            process, teams should focus not on profit but on         All rights reserved.

44 MIT SLOAN MANAGEMENT REVIEW FALL 2017                                                                       SLOANREVIEW.MIT.EDU
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Do You Have a Conversational Interface?
BALA IYER, ANDREW BURGERT, AND GERALD C. KANE

Customer interactions with brands will soon become managed by AI via messaging
platforms — and companies need to be ready.

                                                                                   messaging, or natural language interfaces to interact with
                                                                                   people, brands, services, and bots. This shift is currently
                                                                                   evidenced by the massive adoption of messaging apps
                                                                                   such as Facebook Messenger, Echo, and WhatsApp,
                                                                                   which together host more than 60 billion messages daily.
                                                                                   According to eMarketer, messaging apps will reach 2
                                                                                   billion people within a few years. WhatsApp users average
                                                                                   nearly 200 minutes each week using the service, and
                                                                                   many teenagers now spend more time on smartphones
                                                                                   sending instant messages than perusing social networks.

                                                                                   Messaging platforms can also alter the way businesses can
                                                                                   communicate with their customers. Currently,
                                                                                   conversational interfaces within well-known messaging
                                                                                   platforms such as Facebook Messenger, Slack, Skype,
                                                                                   WeChat, Kik, and Telegram allow companies to chat with
                                                                                   their users.
We live in the age of mobile applications. There are
currently several million apps available. This profusion of                        Bots as Conversation
choices means it can be difficult for users not only to
choose which apps to download, but to manage them all
                                                                                   Partners
— a phenomenon we call “app fatigue.” This situation                               While mobile chat platforms are interesting, the arrival of
creates both a need and an opportunity to engage users                             artificial intelligence-powered engines called bots have
on a single platform. Today, that platform is increasingly                         made them a powerful tool for sense-making and
becoming messaging apps.                                                           commerce. Bots use machine-learning techniques to
                                                                                   understand text and provide better responses to user
We think the next era will belong to “the conversational                           queries. They are present in the background, and they
layer” — both text- and voice-driven — that will use chat,                         make sense of the conversations taking place and convert

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them into actions using apps, such as scheduling a                                 typically uses (intent, words, shortcuts, emojis, etc.).
meeting or ordering a pizza. For example, imagine you                              Companies need to strengthen these natural language
are chatting with your business partner using Messenger                            capabilities in their products, apps, and bots to allow
and discussing a visit to a client site in Boston. Using                           users to communicate with them with ease.
machine-learning algorithms, a bot can recognize that
you are talking about travel and initiate a transaction with                       Individuals will begin to welcome and even expect this
your favorite travel app, such as Expedia, or offer a link                         type of service from brands, but companies must
for a ride through Uber. The messaging platform                                    remember that this trusted personal space is precious.
effectively becomes a distribution channel for software                            Poorly designed interactions can irreparably damage the
and services without leaving the conversation.                                     customer relationship. For example, when Microsoft’s Tay
                                                                                   posted racist remarks on Twitter, it had to be shut down
1-800-Flowers recently launched such an experience on                              temporarily. The bot industry as a whole has yet to come
Facebook Messenger and has since expanded to Amazon                                up with the “killer bot” that tips the scale for wider
Alexa and the IBM Watson platforms. Customers can                                  adoption, but bots continue to grow in sophistication and
order flowers directly from their experience in these                              power.
conversational layers. 1-800-Flowers is very focused on
customer support and maintaining a relationship with                               What Should Companies
their customers, so the company jumped at the
opportunity to be one of the first in the space. Of the tens
                                                                                   Do Today?
of thousands of people who have ordered flowers through                            Pic
                                                                                     ickk a p
                                                                                            pllatform. When reaching users, a brand needs to
the chatbot integration, more than 70% are new                                     understand where current or potential customers spend
customers — and these new customers skew toward                                    their chat time. The platform choice is an important early
younger demographics than the company’s existing                                   decision. This is similar to how brands and engineering
customers.                                                                         teams initially opted to launch their products on iOS,
                                                                                   then Android, and other mobile OS platforms early on. In
What Should Companies                                                              order to reach user conversations today, brands will need
                                                                                   to decide which platforms to target and build on.
Expect?                                                                            Different platforms have a diverse set of capabilities (i.e.,
Companies should position themselves for the                                       user identity, cards, and buttons on Messenger, and work
conversational layer to be more widespread five to 10                              team and slash commands on Slack) and demographics
years from now. Individual users will most likely want to                          target.
interact with trusted brands to fulfill their needs through
natural language interactions. This interaction will occur                         Run ssttra
                                                                                           ratteg
                                                                                               egic
                                                                                                  ic exp
                                                                                                     exper
                                                                                                         erim
                                                                                                           imen
                                                                                                              ents.
                                                                                                                ts. It is not clear if customers
at the exact time the user demands a product or service,                           would use the conversational layer for quick responses or
and in the exact terms she thinks of that product or                               for broader conversations. Brands like Amex Finance are
service, in the language and communication methods she                             using chatbots to provide notifications to customers

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about their new products or alerts about forthcoming                               machine-learning techniques, the bot was able to handle
travel dates. These limited experiments would allow                                97% of the student queries. In online education, where
Amex to set the bar for the nature of interaction with                             dropout rates are quite high, a high level of engagement
clients. The enterprise social networking platform Slack is                        with a “tutor” could make a huge difference in retention.
using chatbots to automate routine managerial check-ins,
reducing the need for meetings.                                                    Pilo
                                                                                     lott bboots w
                                                                                                 wiith yyoour ccu
                                                                                                                ustomer
                                                                                                                     ers.
                                                                                                                        s. Many of the tools that are
                                                                                   provided by the messaging and bot platform providers are
Look ffoor inn
           innoova
                vattive u
                        usses in ootther sseectors. Simple                         from the open-source space, and companies can perform
examples like ordering airline tickets or pizzas are                               low-cost experiments with a reduced set of users to learn
emerging. However, sophisticated bots that understand                              more about conversational interactions and use cases that
the context and make intelligent decisions have not yet                            yield the desired results.
been developed. In fact, recent articles on automated
email assistants have shown that they rely too much on                             The conversational layer of computing may have not yet
human intervention.                                                                fully arrived, but it is coming. Companies should begin
                                                                                   thinking and experimenting now about how to use these
Companies can also learn from examples outside their                               new avenues to support their brand and their business
industry. For example, a Georgia Tech professor used a                             today, so they can be ready for that conversational future
bot as a teaching assistant for a programming class. Using                         as users demand and engage with this type of experience.

                                                                                   About the Authors

                                                                                   Bala Iyer is a professor and chair of the Technology,
                                                                                   Operations, and Information Management Division at
                                                                                   Babson College in Wellesley, Massachusetts. He can be
                                                                                   reached on Twitter at @BalaIyer. Andrew Burgert is the
                                                                                   CEO of Azumo, a San Francisco-based data and AI
                                                                                   development firm. He can be reached on Twitter at
                                                                                   @andrewburgert. Gerald C. (Jerry) Kane is an associate
                                                                                   professor of information systems at the Carroll School of
                                                                                   Management at Boston College and the MIT Sloan
                                                                                   Management Review guest editor for the Digital Business
                                                                                   Initiative. He can be reached at
                                                                                   gerald.kane@bc.edu and on Twitter at @profkane.

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Rethinking the Value of Customers in a Digital
Economy
MICHAEL SCHRAGE

Research by Michael Schrage from MIT’s Initiative on the Digital Economy offers
new insights into platform markets and network effects.

Customers, customer-centric marketers declare, are king.                           network effects as a competitive edge and innovation
Businesses consequently ignore customer behaviors at                               resource.
their own risk. But the power and potential of network
effects suggests that seeing customers as royalty may                              Technically, economists say network effects — known
prove a poor idea and an even worse investment.                                    also as network externalities — exist when the value of a
                                                                                   product or service to users increases as the number of
Successful platform companies and competitors see their                            users grows. But this traditional definition is woefully
customers and clients as assets worthy of innovative                               incomplete. Quality of use — and users — matters as
investment. Yes, treat customers very, very well, but invest                       much or more to value creation as quantity. In other
smartly to make them even better. In Uber’s business                               words, how networks are used is as important as how
model, for example, smart apps make both the company’s                             much they are used.
customers and drivers more valuable to both Uber and
each other. In fact, the ability to creatively invest in one’s                     Amazon, for example, may have hundreds of millions of
customers as a result of digital networks is central to our                        customers shopping for goods, but the fact that tens of
new research, Rethinking Networks: Exploring Strategies                            millions of those customers actively browse through
for Making Users More Valuable.                                                    recommendation engine suggestions and customer
                                                                                   reviews, sample book and video content, and write
As platform companies like Google, Apple, Facebook,                                comments and reviews themselves, contributes
Uber, Amazon, Airbnb, and LinkedIn relentlessly disrupt                            enormously to the company’s value. Amazon’s network
— and redefine — mainstream industries, we see network                             facilitates the creation and capture of data proffering
effects as their “secret sauce” for success. Network effects                       insights into customers and products alike. These
increasingly determine innovation opportunity, value                               qualitative insights have quantitative impact for both
creation, and growth in digital markets. This holds true                           Amazon and its customers.
for Netflix, Twitter, Github and Alibaba — as well as the
so-called Internet of Things — that all rely heavily upon

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Tapping into Network                                                               someone clicks on an ad. And it immediately acts on that
                                                                                   information to improve the experience for everyone else.”
Effects
The crucial economic and business insight should be                                This same design sensibility holds true for browsing
obvious: Network effects turn users into assets. Enabling                          Amazon and Netflix recommendations; hailing — or
network effects empowers users/customers to both                                   driving — an Uber; seeking — or offering — Airbnb
directly and indirectly create new value. Network effects                          accommodation; and utilizing smartphone apps to get
don’t merely create more value for more users, they make                           something done. The more users participate, and the
users more valuable to both the enterprise and to each                             more innovatively they engage, the more value — and
other. Network effects, therefore, are special economic                            valuable data and experiences — can quickly be
phenomena because they make their contributors more                                generated. In turn, the more value created, the more users
valuable to everyone in and on the network.                                        — and innovative uses — materialize. As my MIT
                                                                                   Initiative on the Digital Economy (IDE) colleagues Erik
                                                                                   Brynjolfsson and Andrew McAfee have observed, this
                                                                                   constitutes the raw materials for combinatorial
                                                                                   innovation.

                                                                                   Another way to say this is making users better makes
                                                                                   better users. That investment philosophy helps define the
                                                                                   tools, techniques, and technologies that improve usability
                                                                                   and participation. For instance: How might data-driven
                                                                                   advice or an innovative app make network participation
                                                                                   more productive? Additionally, our research considers
                                                                                   how platform businesses can use digital technology and
                                                                                   social media to make customers more valued to the
                                                                                   business and more valuable in customer’s own eyes, as
                                                                                   well. When developing platforms, how can — and should
                                                                                   — businesses segment users and facilitate how they share
                                                                                   information and insights with each other?

Indeed, as media infopreneur Tim O’Reilly, who coined                              A Framework for Value
the term Web 2.0, incisively observed: “A true Web 2.0
application is one that gets better the more people use it.
                                                                                   Creation
                                                                                   We also look at how businesses can give users new
[For example] Google gets smarter every time someone
                                                                                   capabilities and skills that collectively create virtuous
makes a link on the web. Google gets smarter every time
                                                                                   cycles of value creation. What we call the Triple-S
someone makes a search. It gets smarter every time

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framework– Segment, Socialize, and Skill-ify –has had               — to share, they must decide how they want to
enormous impact in helping traditional marketing and                measure their Return on Network Effects (RONE).
innovation people create and capture the benefits of
network effects.                                                  • Skill-ific
                                                                        l-ificaatio
                                                                                 ionn is about creating new capabilities in users
                                                                    and user communities. Sharing and editing imagery,
                                                                    for example, represents a capability that goes beyond
Figur
 iguree 1. Th
           Thee V
                Vir
                 irttuo
                     uouus S-C
                           S-Cyycle                                 sharing and editing text. Skill-ification means
The enterprise value proposition: Segmentation,                     enhancing human capital.
socialization and skill-ification.
                                                                  The deliberate interdependencies among these three
                                                                  themes is central to the framework’s effectiveness.
                                                                  Explicitly linking Skill-ification to Socialization to
                                                                  Segmentation provides a potent method for examining
                                                                  network effects. Managing them each independently or
                                                                  functionally is a recipe for failure.

                                                                  In two-sided markets, such as Apple’s App Store, Uber,
                                                                  and Airbnb, the framework is as important for the
The ‘Triple-S’ research framework asks executives to              developer/supplier side as for customers and clients. Uber
deconstruct network effects into three interrelated               drivers and iPhone app developers benefit as much as
components: Segmentation, socialization, and skill-               Google searchers and LinkedIn job hunters from
ification, as follows.                                            investments that improve their skills and capabilities. The
                                                                  digital access, algorithms, and analytics that measurably
• Seg
   egmmen
        enttatio
              ionn.Organizations identify specific user
                                                                  enhance individual performance on a network
  segments — such as customers, channels, developers or
                                                                  simultaneously facilitate and accelerate network effects.
  suppliers — they deem particularly important or
                                                                  Taken together, these represent a new genre of
  valuable. For example, they could choose to segment
                                                                  productivity.
  customers who make the most referrals; the suppliers
  who propose the most innovations; or the channels               Understanding the impact of network effects should
  that enjoy the most loyalty. The 80/20 Pareto Principle         fundamentally shift strategic investment perspectives
  is a popular discriminator; for instance, which 20% of          toward investing in one’s users. As noted, in digital
  customers are the most profitable. In short, which users        economies, sustainable success comes not just from
  do the organization want to target, invest in, and create       improving products, services, and user experiences, but
  network effects around?                                         from improving customers, clients, channels, and
                                                                  suppliers, as well. Networks make that possible and
• Soci
    ciaaliza
        lizattio
              ionn. Different social media platforms likely
                                                                  affordable. The next step is for marketing and innovation
  facilitate different kinds of network effects at every
  business — choosing Facebook over Pinterest or
  LinkedIn over Yammer. Organizations not only need to
  define how they want users — and user communities

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executives to explicitly address key questions about                               facilitate value creation. As my MIT IDE research
assessing returns on their network-effects investments                             colleague and collaborator Marshall van Alstyne has
and making it easier for users to participate and create                           observed, network effects are about “customers creating
connections.                                                                       value for other customers.”

The clear top-management concern must be how boards                                If customers are viewed as king in today’s platform
of directors and executive committees effectively oversee                          markets, it’s only because the kingdoms they rule are now
network effects as an organizing principle and an asset for                        larger and more valuable thanks to their networked
the digital enterprise. Network-effects management is as                           nature.
important as risk or R&D management for platform
companies. Our research also suggests that network
effects, arguably, may be the most cost-effective way to
                                                                                   About the Author

                                                                                   Michael Schrage is a Research Fellow at the MIT
                                                                                   Initiative on the Digital Economy (IDE) and a Visiting
                                                                                   Fellow at the Imperial College Department of Innovation
                                                                                   and Entrepreneurship. He is author, most recently of the
                                                                                   Innovator’s Hypothesis, and is a columnist for Fortune,
                                                                                   CIO Magazine, and MIT’s Technology Review, and a
                                                                                   regular contributor to The Conference Board Review.
                                                                                   Michael is a senior advisor to MIT’s Security Studies
                                                                                   Program and is on the MIT Executive Education faculty.

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I N N O VAT I O N S T R AT E G Y

When Customers
Become Fans
The Chinese technology company Xiaomi cultivates a close connection with its
customers through a product development process that invites user participation —
as well as through social media and fan clubs.
BY JIELIN DONG AND YANLI ZHANG

Xiaomi Inc., whose
cofounders are shown
                                       IN LESS THAN six years, Beijing-based Xiaomi                            user-centered and open innovation, harnessing the
here, has actively                     Inc. has become one of the world’s leading smart-                       energies of enthusiastic customers known as
involved enthusiastic
customers — known                      phone makers. One key factor is that the company                        “Mi Fans.” Xiaomi actively involves “Mi Fans” in
as “Mi Fans” — in both
software and hardware                  offers its phones to customers in China at lower                        both software and hardware development pro-
development processes.                 prices than competitors like Apple Inc. — and sells                     cesses. For example, Xiaomi’s Android-based user
                                       mainly via e-commerce to keep costs low.                                interface MIUI went through a fast-iteration devel-
                                          But Xiaomi has done more than just keep costs                        opment process. Xiaomi put the first version of
                                       down; it has also cultivated user pride through                         MIUI online in August 2010 (Continued on page 95)

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96 MIT SLOAN MANAGEMENT REVIEW WINTER 2016                                                                       COURTESY OF XIAOMI INC.
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When Customers Become Fans (Continued from page 96)          To further build a sense of connection with cus-
and set up an Internet forum to communicate with         tomers, Xiaomi has designed off-line programs
a group of tech-savvy users. In the first week, Xiaomi   that arrange for the company’s high-ranking exec-
got 100 users who volunteered to test MIUI. Since        utives to meet with users in certain cities at
then, Xiaomi has been releasing improved versions        irregular intervals in a lively and interesting atmo-
weekly for a group of its lead users. Customer in-       sphere. Plus, Xiaomi fans in many cities have
volvement in the product development life cycle has      voluntarily organized local Xiaomi fan clubs. The
not only helped Xiaomi reduce R&D costs but also         company keeps in close touch with these clubs and
enabled the company to cultivate a sense of partici-     provides support for their off-line events. This is a
pation and pride among tech-savvy lead users. They,      way for Xiaomi fans to communicate with each
in turn, spread the word to other users and generate     other and develop friendships off-line.
enthusiasm about Xiaomi products.
    Thanks to such enthusiasm, when Xiaomi was
about to unveil its mobile phone in September            Customer involvement in the product
2011, there were already 300,000 MIUI users,             development life cycle has not only
many of whom then became the first batch of
                                                         helped Xiaomi reduce R&D costs but
customers for the Xiaomi smartphone. Xiaomi
has continued to cultivate user participation
                                                         also enabled the company to cultivate a
through its online platform, which by April 2014         sense of participation and pride among
had more than 10 million registered users, gener-        tech-savvy lead users.
ating more than 1 million visits and more than
250,000 posts every day.
    Xiaomi turns to the Internet as a major channel          This model of participation and communica-
to communicate with its users. When the youth            tion that harnesses fans’ passion, energy, and time
version of the Xiaomi phone was launched, Xiaomi         generally works well for nonprofit programs like
designed a marketing poster that mimicked a pop-         those for religious groups and believers or for uni-
ular movie but starred seven company executives.         versities and alumni. In recent decades, nonprofit
This poster was put on Xiaomi’s microblog page           open-source movements and Wikipedia have also
and reposted 2.03 million times, and the number of       drawn on similar methods to succeed. In contrast,
fans “liking” Xiaomi’s official microblog account        the history of for-profit companies relying on fan
increased by 410,000. Xiaomi’s high-ranking exec-        energy and participation for growth is much more
utives are also good at interacting with the media.      limited. It will be interesting to see the extent to
They are open to sharing Xiaomi’s stories and their      which Xiaomi will be able to continue to tap into
own stories, which results in publicity.                 its customers’ enthusiasm as the company grows
    Interacting with users in fun and lighthearted       and matures.
ways is another feature of Xiaomi’s marketing
                                                         Jielin Dong is a professor of innovation and entre-
strategy. In China, Xiaomi has compiled humorous         preneurship and director of the Center for Enterprise
videos on different public websites to entertain         Innovation and Development at Soochow University
people and raise awareness of its brand. Xiaomi has      in Suzhou, China. Yanli Zhang is a research fellow
                                                         at the Center for Enterprise Innovation and Develop-
also devised a system to incentivize registered users    ment at Soochow University and an associate
on its website to play games in which they accumu-       professor of management at the Feliciano School
late scores, VIP medals of honor, and even virtual       of Business at Montclair State University in
                                                         Montclair, New Jersey. Comment on this article at
Xiaomi money. Users with high scores and lots of         http://sloanreview.mit.edu/x/57217, or contact the
medals are entitled to precedence in attending           authors at smrfeedback@mit.edu.
events organized by the company and buying in-           Reprint 57217.
demand Xiaomi products. They can also enjoy              Copyright © Massachusetts Institute of Technology, 2016.
premium services.                                        All rights reserved.

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MARKET RESEARCH

Which Features Increase
Customer Retention?
Most companies aspire to design goods and services that
                                                                                                                THE LEADING
encourage repeat business. Yet businesses often invest in                                                       QUESTION
expensive features without adequately understanding                                                             How should
how the features that attract new customers may differ                                                          companies
                                                                                                                decide which
from those that will retain existing ones.                                                                      features to
BY REBECCA W. HAMILTON, ROLAND T. RUST, AND CHEKITAN S. DEV                                                     include in
                                                                                                                products or
                                                                                                                services?
                                                                                                                FINDINGS
COMPANIES MUST MAKE important decisions about which features to include in the                                   Features that retain
                                                                                                                 
                                                                                                                 customers may be
goods and services they offer to customers. Understanding the return on investment (ROI) for a                   different from those
feature is essential to increasing profitability. Adding features increases costs, but it may increase           that attract new
                                                                                                                 customers.
revenues as well, either by attracting new customers or retaining existing customers. Notably, as we             Having too many
                                                                                                                 
describe in this article, the features that retain customers may be different from the features that             features can de-
                                                                                                                 crease customer
initially attract customers.                                                                                     satisfaction.
    Customer lifetime value is the net profit earned over the course of a company’s relationship with            Different research
                                                                                                                 
                                                                                                                 methods are suited
the customer.1 To maximize customer lifetime value, a company must not only convince customers to                to measuring the ef-
buy its product or service once; it must also retain them. Hotel and airline companies, for example,             fects of features on
                                                                                                                 customer attraction
invest heavily in loyalty programs designed to encourage their best customers to come back again                 and retention.
and again. About one-third of leisure
guests and about one-half of business
travelers say they are loyal to a hotel
brand. 2 Subscription-based services
such as Netflix and Amazon Prime
frequently offer free trials to attract cus-
tomers, hoping that they will recoup
their investment when customers sign
up and become paying subscribers.
Profits flow to video game app develop-
ers not when their apps are downloaded
for free, but when users decide to keep
playing and spend money to upgrade the
app or make in-app purchases. Yet in
many cases, the notion of generating
revenue is no more than a pipe dream:
According to one estimate, less than
40% of video game players return to a
free-to-play game after the first session;3
another analysis found that, on average,

                                                                                          WINTER 2017 MIT SLOAN MANAGEMENT REVIEW 79
                                      SPECIAL COLLECTION • “FITTING SOCIAL MEDIA INTO YOUR STRATEGY”• MIT SLOAN MANAGEMENT REVIEW 16
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