By: Dominik Walcher / Fabrizio Salvador / Frank Piller
While compiling data for the Customization500 study over a period of 12 months, the researchers noticed that roughly 20% of the companies went out of business during this time. In part 7 of this series, we take a closer look at the reasons why both startups and established companies fail at implementing mass customization and in what areas managers can expect the strongest resistance.
While working on the Customization500 study, we realized a striking pattern: About 20% of the companies meeting our requirements went out of business during the 12 months of gathering the data. While mass customization seems to work well for many entrepreneurs, it also seems to be a challenging and difficult strategy for implementation.
A high rate of failures in mass customization
One of the reasons for this rather high failure rate (given also the strong market growth) is the lower cost of entry into the mass customization market. Due to relatively low entrance barriers and well-known success stories, many entrepreneurs today take on the adventure of building a mass customization company at an increasing pace. The cost for launching a toolkit-based startup is clearly decreasing.
A core reason is the availability of specialized infrastructure that offers instant access to some of the capabilities of mass customization. Providers like Cyledge in Europe, Treehouse Logic in the US, or No-Refresh in India offer good solutions far beyond the $0.5 million price tag of traditional toolkits in the consumer market (indeed, these companies promise a fully operating toolkit for 1/100th of this cost).
At the same time, specialized suppliers and supply-chain-partners are coming up providing complete fulfillment solutions in some categories, i.e. offering instant access to robust processes. These infrastructures for toolkit-based businesses lure startups in the field, and many of them fail.
Analyzing the failure reasons showed that these startups on the one hand face “common” challenges of startups like not progressing out of the bootstrapping phase into a scalable business due to undercapitalization, wrong investment policy, overconfidence, and an insufficient business model as well as problems within the team, such as the loss of key employees.
The proper management of the three fundamental capabilities of mass customization is essential for survival.
Additionally, mass customization specific challenges come into account. Here, the proper management of the three fundamental capabilities of mass customization is essential for survival. We found several companies that were perfect in executing one dimension of the capabilities while neglecting another.
Consider the case of myMuesli (not a failure, however). This provider of customized cereal had a well-designed toolkit that enables the users to overcome the challenge of customizing a food product despite the limitation of an online interaction (simulation of taste). The company also was rather good in solution space development, predominantly building on lead user characteristics of their founders and continuous learning from past interactions.
The company, however, neglected robust processes. Whenever a press report in their favor was published, the manufacturing capacity (plenty of human labor mixing muesli from about 65 different categories of options by hand using precision scales) was not sufficient, and the company had to turn down prospective customers by setting a daily order limit. Only after investing into a fully automated, scalable mixing system, the complementarities of the business model could be established, and the company began to generate profits. In many other examples it was especially the capability to develop the solution space that was lacking, leading to failure when the toolkit options did not represent the heterogeneities of demand that mattered for users in the particular market.
Challenges of implementing mass customization for established companies
Implementing mass customization also provides challenges for established companies. Take, for instance, John Deere, one of the world’s largest manufacturers of garden equipment. To keep up with its market for premium products, which had been evolving towards greater fragmentation and customization for more than a decade, the company lawn and garden equipment division began to offer more products, but that then resulted in a proliferation of parts and processes. Divisional managers were aware of this and they knew that they could save millions of dollars every year by simplifying their product platforms. Yet they stubbornly resisted the change. In fact, it took John Deere more than a decade to realign its solution space to the customer base and to add flexibility to its value chain. And this happened only after the very survival of the business was at stake.
In our research, we were repeatedly amazed at the difficulty that companies had in achieving even just moderate improvements along the three fundamental capabilities. We found that managers typically have to overcome powerful inertial forces in the organization, with the strongest resistance tending to come from the following areas:
Marketing Focus. For mass producers, the focus of the marketing group is not about spotting differences; it’s about identifying and exploiting needs that are similar. Consequently, traditional marketers often lack the appropriate knowledge and tools required by a mass customizer and, when urged to add more variety to their product lines, are likely to 1) unimaginatively rely on product differentiation criteria that were successful in the past or 2) mimic differentiating attributes introduced by competitors. Either approach will likely fail to tap into unexploited customers’ heterogeneities. These companies will not define a proper solution space crucial for generating value from a user toolkit.
Design Culture. With mass production, the emphasis during product development is on design uniqueness or on minimizing the variable cost of newly developed components. This leads to designs of maximal uniqueness or the use of ad hoc parts with minimal cost. With mass customization, the focus is instead on designs that have synergy with other designs, that is, designs that share parts and processes as part of the solution space.
Accounting Procedures. At a mass producer, accounting procedures do not need to accurately compute and allocate to specific product offerings the portion of manufacturing and engineering overhead that results from parts proliferation, simply because there is little or no variety. Consequently, such organizations will often have trouble determining the precise cost implications of expanding their product offerings, and they can fail to appreciate the advantages of parts standardization. When that happens, costs can easily spiral out of control.
Investment Criteria. The dominant investment logic for a mass producer is the quest for economies of scale, which tends to favor rigid fixed assets that are unlikely to fit mass customization. This problem is exacerbated by the “sunk costs” syndrome: Managers will often resist divesting an investment they made in the past even it’s no longer appropriate.
Value-Chain Constraints. Reconfiguring a value chain that was originally conceived for volume production in order to accommodate a variable product mix can present a number of problems. An existing corporate purchasing policy, for example, can make it difficult for a division to select a new base of suppliers. Moreover, external structural constraints within supplier and distribution channels can also pose significant obstacles.
Making mass customization successful
We did not find any magic bullet to overcome these challenges. As we have argued before, mass customization requires a business to develop three fundamental capabilities. Admittedly, the development of these capabilities mandates for organizational changes that are often difficult, because of powerful inertial forces that might exist within a company.
Shifting the focus of value creation toward true customer centricity requires no less than a radical change in the management mind-set.
We have seen a repeating pattern of companies that failed in implementing mass customization. These companies were unsuccessfully managing the change process from a product-focused, mass producing firm to a customer-centric organization. Business managers and their employees often get accustomed to a dominant logic shaped by the attitudes, behaviors, and assumptions that they have witnessed in their environments over a long time.
However, shifting the focus of value creation toward true customer centricity requires no less than a radical change in the management mind-set. Firms must thus begin at the level of normative management with the challenge of changing the old and adversarial perceptions towards customers and developing an attitude of listening to and aligning with them. The introduction of mass customization must always be preceded by a well-conceived and well-deliberated change management process that will make the organization more customer centric. In the final part of our series of articles, we will discuss a number of more concrete action points.
By Fabrizio Salvador & Frank Piller
About the authors
Frank Piller is a chair professor of management and the director of the Technology & Innovation Management Group at RWTH Aachen University. He also is a founding faculty member and the co-director of the MIT Smart Customization Group at the Massachusetts Institute of Technology, USA. Frequently quoted in The New York Times, The Economist, and Business Week, amongst others, Frank is regarded as one of the leading experts on mass customization, personalization, and open innovation. Frank’s recent research focuses on innovation interfaces: How can organizations increase innovation success by designing and managing better interfaces within their organization and with external actors.
Email: [email protected]
Fabrizio Salvador is Professor of Operations Management at Instituto de Empresa Business School, Adjunct Professor at the MIT-Zaragoza Logistics Program and Research Affiliate at the Massachusetts Institute of Technology. His research focuses on operation strategy in uncertain environments and customer-centric organization design. He has been researching such topics as mass customization, concurrent product-process-supply chain design and organization design for efficient product configuration. His research has been published in many prestigious academic journals, and he is co-authoring the book “Information Management for Mass Customization” . He received a Ph.D in Operations Management from the University of Padova, where he also graduated in Industrial Engineering.
Email: [email protected]
More articles in this series:
Introduction: A special series of articles on mass customization and customer co-design
Part 1: Competing in the Age of Mass Customization
Part 2: The market for mass customization today
Part 3: Solution Space Development: Understanding where customers are different
Part 4: Robust Process Design: Fulfilling individual customer needs without compromising performance
Part 5: Choice Navigation: Turning burden of choice into an experience
Part 6: Choice Navigation in Reality: A closer look into the Customization500
→ Part 7: Overcoming the Challenges of Implementing Mass Customization
Part 8: A Balanced View: Conclusions and Key Learnings