HRM FOR CUSTOMERS: HOW TO MANAGE CUSTOMER INVOLVEMENT FOR MAXIMUM INNOVATIVE CAPABILITY 1JM06 – Essay
N.F.J. Hubbers 0752194 Eindhoven University of Technology June 4, 2012

Abstract
The role of the customer is changing. Nowadays customers demand an even more sophisticated role in the production process. Organizations can benefit from this change in role by using user knowledge in the innovation process. However this change in role has influence on both the existing HRM activities directed at the employees as well on new HRM activities directed at the customers. This research shows most important changes within the HRM functions: Reqruitement, Performance appraisal and rewarding. Key words: Lead user involvement, HRM, customer employee interaction

1JM06 – N.F.J. Hubbers – HRM FOR CUSTOMERS

Introduction
Within the technical innovation environment we see an up march of the involvement of the so called lead users, which are users of a product or service that currently experience needs still unknown to the public and who also benefit greatly if they obtain a solution to these needs (Von Hippel 1986). New perspectives within organizations have emerged over the past decades focusing on the co-creation of value as more leading companies acknowledge the potential benefits from attracting important stock holders (such as lead users) into the innovation

process. Since this involvement results in mutual influence on both the employees within the organization as well on these lead users they should not be considered as isolated parts of the management process. HRM can provide the solution to this management challenge as HRM has become the key department in developing and improving organizational effectiveness (Pfeffer, 1995; Ferris et al., 1999). However this topic regarding the involvement of lead users is usually investigated separately from HRM, as most HRM research still is concentrated within the boundaries of the company. Therefore, unfortunately, there is still little known about best practices and how to steer these lead users from within the HRM perspective. Should lead users be guided by the HRM department and to what extend? Do they need some form of leadership and should they be managed in a way the organization manages her own creative personnel? What kind of HRM stimuli for innovation work on lead users and which do not? These questions arise when putting lead users involvement under a human recourses management perspective. To improve the organizational effectiveness, the HRM department need to develop a broader orientation, crossing the borders of the organization. This movement towards developing and

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integrating resource management activities for customers involved into the innovation process raises the critical issue: How can the HRM department effectively manage lead user involvement for innovation? We try to find which kind of HRM activities can play an important role in motivating innovating capabilities from these lead users. Therefore an analysis is made on the roles the lead users play within organization and their interaction with the organization. Finally knowledge on both main topics is combined and challenges and implication for HRM in practice is discussed.

Method
First a selection of top 10 journals was made using the articles provided during the lectures. Second a search using Jstor database and Science direct was used to search for articles with the stated keywords and comparative keywords like customer involvement, lead users in combination with HRM or management. A visual scan of the article title, abstract and the corresponding journal was used to find the initial articles. Thirdly, references where checked of the already selected articles to find additional relevant articles. In total about 15 articles where selected and reviewed. The literature was mainly divided in the subjects (1) Customer roles and (2) the management of customers. Combining these articles with knowledge and articles obtained by the 1JM06 Human aspects of innovation course has led to the conclusions on how HRM should cope with customer involvement

Structure of the essay
The aim of this research is to combine knowledge on customer involvement with existing literature on HRM activities and their effect on stimulating innovation. Therefore, after the introduction, the paper will be structured in a way that both theory will be highlighted in two separate short sections. Different interactions and HRM activities will be discussed in the 3

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following sections before we conclude with the roles HRM can play in the effectiveness of innovation through lead user involvement.

Literature review

The changing role of the customer
As result of today’s information and communication technologies, consumers have gain access to practically all the information which companies have. This has led to a whole new form of customers. Nowadays customers want and even demand a more sophisticated role in the production process; from idea generation to after care. This have resulted in what Prahalad and Ramaswamy, 2000 has called the “shift of power”. Prahalad also acknowledge that consumers can actively co construct their own consumption experiences through personalized interaction and by this are creating unique value for themselves (Prahalad and Ramsawamy, 2003). This created value for and by consumers is not only defined by the consumer interaction but also by their interactions with communities and companies (Albert Graf, 2007). This said it is likely to assume that

companies have to act in a different way so that customers are enabled to create this value for the firm. The involvement and the interaction with these customers is not a new thing. On the contrary Lovelock and young argued as early as in 1979 that an increase in productivity can be achieved through a stronger involvement of customers in the production process. In 1983 Mills et al. call the customers “partial employees” in whih he archues to expand the organizational barrier to include customers. Mills and Morris also describe this expansion in 1986. In most research customers are seen as a highly uncertain source of input (Argote, 1982; Bowen and Jones, 1986; Bowen and Schneider, 1988; Larsson). However in Bowen (1986) proposed a different approach, describing how customers can be managed as internal organisational human resources. The use of this approach was intended to lead to an increase in productivity by having customers carrying out 4

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certain service operations themselves and thus management’s important strategic task is to define the optimal role for the customer, e.g. as a productive resource or as a contributor to quality, satisfaction, and value (Bowen, 1986; Bitner et al. , 1997). Since then we have seen a shift in research results from customer involvement as a more uncertain negative source to a more valuable source if managed in an efficient and effective way. Customers are increasingly being seen as a valuable resource for the company and that their involvement offers companies new opportunities (Albert Graf, 2007). Different levels of customer involvement Various models and differentiations exist in the literature on the roles of the customer. After studying literature on customer the most common distributions of roles are defined by Bitner et al 2000, who found that customers have three different type of roles: (1) the customer as productive resource; (2) the customer as contributor to quality, satisfaction and value; and (3) the customer as competitor to the service organization. Whereas Halbesleben and Buckley (2005) define the customer role as either (1) employee replacing or as (2) a strategic partnership. Finally, Albert Graf 2007 combined existing literature on characteristics of customer interaction and defined the customer roles as in which the customer is (1) a partial employee (2) a human resource (3) a source of competence (4) as an innovator (5) as an advocate (see figure 1). These roles are chronological based on developments and trends in customer involvement. Roles 1 and 2 therefore are still situated in a more negative atmosphere. Graf found that from role 3 to 5 customer involvement is becoming increasingly important. Graf further distiquishes multiple involvement levels of customers involvement varying from a purely technical or economic nature (e.g. online shopping) to a relation-ship based nature in which several encounters take place and intensive and personal contacts between customers and employees play a central part. Specifically in these types of 5

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involvement, customers can play a powerful role. Graf states that “The impact of changing customer roles on employees, and also on HRM, is highly relevant for these relationship-based services” (Graf 2007).

Figure 1 Customer roles as adopted by Graf 2007

Costumer as innovator As this research focusses on what kind of HRM activities can stimulate and extract the innovative capacities of customers by expanding the reach of HRM behind the border of the company, we are specifically interested in the role of the customer as an innovator. Therefore we will now first discus this type of customer role before we introduce the sort of connection between customers and the company. Customers can aid in in the development of new products and services. In this case the customers become innovators in favor of the organization. Customers who can provide this aid are the so called lead users. Lead users are defined as users of a given product or service type that combine two characteristics: (1) they expect attractive innovation -related benefits from a solution to their needs and so are motivated to innovate, and (2) they experience needs for a given innovation earlier than the majority of the target market (von Hippel 1986). Von Hippel also suggest that these

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there are two general methods in which lead users can be innovators for the company. First organizations can actively search for innovations developed by the lead users, and use it as a basis for the development of new commercial product or service. Second organizations can try to get lead users to joint design with the company by providing certain toolsets for user innovation. The central idea is that companies make this toolkit available which enables users to take part in the configuration of new developments or even create own designs. A field example is the toolkit made available by Lego in which users can develop new product ideas. As lego states: “The Mindstorms NXT is an enduring example of what a great product can emerge from a leaduser process. The LEGO hobby train was a complete lead-user effort with minimal involvement from LEGO and launched the train category as a user-collaboration platform”. Lilien et al (2002) further suggest that lead users that are found outside of the target market encounter more extreme conditions on a trend relevant to that target market. These users may therefore be forced to develop solutions that are novel enough to represent “breakthroughs” when applied to the target market. Lillien et al uses the example of a car manufacturer which seeks to improve car efficiency by reducing weight which might find breakthroughs in the aerospace technology.

Consequences for employees
Now that we have discussed the changing roles of the customer and which roles are most relevant for applying HRM activities to, we will now discuss the possible implications and consequences for the firm and in particular the employees, when connecting to the customers in a relationship based way. The customer-employee interaction will become a more increasingly important factor in connecting with lead users and to extract innovative ideas. This stresses the importance of the employees which will operate at the customer contact level which are the so called boundary 7

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spanners. (Graf 2007) states that “A change in role of customers has an immediate impact on the customer’s relationship with company employees”. This impact on the customer-employee relationship leads to a number of implications. Graf found four main implications which are of substantial importance to consider for the human resource management. First the form of communication and interaction is critical in order to get customers to share their knowledge and ideas. Therefor the building and maintain of relationships based on mutual trust can be essential, leading to an increase in importance of an employee’s emotional and communicative competences . Second and closely related to the first implication, the deeper customers are involved in the production process, the more customer-employee contact there will be. This will lead to an extension and change of employees tasks. Because of this increase in contact the organization is required to “employ higher level of human capital in order to deal with the heightened information flows and variability resulting from this increased interaction” (Skaggs and Youndt, 2004, p. 94) Third, The more sophisticated the customer role, the more complex and challenging the employee’s job and the greater the possibility for role conflict and role ambiguity. Role conflict can arise when employees have a different expectation on what the customers want them to do than what they think that the management want them to do. Role ambiguity may be caused by poorly defined customer contact responsibilities, when assignments are not clear, priorities change, or the appraisal varies over time. Last, Graf found that the implication as stated above in combination with increasing expectations regarding employee skills and competences can result in potential psychological contract violations. These implications will form the input for the adaption of future activities performed by the HRM department to stimulate innovation as found in the next section. 8

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Consequences for HRM: Stimulating innovation through HRM activities
Based on the consequences of customer involvement for the employees and HRM new challenges are derived for the HRM functions. Following in this section is the combination between results found in HRM research applied to the customer involvement. Two main themes seems to be of importance for supporting maximum innovative: (1) the adaption of the internal HRM activities as result of the consequences for the employees in the firm; (2) the appliance of HRM activities specifically designed and directed towards the involved customers. In the literature on HRM activities there is little consistency on the functions and the activities performed by the HRM department. It seems that there is not a single complete description of the HRM department functions and activities. Therefor the primary HRM functions that are commonly used in the literature will be discussed in perspective of their contribution to the fostering of innovation through customer involvement. Recruitment, HRM has the task of developing, implementing, and evaluating goals, strategies, and instruments that will ensure that the right people with the right motivation and appropriate skills are hired (Hilb, 2002). First, employees within a firm who is searching for innovation through customer involvement will have to gain a whole new set of competences. It will be important that employees have the skills necessary to communicate and to provide the customer or community in its expectations. A major challenge for HRM is to include not only task specific but also general characteristics into the selection of employees. As Singh 1993 propose, role conflict and ambiguity can be avoided by supplying sufficient consideration, feedback, and autonomy. Graf 2007 suggest that a way to offer this is through the involvement of the customer in the job description.

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Second when involving customers for an increase in innovative capability, the organization must consider a recruiting strategy. As stated earlier, there are different types of role a customer can play in the organization’s production process. When selecting the customer as an source of innovation, the organization must first consider the target area in which the lead users are selected. As proposed by lillien and von Hippel, lead users coming from a whole different target market could provide breakthrough solutions. Recruiting in a different target market however requires different experts to be involved. HRM should also select not only by innovative capability but as von Hippel 1987 suggest, choose between the type of approach. Are customers being approached mere to act as a problem solver or do they provide the customer with some kind of toolkit? For the latter, sufficient personnel should be provided to reach an interaction level and to provide information and feedback on the output of customer involvement. When recruiting customers, Halbesleben and Buckley (2004) propose that the HRM department should utilize marketing resources to attract customers who are interested in customer contribution opportunities. Doing so will lead to greater productivity and efficiency in the process. Performance appraisal,

First for the employees which are at the facilitators of customer employee interaction, roles and tasks change when involving customers. Therefore the appraisal should be adapted to a more dynamic range, including the appraisal of emotional and communicative

competences. Not only the type of skills and competences assessed within the appraisal should be questioned but also the appraisal source. When including assessment of employee-customer relationships, the customers themselves can best evaluate the

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customer oriented performance criteria (Graf 2007) and should therefore be included in the employee evaluation. Second, if the customer role is to stimulate innovation than not only the employees performance should be evaluated but also the customers performance as well. Of all of the HRM functions, performance appraisal is arguably the most difficult to implement in customer environments. Halbesleben and Buckley (2004) found that the reason for this difficult implementation of performance appraisal is due to some implications. First the large volume of customers involved in typical lead user involvement methods and the relative temporary nature of their relationship with the organization makes it probably not feasible to offer extensive performance feedback. Second, customers are more sensitive to feedback than employees especially negative feedback. If the customer get a great deal of negative feedback, he has the flexibility to just leave the company for another. This said, other methods of performance appraisal need to be applied to stimulate innovation through customers. One method suggested by Halsbesleben and Buckley (2004) is that organizations put into place more diagnostic and guiding feedback to customers. A other way is to provide a platform on which users can generate performance feedback to each other. Many online platforms work with some sort of automated appraisal system, some based on the extend of contribution of the user and some based on the value of the contribution. These appraisal systems could play a significant role in assessing the performance of lead users.

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Do the lead users need to be directed? Mumford et al. found that in previous studies the role of the leader seems to be discounted in potential influences of innovation. They argue against the traditional conception of creative leadership that (1) creative people do not need leaders, (2) leaders are simply to support or facilitate the creative work of others , (3) the leader of creative people must inspire providing followers with a vision and (4) the leader of creative people must be a technical guru. Rewarding First employees which support the employee-customer relationships should benefit from the involvement of the customer. Since they fulfill an important role in supplying and filtering customer input this performance should be rewarded. One way to determine the reward level is by the amount of relevant input these employees feed back into the organization. Second, the involvement of customers brings up new challenges for rewarding. Primary in customer involvement is the development of innovative ideas. What is important in this perspective is the motivation of customers to get involved with an organizations innovation process. Langerak (2011) suggest that lead users are driven by bots intrinsic and extrinsic Motivation (table 1). Important is that lead users are not extrinsic motivated in terms of money.

Intrinsic Motivation: Having fun on programming Intellectual challenge Learning effects Obligation with regard to the community Feeling of fairness, solidarity

Extrinsic Motivation: Reputation Signaling (employer, venture capital) Benefits from a better solution Job opportunities General reciprocity
Table 1: Motivation for lead users to get involved adopted by Langerak 2011

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This is also supported by Bear et al. 2003 which suggest that innovators in complex jobs are unaffected by extrinsic rewarding (see figure 2). Lead users are identified as innovators and the innovation process is one of a complex nature. Therefore the extrinsic rewarding of lead users seem not to be trivial.

Figure 2: effects of extrinsic rewarding on creativity (adopted by Bear et al 2003)

However there are ways in which an HRM department can stimulate innovation an ensure future involvement. Most important in this perspective is the feedback of importance of customer contribution. Customers are more likely to put forth the effort to be an effective co-producer or innovator if they believe their actions and ideas will make a positive difference (Lengnick-Hall et al. , 2000). A second motivator for customer innovation is the eventual hiring of highly valued lead users if possible. Sharing success stories can be a positive influencer of the motivation for customers to contribute. Another way to reward valued customers is by providing some sort of challenges with an award. These kind of challenges are specifically useful for idea generation.

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Conclusion
This research has focused on the role which HRM could play in stimulating innovation through customer involvement. One important conclusion in this research is that customer involvement not only creates new HRM activities that apply to customer management, existing HRM activities applied to employees of the firm might change as well. This results in new challenges for HRM to reduce employee implications and to stimulate customer innovation in an effective way. On employees the HRM department must be aware of a shift in the competence set and skills needed to communicate and participate with customers. These skills should e selected in the recruitment activities of HRM, assessed in performance appraisal using customer feedback and rewarded when resulting in high customer input performance. On the management of customer resources, the HRM department should formulate a strategy when selecting customers to involve. Important factors in this strategy is the type of innovation which is being sought and the type of relation the organization is striving for. Assessing customer performance should be done in a different way than traditional appraisal because of the flexibility of the customers and the more temporary nature of the relationship. Performance appraisal should be of guidance to the lead users. When rewarding customers in innovation performance, the HRM department should essentially acknowledge the importance of the contribution of the customers.

Limitations and further research
This research is based on a selection of articles contributing to the main topic: customer involvement. Although this articles represent an representation of the findings in research on this topic, it is not complete in any sense. Also because of the various definitions in terms of customer roles and HRM activities, there is still a considerable amount of research to be done to the effects of 14

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HRM activities on different customer roles. Adding (empirical) research will result substantial power to the generalizability of the results found in this study.

Reference List
Von Hippel, E. (1986), "Lead Users: A Source of Novel Product concepts", Management Science 32(7): 791–806 Albert Graf, (2007) "Changing roles of customers: consequences for HRM", International Journal of Service Industry Management, Vol. 18 Iss: 5, pp.491 – 509

Bitner, M. J., Faranda, W. T., Hubbert, A. R. and Zeithaml, V. A. (1997), “Customer Contributions and Roles in Service Delivery”, International Journal of Service Industry Management, Vol. 8 No. 3, pp. 193–205. Bowen, D. E. (1986), “Managing Customers as Human Resources in Service Organizations”, Human Resource Management, Vol. 25, pp. 371–383. Cardy, R. L., Gove, S. and DeMatteo, J. (2000), “Dynamic and Customer-Oriented Workplaces Implications for HRM Practice and Research”, Journal of Quality Management, Vol. 5, pp. 159– 186.
Kristin B. Munksgaard, Per V. Freytag, (2011),"Complementor involvement in product development", Journal of Business & Industrial Marketing, Vol. 26 Iss: 4 pp. 286 – 298

Larsson, R. and Bowen, D. E. (1989), “Organization and Customer: Managing Design and Coordination of Services”, Academy of Management Review, Vol. 14 No. 2, pp. 213–233. Lengnick-Hall, C.A., Claycomb, V. and Inks, L.W. (2000), “From recipient to contributor: examining customer roles and experienced outcomes”, European Journal of Marketing , Vol. 34 Nos 3/4, pp. 359-83 Lilien, G., Morrison, P. D., Searls, K., Sonnak, M. and von Hippel, E. (2002), “Performance Assessment of the Lead User Generation Process for New Product Development”, Management Science, Vol. 48, pp. 1042–1059.

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Pitta, D., Franzak, F. and Katanis, L. (1996), “Redefining New Product Development Teams. Learning to Actualize Consumer Contributions”, Journal of Product & Brand Management, Vol. 5 No. 6, pp. 48–60. Wikström, S. (1996), “Value Creation by Company-Consumer Interaction”, Journal of Marketing Management, Vol. 12, pp. 359–374. Pfeffer, J. (1995), “Producing Sustainable Competitive Advantage Through the Effective Management of People”, Academy of Management Executive, Vol. 9 No. 1, pp. 55–72. Ferris, G. R., Hochwarter, W. A., Buckley, M. R., Harrell-Cook, G. and Frink, D. D. (1999), “Human Resources Management: Some New Directions”, Journal of Management, Vol. 25 No. 3, pp. 385–415. Langerak Prof.dr. F. 1ZM16 Lecture 4: October 10th, 2011 Portfolio Management, NPD Metrics and Lead User Involvement. Eindhoven\ Baer et al. Rewarding creativity: when does it really matter? The Leadership Quarterly 14 (2003) 569–586 Shipton et al HRM as a predictor of innovation Human Resource Management Journal, Vol 16, no 1, 2006, pages 3–27

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