Have you ever heard of the company Threadless? They’re the classic case of applying key principals in my upcoming book: Relationship Economics (Wiley, 2008). When it comes to building business relationships, Threadless is the epitome of the intentional, strategic, and thus quantifiable value of social networks. Forget LinkedIn® for handshakes and introductions – this is Adaptive Innovation™ at work!

Threadless manages to solve business problems by consistently producing highly creative, profitable products month after month with no advertising, no professional designers, no sales force, and no retail distribution. They have been able to dramatically rethink and reposition their long-term relationship with their customers by blurring the line between producers and consumers.

Call it user innovation, crowdsourcing, or open source – adaptive innovation is the process of engaging customers in a broad spectrum of idea generation (R&D), marketing (awareness), initial distribution (trial), and much more importantly, up-sell and cross-sell opportunities to an almost cult-like customer base (repeat). By encouraging customers to develop a self-sustaining community, savvy companies engage them to contribute to – in many cases, to even create – the products being sold.

When users collaborate with one another to figure out pull-through demand via relevant and timely taste, preferences, and emotional ties to certain products – exploration of new designs, form and functionality become both fun and engaging. This level of interpersonal business relationships leads to a mutual exchange of value – hence exchange of Relationship Currency®, reduces traditional customer support requirements as the community becomes self-supporting, and continues to provide insights on future product or service enhancements.

Customers give respect and credibility to organizations – regardless of their size – that can not only listen, but also put that input to good use. Beyond consumption, they become active participants in product roadmaps, often prioritizing “must have” features, functionalities and benefits (which many organizations miss) versus simple “nice to haves.” Ignore the power of intercultural business relationships via social networks in almost any industry and you are likely to ignore the products and services your customers want you to create.

A study published last year in the Strategic Entrepreneurship Journal suggested that “user entrepreneurs” – people who went into business to improve a product they already used – found the vast majority of companies. Although early applications of social networks directed at adapting one’s product or services to the specific, unique, and often changing market demands are beginning to appear, there still lies a huge gap between gathering external input and using it. Sustainable market differentiation often comes from the later.

Pitney Bowes has built a social network for organizational relationships with direct marketers who use its mail machines. Ford is strengthening its business relationships by allowing drivers of its Focus sedan to add third-party alliance partner hardware and software to the vehicle’s navigation and entertainment systems. BMW’s innovation portal receives thousands of good ideas each year – and they implement one or two. Unfortunately, when it comes to adaptive innovation, there are more corporate excuses as to why many of these ideas are not viable than recognition that this very vibrant online community is as an uncommon and previously unconsidered option.

Another fundamental challenge is that, somehow, social networks have become synonymous with technology-centric businesses. As customer communities become exceedingly inexpensive, more and more non-technical businesses will get on board.

By the way, Threadless is in the t-shirt printing business, where 75% of the company’s employees were members of its online community before they were hired. The organization’s steadfast dedication to staying close to its customers captures more than just ideas – it captures the community experience. This proactive customer-focus is also building its Reputation Capital® as an organization which not only gathers market insights but puts it to practical applications.

Only by fully immersing yourself in the lives of those ideal customers will you be able to fully understand and appreciate their perspective in the fundamental need, application, and desired outcome of your products and services – many of which are a means to an end and that end is a moving target. Adaptive innovation, driven by a social network, will become a strategic asset in the Web 2.0 economy that is just around the corner.

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