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Technovation 29 (2009) 395–407

www.elsevier.com/locate/technovation

Avatar-based innovation: Using virtual worlds forreal-world innovation

Thomas Kohlera, Kurt Matzlera,�, Johann Fullerb

aDepartment of Strategic Management, Marketing and Tourism, Innsbruck University School of Management, AustriabHYVE AG, Munich, Germany

Abstract

The purpose of this article is to explore the opportunities virtual worlds offer for real-world innovations. By integrating users of virtual

worlds into an interactive new product development process, companies can tap customers’ innovative potential using the latest

technology. Connecting the emerging technology of virtual worlds with a customer-centric perspective of open innovation allows unique

and inventive opportunities to capitalize on users’ innovative potential and knowledge. The concept of avatar-based innovation serves as

a point of origin to reveal these possibilities and represents the first attempt to systematically take advantage of virtual worlds for

innovation management. In doing so, this paper argues that latest advances of information and communication technologies enrich the

interaction process and can improve new product development process. Further, characteristics are presented that suggest that the digital

environment is especially conducive to innovation and creative tasks. Based on theoretical insights, the analysis of eight cases

(Coca-Cola, Steelcase, Osram, Alcatel-Lucent, Toyota Scion, Endemol, Aloft, and Mazda), participant observation directly within the

virtual world and 23 interviews with both managers and customers, this paper demonstrates how virtual worlds allow producers and

consumers to swarm together with like-minded individuals to create new products and permits companies to find an audience to test, use,

and provide feedback on the content and products they create. We highlight the active roles avatars can play throughout the whole

innovation process, and demonstrate the opportunities of how manufacturers and customers could collaborate to innovate from idea to

launch. A few pathfinding companies experiment with avatars as a source of innovation. Specifically, the initiatives of Osram, Steelcase,

Mazda, and Toyota truly link the concepts of open innovation and virtual worlds to employ the interactive technology for new product

development. These efforts are critically analyzed to examine the hypothesized potential of avatar-based innovation. The cases pinpoint

practical implications and reveal both preconditions and challenges of this new approach to interactive new product development. The

results suggest that in order to fully realize the potential of avatar-based innovation, companies need to create a compelling open

innovation experience and consider the peculiarities of virtual worlds.

r 2008 Elsevier Ltd. All rights reserved.

Keywords: Innovation; Avatar; Second Life; Co-creation

1. Introduction: linking open innovation and virtual worlds

Virtual worlds, such as the most prominent exampleSecond Life, are computer-generated physical spaces,represented graphically in three dimensions, that can beexperienced by many users, or the so-called avatars, at once(Castronova, 2005). They provide companies with arepresentational-rich-mediated environment that facilitates

e front matter r 2008 Elsevier Ltd. All rights reserved.

chnovation.2008.11.004

ing author.

ess: kurt.matzler@uibk.ac.at (K. Matzler).

direct and rich interactions with customers. In fact, theplayful environment of virtual worlds has been described asengines of creation that provide the freedom to experimentand lead to unprecedented rates of innovation (Ondrejka,2007). The built-in tools encourage users to createiteratively and interactively almost anything imaginable,while sharing the act of creation with other users. The user-generated environment allows anyone to create nearlyanything they can imagine, and look like nearly anyonethey want to be. This has proven to be fertile ground formany innovative thinkers and virtual worlds’ creative

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activities have become more visible and extensive. As theboundaries of the virtual and the real-world dissolve,avatars might very well use their creativity to designproducts with real-world potential (Hemp, 2006). This iswhere the idea of avatar-based innovation (ABI) origi-nates. The combination of robust innovation activitieswithin virtual worlds and the growing overlap of virtualworlds and the real world suggest opportunities for creativereal-world companies. It is argued throughout this paper,that this makes it conducive to innovation.

Turning to the physical world, the paradigm of open

innovation is gaining traction (Chesbrough, 2003), andcustomers are well recognized as a valuable source forinnovation. (e.g. von Hippel, 2005). The emergence of theInternet has facilitated unique and inventive opportunitiesto capitalize on users’ innovative potential and knowledge,resulting in what has been termed virtual customerintegration. Instead of taking place in the physical worldin a face-to-face setting, the interaction occurs via theInternet, mediated by the computer. We suggest toincorporate the latest technological advances into openinnovation practice, namely the emerging technology ofvirtual worlds. The technology of virtual worlds couldfurther enrich existing web-based customer integrationmethods, by allowing real time, media-rich and highlyinteractive collaboration between manufacturers and theircustomers.

This paper links the two emerging phenomena of openinnovation and virtual worlds and advances the perspectivethat virtual worlds can be used for real-life innovations byemploying virtual world platforms for an interactive newproduct development process. Towards that end, theconcept of avatar-based innovation is introduced and theimportant role virtual worlds could play for the innovationprocess is described. In doing so, this paper is descriptiveand explorative rather than prescriptive. It first presents abrief overview of the concept of avatar-based innovation,defines the idea and clarifies the underlying assumptions.Next, we attempt to present arguments and opportunitiesfor this approach. The following section identifies thechances for each step during new product development andillustrative cases shows that some pathfinding companiesexperiment with a virtual world-based interactive develop-ment process. Participant observation and qualitativeinterviews with participating avatars and mangers ofcompanies that use Second Life for their innovationprojects are conducted to generate additional insights.Finally, the limitations of this new approach to virtualcustomer integration are discussed, before the conclusionhighlights the central preconditions of avatar-based in-novation.

1.1. Introducing avatar-based innovation

Every day, millions of users interact, collaborate, andform relationships with each other through avatars inonline environments. An avatar is the graphic representa-

tion of the self in a given physical medium that other userscan see or interact within a virtual environment (Galanxhiand Nah, 2007). Avatars as a ‘‘vehicle of the self’’(Castronova, 2003, p. 5) are the inhabitants of virtualworlds. Linking open innovation and virtual worlds resultsin what will be described as avatar-based innovation, whichrefers to an interactive new product development process,where manufacturers collaborate with virtual world’savatars, to generate value for their innovation activities.Based on virtual world technology and employing openinnovation mechanisms, customers and manufacturersjointly develop innovations in a media-rich and interactiveenvironment. A variety of different customer types areintegrated throughout all stages of the product develop-ment process.Out of this definition, a number of guiding principles and

assumptions merit emphasizes for the context of this paper:

�

The goal is to create value for the real world: The firstcharacteristic restricts attention to corporate efforts thatare directed to transfer the value created in virtualworlds to the real world. The term virtual does notimply that this world is not real. It only serves todifferentiate the world of bits and bytes generated bytechnology and the physical earth world. Because thepresent study regards the potential of virtual worldsfrom the perspective of a real-world manufacturer, onlythe activities that aim at developing or improving real-world products are relevant. However, virtual products,defined as products that have their origin in the virtualworld and are non-existent in the real world (Hemp,2006), could very well be relevant for avatar-basedinnovation. For instance they could serve as a source ofinspiration for the development of a physical versionand cross the border from the virtual to the real world.But ultimately the products should fit the physicalworld. The successful use of virtual worlds for real-world innovation is not constrained to any specificbranches or product characteristics, but could be usedfor all products. � Systematic integration of customers occurs throughout the

whole new product development process: In line with theargument that today’s product development processesrequire input from customers iteratively at many timesduring the development process (Dahan and Hauser,2002), we argue that avatar-based innovation canfacilitate innovating activities throughout all stages ofnew product development. The integration of customersshould extend from the idea generation via the conceptdevelopment and prototype testing until post-launch ofthe new product. For instance, avatars can delivercreative input during ideation, co-create concept de-signs, or provide feedback during product testing.

� Different types of customers assume an active role during

the innovation process: Following Reichwald and Piller(2006) not only lead users are able to deliver high qualityinput for new product development, but a wide range of

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Table 1

Examples to illustrate the fidelity of virtual world-based simulations.

Perception system Technological capability Example Usefulness

Basic orienting Navigation through 3D environment Structure of bank interior |||Visual 3D representation of objects and environments Design of counter |||Auditory 3D voice and spatial sound Background music and customer dialogue ||Touch Interaction and manipulation of objects Functionality of ATM |Taste–smell – Brand typical smell –

1

PA

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different customers assume different roles and arecapable to provide various contributions. The secondpoint emphasizes the active role avatars hold duringopen innovation. Avatars should interact to innovate,rather then be assigned the passive role, characteristicfor traditional market research. Note, that avatar-basedinnovation presupposes a certain degree of virtual worldliteracy on the users’ side.

� The enabling technologies are three-dimensional virtual

worlds that facilitate avatar-mediated communication.This last assumption posits a broad interpretation of

‘‘virtual’’ in applying it to describe any interaction thatdoes not require physical co-location. This definitionrenders the nature of the underpinning technologyirrelevant to the analysis.

Understood this way, the usefulness of employing virtualworlds for customer-centric product development variesaccording to the stage of the product development cycleand with regard to the type of product or service underconsideration.

1.2. When avatar-based innovation makes sense

To restate, the goal of avatar-based innovation is todevelop products and services that will satisfy needs of realconsumers within real contexts of use. However, virtualproduct development tasks are carried out using simplifiedversions of the product being designed and its intended useenvironment (von Hippel, 2005). The usefulness of thesemodels depends upon the fidelity of this simulation, whichdescribes ‘‘the degree to which a model and its testingconditions represent a final product, process, or serviceunder actual use conditions’’ (Thomke, 2003, p. 99). Todate, virtual worlds reproduce the real world mainly basedon visual, sound, and touch cues. This makes certainproduct types better suited than others. To classify whichproducts are well suited, we use Gibson’s (1966) fivesystems of perception, namely basic orienting, auditory,touch, visual, and taste–smell. The case of Barclays bank,which conducted a group discussion of different branchdesigns within Second Life, serves to illustrate theappropriateness of the simulation.1 Instead of meeting in

To visit this place in Second Life: /http://slurl.com/secondlife/

Consulting%202/35/167/25S.

a conference room to review pictures, listen or readdescriptions of the different options, the participantsactually where able to walk around inside the variousbranch designs to discuss the option at hand. Avatars couldorient themselves in the virtual setting and experience thephysical context. They were able to provide feedback onthe visual elements inside the bank, even if admittedly, therepresentations of real objects to date are often stylized.The availability of spatial sound enhanced the richness ofthe representation. Scripting of virtual objects addsfunctionality and facilitates that virtual prototype simula-tion mirrors the functions of the real product. While in thecase of software it is conceivable that feedback about thetechnical performance is provided, for other productssimulating the functionality is rather complex. Even lessappropriate is getting feedback on the taste or smell ofproducts, since no simulation opportunities are available.Table 1 summarizes these arguments and lists examples toillustrate the usefulness of avatar-based innovation fordifferent product types.It is important to note that while certain product types

are evidently better suited, the benefits of virtual worldscan accrue to any product, if the technology is understoodas a communication platform. Put it in another way, even ifa product is represented as low fidelity, companies can stillemploy virtual worlds to provide the context to interactwith their customers and facilitate interaction amongconsumers to discuss their product. Keeping in mind thatavatars are the virtual puppet of a physical person, theunique aspect of the virtual world is that the fidelity ofcertain elements of social interaction is very high. The nextsection will further contribute to a better understanding ofhow virtual worlds can help the innovating companiesthroughout an open innovation process.

2. Opportunities of avatar-based innovation

To understand the potential of virtual worlds for real-lifeinnovations, two basic questions must be answered. Firstly,how are virtual worlds different from the two-dimensionalweb and from the real world? Secondly, what opportunitiesarise from this difference? By addressing both questions,we hope to lay the foundation for integrating virtualworlds into new product development of innovatingcompanies. In this endeavour, a number of arguments thathighlight the opportunities of this new approach of virtual

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customer integration are presented. The opportunities forusing virtual worlds for real-life innovations are reallymanifold. However, the arguments can be structured alongtwo key dimensions. The first dimension captures thenotion that existing customer integration tools shouldcapitalize on the advances of information and commu-nication technologies. The second dimension relates to thenature of virtual worlds and their native creativity.

2.1. Incorporating technological advances

Communication and information technologies are add-ing new capabilities for rapid and inexpensive customerinput to all stages of the product development process.Indeed, ever since the World Wide Web has beendeveloped, the process of customer integration hasexperienced enormous improvements (Nambisan, 2002).Instead of simply moving paper-and-pencil or central-location interviewing methods on the web, the so-calledvirtual customer integration methods were designed toexploit the new communications and computing power toprovide capabilities that were not feasible previously(Dahan and Hauser, 2002).

The advent of virtual worlds, resulting from recentadvances in 3D graphics, bandwidth, and networkconnectivity, facilitates new forms of producer–customerinteraction in product development and proposes the nextevolution for virtual customer integration. The dynamicsand opportunities of this enabling technology of customerintegration already led to experiments of a handful ofcompanies and many analysts point toward virtual worldsbeing suited for virtual customer integration. For example,Menti (2007, p. 1) suggests that:

Product and concept testing take on and exciting newdirection in Second Life. Consumers are always ininteractive mode, sitting on furniture, trying on clothesor even wander up and down the aisles of a virtual store.It doesn’t take a huge leap of the imagination to moveonto co-creation, and picture a scenario where avatars[y] help design and build product prototypes as part ofthe market research process.

The highly visual and interactive applications possiblewith virtual worlds could bring customer integration tonew levels. In briefly describing some of the differences andsimilarities of the traditional two-dimensional web versusthe emerging three-dimensional web, the advantages of aninteractive product development process within three-dimensional virtual worlds will be highlighted. Note,however, that the discussion is not about a two-dimen-sional versus a three-dimensional Internet or aboutreplacing established online-based customer integrationtools with virtual world-based interaction methods. Farmore, the differences and similarities provide the basis ofargumentation for linking the concepts of open innovationand virtual worlds. In fact, if any true contribution is to bemade by virtual worlds, it must come from exploiting their

new and intrinsic qualities and not from imitating orsubstituting what already can be done in other media.Virtual worlds incorporate avatar-mediated communica-

tion that differs from the traditional Internet in several keyrespects. The traditional Internet as a communicationmedium is characterized by three significant disadvantages,namely that it is generally asynchronous, it lacks place, andit is descriptive rather than experiential. Virtual worldspartly eliminate the communicative shortcomings or atleast improve the existing technology to approximate theopportunities of the physical face-to-face contact (Ondrej-ka, 2005). Avatar-mediated communication already nowrepresents a real-time, two-way, and low-cost communica-tion mode.Virtual worlds are further characterized by a high degree

of anonymity because actors are free to choose apseudonym and can adapt their virtual personality how-ever they please. While there are some disadvantages,which will be addressed in the final section, there arecertain advantages that could be beneficial for avatar-basedinnovation. For instance, Bargh et al. (2002) point out thatthe ‘‘true self’’ is both more accessible and better expressedin Internet settings then in face-to-face settings. The sameeffect can be expected in the case of virtual worlds. Thiswould further suggest that the demand customers poseupon new products might be particularly revealing in thecontext of virtual worlds because some people may preferto have a simulated self do the talking rather than the‘‘real’’ person in a physical setting.The level of realism provided is one of the most

important dimensions that differentiate new media fromtraditional media. New media is able to incorporate levelsof media-richness and interactivity that traditional mediacannot (Coyle and Thorson, 2001). Building upon differenttechnologies, virtual worlds represent the newest form ofan interactive medium and the fundamental tenet is thatvirtual worlds enable an unprecedented level of interactiv-ity. Interactivity between the users, as well as between usersand the virtual objects, allow for rich collaborationopportunities. The large part of Second Life usersperceived that the virtual world improves collaboration,communication and cooperation between people (Fetscher-in and Lattemann, 2007). This is critical for the context ofthis study, since innovations are seldom the result oflonesome individuals, but rather origin from the collabora-tion of diverse groups. For instance, part of IBM’sInnovation Jam—an ongoing effort to facilitate collabora-tion among IBM employees—was held in Second Life.Besides the key benefit of virtual meet-ups erasinggeographical and financial, the reports indicate uniquequality of interaction, with the opportunity to create asense of camaraderie without physically gathering peopletogether in one room for people who are dispersed acrossthe world (Ringo, 2007).The media characteristic that is expected to be increased

in virtual worlds is termed telepresence, the sensation of‘‘being there’’ in a mediated environment in time and place

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(Ijsselsteijn et al., 2000). Interactivity and media-richnessare considered as the two principal variables that influencetelepresence (e.g. Steuer, 1992; Coyle and Thorson, 2001).

The explicated concepts of interactivity, media-richness,and telepresence are important to understand the notion ofdirectness of experience. The different media alternativesvary widely in the quality and quantity of productinformation they can transmit to consumers and in theability to emulate experiences (Klein, 2002). Virtual worldsallow users to interact with the products instead of onlyseeing them. This experiential content allows consumer to‘‘experience’’ the ownership of a product, service or brand.

To a large part, these media characteristics address thetechnical functioning of the technology of virtual worlds.The success of an interactive product development processis, however, by no means only defined by its technologicalcapabilities. The next section highlights the environmentthat is regarded to be conducive to open innovation.

2.2. Innovation activity within virtual worlds

The potential for integrating virtual worlds into newproduct development is suggested by the innovativeactivities that already take place within them. The case ofSecond Life serves to illustrate the creative potential that isgoing on within virtual worlds. As Second Life attractsmore interest and activity, it is fast developing into whatThe Economist described as a ‘‘petri dish for innovations’’(The Economist, 2006). Because Second Life has no presetscript, and apposes few limitations upon what players cando, user-generated content is experiencing enormouspopularity. Virtual worlds of this type are no typical‘‘product’’ as they are created almost entirely by itscustomers, who actually co-innovate and co-produce theproducts they consume, or as Pearce (2001, p. 6) puts it‘‘participation is part of the production processes’’. Afterall, users participate in the design, creation, and productionof the product, while the operator company is content tomanage the community and make sure the infrastructure isrunning. Hence, virtual worlds are described by (Ondrejka,2005, p. 3) as ‘‘engines of creation’’ that ‘‘provide thefreedom to experiment and lead to unprecedented rates ofinnovation’’. Truly, Second Life is a place where anythingone can imagine can be created from thin air and this is notonly allowed but encouraged. The limits of the virtualworld are only human creativity. Combined with the factthat creators own their products and then can sell them,Second Life has attracted both professional and amateurdesigners (Lavallee, 2006). For Tapscott and Williams(2006, p. 127), Second Life provides a model for othercompanies showing how customers can be invited andenabled to collaborate and add value on a massive scale:

In the same way that Second Life is an infinite platformfor customer innovation, not a product, this newgeneration of prosumers treats the world as a place forcreation, not consumption. This new way of learning

and interacting means they will treat the world as a stagefor their own innovations. Just as you can twist andscramble a Rubik’s Cube, prosumers will reconfigureproducts for their own ends. Static, immovable, none-ditable items will be anathema, ripe for the dustbins oftwentieth-century history.

Simply put, Second Life’s open-ended digital environ-ment makes it currently the ultimate in participatoryentertainment and truly resembles ‘‘playgrounds of theimagination’’ (Castronova, 2005, p. 2). Note, that theinnovative activity within virtual worlds is not limited toSecond Life. A number of researchers in innovationmanagement (e.g. Prugl and Schreier, 2006; Jeppesen,2002; Jeppesen and Molin, 2003) have chosen the computergames industry as a field of research. For instance, Prugland Schreier (2006) empirically analyzed user innovationwithin the computer game ‘‘The Sims’’. The authorsshowed that users innovate substantially with the built-intoolkits and even create their own tools to design new files.With regard to open innovation in general and toolkits foruser innovation and design in particular, they furtherconclude that the gaming industry is at the cutting edge ofthis trend. This is backed by Jeppesen and Molin (2003),who found that that 35% of the investigated computergames included toolkits for their users. Returning back toSecond Life, their approach is radical in so far the solutionspace for possible innovations is almost infinite.To sum up, the point was made that there is substantial

innovative activity and considerable native creativity with-in virtual worlds. But what does that mean for the ‘‘realworld’’?Hemp (2006) builds the bridge to the real world,

suggesting that avatars could use their virtual-worldsensibility to design products with real-world potential.To underline this statement, he names the example ofseveral Second Life clothing designers that have beenapproached by real-world fashion houses, and that at leastone business makes real-world version of furniture basedon virtual designs by Second Life residents. Particularly infashion design, Second Life designers started to producetheir virtual clothing for the real world and the virtualworld is becoming an inspiring source for future trends.This means that the native creativity of virtual worlds isnot limited only to the digital world, but crosses the lineinto the physical world.In the context of innovation management, this opportu-

nity has gone relatively unnoticed, whereas for advertise-ment purposes the idea, labelled reverse product placement,is gaining traction. While traditional product placementrefers to integrating a real brand into a fictional environ-ment, reverse product placement describes creating afictional brand in a fictional environment and then releaseit into the real world (Wasserman, 2007). Edery (2006)states the example of American Apparel clothing chainlaunching its first line of jeans in a store that appears inSecond Life several months before launching them in its

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real-world stores. Evidently this generated interest beforeits launch. He further argues that even users of virtualworlds could take virtual brands to the real world. Personalfabrication via 3D printers might not be too far of. AgainOndrejka (2005, p. 22) projects that ‘‘As modeling andsimulation technology improves, more and more real-world items will be successfully designed in collaborativespaces that can be leveraged both by corporations and adhoc groups.’’

In the end, as the realms of fact and fiction blur and thephysical and non-physical world increasingly intertwine,users taking a virtual or fictional brand and make it real,could be considered an innovative approach to userinnovation. The potential of virtual worlds for innovationhas, in some sense, already been realized. Already nowcompanies are beginning to explore ways to apply theinteractive technology of virtual worlds for an openinnovation process where customers and manufacturersjointly work on new products. It is not major, but it isindicative of the possibilities.

3. Research method

The initiatives of a few pathfinding companies working itthis area point toward the potential of taping avatar’screativity. To gain a deeper understanding and a moredetailed overview of the opportunities of avatar-basedinnovation multiple-case studies where conducted. Theresearch aims were to generate insights into the applic-ability, the peculiarities and challenges of using virtualworlds for real-world innovations. The case studiescombined participant observation of approximately 70avatars with semi-structured interviewing with bothmanagers (n ¼ 8) of the projects and the participatingcustomers (n ¼ 15). Observation and the interviews withthe participating avatars were conducted directly in SecondLife, managers were interviewed via telephone.

4. Illustrative cases

Lang et al (2008) provide an overview of the companiesthat entered Second Life with the intention of interactingwith users for new product development. Analyzing 130public announcements of companies establishing a pre-sence, they found that 17% of the corporations claimed touse the virtual world in some way or another for newproduct development. Two major points deserve closerattention. Firstly, the companies which state the solicita-tion of customer contribution and new product develop-ment as their main objective for venturing into Second Lifeare relatively few. Secondly, it is important to note thatthere appears to be a gap between announcing plannedactivities in a press release and delivering on the promisesin-world. Anecdotal evidence showed that many of thecorporations that entered Second Life early, failed todeliver on the goals they stated in their announcements.There are two possible explanations for that: Either they

did not even plan to deliver on the promises and onlymoved into Second Life to promote their innovative image,or they tried to create value but their approach simplyfailed. The intention of the large part of the involvedcompanies to regard their activities in Second Life asongoing developments (Lang et al., 2008) and the tendencythat the second wage of newly entering companies willinvest in virtual worlds with an agenda, other then solelygenerating media attention, points toward interestingfuture projects.In the forthcoming pages, some illustrative cases are

described and analyzed. Several criteria were used to selectthe projects under study. Firstly, we only considered thecorporate activities that resemble the thesis underlyingunderstanding of avatar-based innovation. Thus, onlyinitiatives were relevant that assigned an active role tothe participating customers and aimed to transfer the valuegenerated in the virtual world to the physical world.Secondly, only the most successful and visible activitieswere selected. For this study, success was defined as theamount of generated interest among participants and theattention received among the relevant media. Participationwas considered to be a key criterion indicating the successof a customer-centric open innovation project. Thirdly, wewanted to include a diversity of approaches that wouldrepresent the whole spectrum of the product developmentcycle. The selected cases are tangible examples of a newmode of customer–manufacturer dialogue that is emergingin virtual worlds. Some of these cases can both guide andenlighten managers, when viewed through the new frame ofopen innovation. The cases are analyzed following anidealized three stage product development process, of (1)need identification and idea generation, (2) concept and

design, and (3) test and market launch.

4.1. Need identification and idea generation

The generation and collection of innovative ideasconstitutes the point of departure for the remainder ofthe product development process. This stage of preliminaryinvestigation deals with the generation of new productideas, their initial evaluation, and preliminary appraisal ofother potential factors that might affect the success of thenew product ideas under consideration (Cooper, 1996).Among the most famous companies that utilize Second

Life as a platform for idea generation is the Coca-Cola

Company. For the initiative called ‘‘Coke Virtual Thirst’’Second Life residents as well as the general public wereinvited to submit ideas for a portable virtual vendingmachine. The design competition should yield inventiveideas for the next generation of Coke machines. ‘‘We’veinvited the world to use the Second Life platform todesign and prototype the ultimate Coke machine-some-thing that delivers an innovative, engaging experience inSecond Life,’’ explained Michael Donnelly, Director ofCoke’s Global Interactive Marketing. Donnelly furtherdescribes that virtual worlds make it possible that radical

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innovations may occur, because it enables individualcreativity and puts no limit to ones imaginations (Kacur,2007). While this case illustrates the potential to gainradical ideas that only exist in peoples’ imaginations, criticsmay argue that the value for the real world is missing.Nonetheless, even if ideas generated in the described modeare not directly transferable to the physical world, theymight still provide a creative source of inspiration. Theenvironment of virtual worlds is especially conducive forsuch experiments.

To provide an example that bridges the boarder of thereal and the virtual, consider the case of Steelcase. Thecompany invites Second Life builders to design aninnovative new executive chair. The winner presents theirmodel to the company’s design staff, with the idea ofincorporating their ideas into actual models. This is anexcellent example for user input generated in the virtualworld and considered for future product developmentopportunities. Still, the nature of this project is character-istic of this early stage where companies are more or lessexperimenting with the emerging virtual environments,rather then expecting to develop the next generation ofinnovative products. The responsible manager confirmedthat for his company the project is a learning experienceand that their goal is to test the opportunities of this newform of interaction (Fig. 1) (Steelcase, 2008).

Yet another example where companies aim to tap thecreativity of avatars is the light manufacturer Osram.Interested participants are invited to envision and designtheir ideas around the topic of lighting. They areencouraged to unleash their creativity and join thecompany on an exploration of the future of new productideas or related applications. Residents can create in a‘‘sandbox’’ area and submit their ideas to be part of thecompetition.

For many of the participating avatars, the process of thecompetition was fun and a satisfying experience to be partof. As one informant put it, ‘‘I thought it was a great idea,always a fan of promoting innovation.’’ Typical commentsfrom the interviews revealed that for avatars, ‘‘it was good,we could present our ideas’’, and they agreed that ‘‘it’s agood way for businesses to reach a wide audience’’. Onetheme that emerged from the interviews was that not onlythe creative challenge was a reason for them to participate,but the social interaction with like-minded appeared to bean important factor. Critical remarks pointed towards thatnot all the creations would be realizable in the physicalworld.

Regarding the company perspective, the project organizerswould have expected more attention. Evidently the goals interms of number of ideas submitted were not reached (vonOertzen, 2008). From a marketing perspective, the projectcould still be considered a success. A similar idea competitionhosted by Alcatel-Lucent was challenged by the sameproblem: only a limited number of interested participantssubmitted an idea and the project failed to engage asatisfactory number of avatars (Goodman, 2008).

Based on these cases, we can distinguish three primaryways to use virtual worlds during this step of the productdevelopment cycle. Firstly, companies can discover creativeideas through observation of consumer behavior. It hasbeen argued, that avatars’ consumption may reveal deeprooted wishes and needs as expressed by Hemp (2006, p.50): ‘‘many people take considerable pride in theircreations as public expression of hidden aspects of theiridentities.’’ Companies could discover these hidden aspectsand identify them as opportunities to innovate, or findareas of need and untapped demand. This potential hasalready been outlined in the context of reverse productplacement. Secondly, and related to the above argument,the viability of new product ideas can be assessed beforemaking substantial commitments to further developmentof these ideas. Regarding web-based product development,Dahan and Hauser (2002) argue that the web facilitatesrespondent-to-respondent communication that is expectedto improve the quality of information gathered. What istrue for the web context is even more relevant for avatar-based innovation. The characteristics of virtual worldsallow for intense customer-to-customer interaction in realtime, that product development teams can observe to gaininsight into customer needs and better estimate a newproduct’s potential. Finally, and most importantly, custo-mers may be asked to play an active part in ideageneration. This is by no means limited to questioningcustomers with surveys, opinion pools or focus groupswithin virtual worlds. In contrast to this traditional marketresearch instruments, avatar-based innovation proposesthat customers take an active part in the idea generation.Accordingly, development and design tasks could beshifted from the manufacturer to the user. Idea competi-tions are one way for manufacturers to access innovativeideas and solutions from users. The competitive nature isexpected to encourage users to participate, inspire theircreativity, and increase the quality of the submissions.Winning contributors could be identified as lead user andcould be integrated into further innovation tasks (Pillerand Walcher, 2006). The characteristics of virtual worldscould help to overcome some of the limitations thattraditional customer integration faces during this stage ofproduct development. Especially during the idea genera-tion phase users can be ‘‘functionally fixed’’ to their currentuse context and therefore unable to develop radically newideas (e.g. Birch and Rabinowitz, 1951). Because virtualworlds provide the environment that allows users to forgetearth constraints, it might provide an environment forradically new ideas.One has to admit that this early idea generation projects

in Second Life are partly driven by marketing aspects togenerate buzz and to revamp the corporate image.Companies at this stage are starting to explore theopportunities that virtual world offer rather than exploit-ing the full potential. But the opportunity to generatecreative ideas with real-world potential is starting to berecognized. The pathfinding projects point toward this

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Fig. 1. Steelcase chair designs in Second Life.

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direction, which also Au (2007) anticipates: ‘‘Second Life’sresidents not simply treated as a marketing opportunity,but as content creators with untapped potential toprototype the future’’.

Taking fidelity as the lens through which these initiativesare analyzed, it becomes evident that most of the cases relyforemost on receiving feedback on visual aspects of aproduct. The choice of the Coca-Cola Company to pick avending machine as the contest underlying product isillustrative. When it comes to the taste of the soft-drink,unquestionably ‘‘real’’ has a fidelity advantage comparedwith virtual worlds. Instead the company put the focus ona product, which is highly visual. In addition, the contestinvited avatars to add high-fidelity sound and technicalfunctions to the objects.

4.2. Concept and design

As its title implies, companies in this stage of productdevelopment conduct a more comprehensive study to builda business case for the new product idea so that it can bedeveloped further (Cooper, 1996). The ideas selectedduring the previous stage are developed into concepts.Especially, the Internet allows customers to self-configureand self-design products, bringing customers directly intothe design and development process (von Hippel, 2001).So-called toolkits for customer innovation have beendeveloped to tap users’ creativity. Virtual world alreadyheavily rely on toolkits for their content creation (e.g.Jeppesen and Molin, 2003), and the following casesillustrate that these toolkits could also be a valuable toolthat enables consumers to transfer their explicit andimplicit knowledge to producers.

To illustrate the potential for an open innovation toolkitconsider the case of Toyota Scion. To make their carscustomizable, the car manufacturer added an additionaldisplay to the interface, the so-called head-up display.Users can choose from different colors and select theirpreferred type of rims. One important dimension differ-entiating the types of toolkits is their scope, meaning theusers’ design possibilities or design freedom (von Hippel,2001). Those with a rather limited solution space aredescribed as toolkits for mass customization, aiming rathertowards individualization then generating innovation.Toyota’s toolkit initially appears to be one for masscustomization. However, besides the obviously availableoptions, skilled users can modify the whole vehicle becausethe manufacturer has made this option available. Thetemplate for the texture can be downloaded from the weband owners of the virtual car are granted permissions toexperiment with the components. Because the design spaceis vast, this invitation to innovate can be expected to leadto creative explorations which value might be transformedinto the real world. This case also teaches a lesson on howcompanies should provide their customers modular‘‘Lego’’ parts to play with instead of static and non-editable products and services. The popularity of this car

model revealed by participant observations suggests thesuccess of this approach (Fig. 1).A second example that enhances the existing Second Life

toolkit is Endemol’s Furniture Design Competition. Dodate, this corporate example stands out when it comes tothe implementation of open innovation in virtual worldsand this case especially illustrates the potential of avatar-based innovation. The task is to fully develop original 3Dfurniture that could serve as inspiration for real-lifedesigns. The winner will be selected partly from visitorvotes and a jury, and the winning design receives 1 millionLinden dollars. The island comprises an inspiration areawhere avatars can get creative input from interacting withsample rooms and objects. Within the ‘‘texture switchrooms’’ participants can display their creations and playwith the textures and colors on the ground, walls andceiling. In the ‘‘design ME bar’’ participants can chat andmeet like-minded designers and exchange their ideas. Thebuilding area provides participants with free samples,objects, and textures so inexperienced builders do not haveto build the furniture from scratch. For starters buildingtutorials are available. All considered, the case of Endemol

represents a holistic approach to create an open innovationexperience within a virtual world.An interview with the responsible manager revealed that

this project fulfilled the company’s goals: ‘‘It was a learningexperience for us to see, whether people where willing to doit; and what would happen if you come up with acompetition’’ (Virtual Me, 2008). Not only were they ableto demonstrate that Second Life avatars were willing tojoin firms to innovate, but also that they are ready to signoff all their rights to a company. What is also interesting tonote is that only a small percentage of the over 150 visitorsparticipated in the side activities that are only indirectlyrelated to the innovation activity. This suggests that co-creation can be considered an engaging activity, be it themutual rating of the submitted ideas or actually building athree-dimensional model.Again, the cases indicate that design-related aspects of

the product can be considered as high fidelity. Addition-ally, these cases build upon the technological capacity thatallows users to manipulate and interact with objects.

ARTICLE IN PRESS

Fig. 2. Mass customizing a Toyota Scion in Second Life.

Fig. 3. Aloft testing the virtual hotel.

T. Kohler et al. / Technovation 29 (2009) 395–407 403

The need to manipulate virtual objects, or the so-calledneed to touch (Peck and Childers, 2003) is evident inavatars’ behavior and suggests that objects need to allowfor a high degree of interactivity.

4.3. Test and market launch

During this stage, the new product concept is convertedinto a new product or service. To ensure that a newproduct or its prototype functions properly before it iscommercialized, this stage of product development iscrucial. In the web context not only software has beentested successfully. Empirical studies have shown thatonline prototype testing is as effective as more traditionaloffline physical prototype testing, with the difference thatonline methods can be conducted faster with less costs(Dahan and Srinivasan, 2000). Similarly, animated productdepictions, showing how the new product works, allowassessing ease of product use (von Hippel, 2001). Ozer(2003) proposes that this should be particularly relevant fornew products that require expensive physical prototypes.Furthermore customer-ready prototypes provide the cus-tomer with important additional information (Srinivasanet al., 1997).

One example that is representative of the numerousopportunities is the case of Aloft, a new hotel concept fromStarwood Hotels. Before the building process starts in thephysical world, the company built a mock-up of their newconcept in Second Life. This hotel served as a laboratory.‘‘For Starwood, opening aloft in Second Life is a way totest-market the hotel’s design and rapidly prototype theevolving concept. For instance, staffers will observe howpeople move through the space, what areas and types offurniture they gravitate towards, and what they ignore. Theproject is also an effort to tap consumers for ideas’’,describes Jana (2006). Based on the feedback, severalchanges to the overall design of Aloft resulted. Thesechanges have been applied both to the virtual hotel and tothe physical aloft hotels (Fig. 3) (Schiller, 2007).

Other prominent examples for virtual prototype testinginclude American Apparel, which are test-marketing its firstline of jeans within the Second Life store, before they hitphysical stores. Cresendo Designs has created virtualdesigns and structures to allow clients to visualizematerials, colors, finish choices, and landscaping. Architectand client stroll through the space and move walls,windows, ceilings, and other features to make valuabledesign changes before building the house (Fig. 2).

A final example to highlight the potential of virtualworlds to test and validate concepts: Mazda launched aconcept car that assumed great interest in the real worldbut interested customers could not make any directproduct experiences other then seeing pictures or readingabout the new car. With the launch of the virtual version ofthe car, future customers could experience the vehicle in atest drive. The offer was met with great interest by avatarsand the responsible manager reported positive feedback to

the initiative (Mazda, 2008). This example ties into anothertask of the new product development process, namely tocreate product awareness among potential buyers (Ozer,2003). The marketing opportunities offered by the med-ium’s capacity to stage branded experiences might very wellcreate awareness. The potential role virtual worlds couldplay during the stage of new product commercialization isample.These cases reveal a number of insights. Virtual worlds

allow innovating companies to test new product conceptsquickly, inexpensively and confidentially with more directproduct experiences as the traditional web allows. This isreflected by the study informants who agree to thepotential: ‘‘If a prototype is created and sells well inSecond Life, this would be sign of potential real-lifeinterests’’, and additionally ‘‘without paying a fortune toget feedback in real life’’. Rather then waiting for physicalprototypes, product development teams can test virtualprototypes with customers in a media-rich environment ofvirtual worlds. As Dahan and Hauser (2002) underline,interactive and media-rich depictions enhance respondents’

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understanding and enjoyment of the task. Second Life actsas the enabling technology to produce animated 3D modelsplaced in a quasi realistic usage scenario in a fast and cost-effective way. As Fuller and Matzler (2007) point out, thisenables customers to virtually experience innovativeproducts long before they exist in the physical world. Ina trial-and-error experience, customers cannot only learnhow new products function (von Hippel and Katz, 2002),but also build sound judgments, and provide valuableinput for the product development teams (Fuller andMatzler, 2007).

Participant observation revealed that the degree ofdirectness of the experiences is the key advantages,compared with traditional web-based prototype testing.Because virtual worlds allow manipulations that are notpossible to implement in the physical world, virtual worldsare an emerging prototyping lab. Especially, the buildingtools of Second Life offer a new prototyping environmentfor real-life products, buildings, landscapes, and experi-ences. Companies can introduce lower-fidelity virtualgoods and services that would take years to develop andare costly to produce in the real world, hand out copies toother users, analyze users’ reaction to the prototype, andgain valuable insights for modifications of the virtualprototype. Thus, the technology of virtual worlds offersinexpensive opportunities to experiment early in theproduct development cycle. As projects progress anddesign matures, Thomke (2003) maintains that models ofincreasing fidelity are included. Depending on the varyingdegrees of fidelity to reality certain products are bettersuited and depend less on a real-life prototype. For others,higher-fidelity models or physical prototypes are unavoid-able.

5. Limitations and challenges

Several exceptions to these generally optimistic norma-tive arguments need to be discussed. The 3D avatar-mediated setting poses unique issues for open innovationthat are distinct from those from traditional online settingsand there are a number of limitations and challengesavatar-based innovation has to overcome. The technologyitself bears some challenges that deserve considerations.That said, there are also a number of specific pitfalls whendeploying virtual worlds for an interactive developmentprocess that firms need to pay attention to.

One concern that resonates to critiques of the early daysof online market research is that a sample drawn out ofvirtual worlds is non-representative. Avatars who partakein virtual open innovation activities may not represent thetarget customers. In a web context, Ozer (2003) addressesthis concern by recommending that respondents are invitedto a computer at a central location to participate in thetesting. The same approach could be applied with the newmedium of virtual world, where the technology acceptancehas not diffused sufficiently. As far as the representative-ness is concerned, emerging virtual environments are at

present not the adequate mean to generate representativestudies. More traditional market research techniques couldbe used along with the digital environment to have a betterrepresentative sample and to validate the results of avatar-based innovation. To date, virtual worlds are rather suitedas a channel to generate creative ideas, a platform for co-creation and an opportunity to get straightforwardunbiased feedback on ideas, concepts and prototypes. Thisassumes, of course, that the behavior of avatars in theseonline worlds has some similarity to typical behaviors inphysical worlds. This point leads to the next challenge.Quite obviously the downside of anonymity is that

avatars in a pseudonym environment cannot be heldaccountable to their actions. Firms may worry, thatavatars could pretend to be someone else, give untrust-worthy input or even harm the development activity. Sohow can innovating companies receive trustworthy, reliableand valuable input for the development process? Hine(2000, p. 120) points toward a solution: ‘‘The Internet isonly a space for identity play as far as the boundarybetween online and offline is sustained. If this boundary isbroken down, the Internet loses its radical potential.’’ Tobreak down this barrier, avatars could be asked to revealtheir real identity. Nonetheless, the same challenge—arguably to a lesser extent—occurs in a traditional onlinesetting.With all of the promises that avatar-based innovation

offers, there is one further word of warning. Regarding thenecessary new media literacy, Jeppesen (2002) is right whenhe argues that consumers might not be endowed with theappropriate design capabilities needed to handle the newtools, and to undertake complex innovation tasks. True,for those unfamiliar with virtual worlds the innovationactivities will constitute an excessive demand and theytherefore have to engage in learning activities beforehand.Again Jeppesen (2002) suggests for the web context tointegrating consumer-to-consumer learning. This solutioncould be applied to virtual worlds.The concern that information collected through virtual

worlds is irrelevant, incomplete or inaccurate, is related tothe discussion of fidelity and best described by an analogyprovided by von Hippel (2001, p. 248):

ythe tale of the unfortunate boat builder who builds aboat in his basement, either forgetting the need to movethe boat outside when it is finished, or assuming that hisbasement door is big enough to allow this. If the doorfrom the basement is in fact too small, the setting willmake the problem very clear the first time he actuallytries to remove the boat.

Put in another way, products that are developed in thevirtual world, even if specified and designed with theintention to be used in the physical world, might be likelyto fail in the real world. A higher degree of fidelity couldreduce this challenge. This challenge, however, is notunique to virtual worlds. New product development ingeneral is based on assumptions that are incomplete and

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partially inaccurate representation of the real world. Butthe unconstrained nature evidently amplifies this concern.

Judging from anecdotal experience, another problembecomes evident from observing the early projects as wellas drawing upon the many reports that point towardvirtual presences being ghost towns (e.g. Rose, 2007).Commercial projects especially in Second Life fail to agreat part in attracting sustained engagement. The interestin nascent corporate presences is typically poor. Forinnovation projects initiated by companies this impliesthat there are too few interested participants, and thereforetoo few activities that make the island a vibrant source ofgreat connections and innovations. The underdevelopedstate of these islands in terms of innovation tasks and thelacking knowledge of how to attract innovative avatarsinhibits the ability of companies to achieve their productdevelopment goals, which, in turn, puts a damper onavatar-based innovation. This raises the pivotal question:How can companies create a compelling co-innovationprocess to attract and engage avatars?

6. Discussion and implications

In this concluding section, we discuss the majortheoretical and practical implications of this new approachto integrating customers in a company’s innovationprocess.

6.1. Theoretical implications

This article has advanced the perspective that avatar-based innovation presents an opportunity for companies toengage with customers in new and interesting ways duringan interactive new product development process. The user-generated nature of the virtual platform could furtherenrich innovation efforts. The practical cases illustratedthat the potential of virtual interactions to add valuetowards ‘‘real’’ world innovation efforts—from ideageneration to market launch—is already explored to someextent. From a research perspective, this article sets abroad agenda for future research. Given the nascent natureof the study phenomenon, there are many excitingopportunities for new research. The issue of how toeffectively design and deploy avatar-based innovationprojects is only one among many important researchquestions. Other important research questions that framefuture research in this area relate to the participants ofinteractive new product development. How can companiesattract appropriate customers, and what are the incentivesthat firms need to implement in order to promote andleverage valuable customer contributions? To which extentare avatars engaging in deceptive behavior or what are themeasures companies can undertake to guarantee thequality in contributions? Furthermore the nature of virtualworlds calls for a re-examination of various issues, such asavatars’ motivation to engage in co-innovation activities.Turning from the contributors to the nature of the

interaction, the question arises, what the mechanisms forsupporting and facilitating collaborative innovation invirtual worlds are. Further research is also warranted tocompare traditional web-based methods with avatar-basedefforts, to shed light on the question of when to bestemploy which technology. Finally, as the number ofdifferent types of virtual worlds increases, it is importantto study their use for diverse new product developmenttasks.

6.2. Practical implications

Given the illustrated potential, managers need toacquaint themselves with the phenomenon of virtualworlds and consider using avatars as co-equal partners inthe new product development process. They can draw onthe experiences of pathfinding companies that have begunto explore this opportunity. Taking inspiration from thesepractical cases and building on the groundswell ofenthusiasm for the new medium, companies at this stageneed to experiment and learn. Unquestionably, whensetting out to integrate existing customer integration toolsin these new virtual environments, companies are facedwith a set of questions about how to design the methodsand whether existing rules still apply. Firms and research-ers are just beginning to experiment with this newopportunity. Several parts of the emerging virtual terrainare not well populated and the role the new technologycould play for interactive new product developmentremains to be explored. This being the case, there are noexplicit guidelines on how to pursue avatar-based innova-tion and the outcome is not very clear at the outset. Despitethe natures of such unpaved roads and the associateduncertainties, companies have to be willing to experimentand to make mistakes. As their initiatives progress, theywill learn and can continuously adapt their strategiesappropriately. What companies already realize is that it isnot enough to simply port existing methods from thetraditional web to virtual worlds, but rather they must bedesigned with the virtual world in mind. The emergingvirtual platform offers complimentary advantages notavailable in other media or face-to-face settings. In lightof the challenges and new opportunities, these methodsmust be adapted. Managers also need to carefully considerand manage the various risks that the deployment ofvirtual worlds for an interactive new product developmentprocess entails.We conclude, as proposed in the beginning: Virtual

worlds offer an inspiring perspective for enhancinginnovation activities through virtual customer integration.It has become clear that the digital environment offersmany opportunities for firms to interact with theircustomers along the entire new product developmentprocess. The practical examples exemplify the emergingreality of the consumer–company interaction as the locusof value creation during the innovation process. Firms’recognition of the customer as a valuable partner in an

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open and interactive approach to innovation has extendedto the emerging technology of virtual worlds. With theright approach, companies can enhance their innovationefforts, by learning how to engage and co-create withavatars—the latest visual representation of their actual orpotential customers.

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