Notes on DEMOCRATIZING INNOVATION- by Eric Von Hippel

Why users innovate for themselves

Users do it themselves rather than hiring a customizer because of agency costs (i.e., cost of monitoring the agent), because their needs are unique and they want to get precisely what they want, and also becuase they enjoy innovating.

Because innovation by users is widely distributed, they need a way to leverage and combine their efforts and avoid more than one user developing the same thing independently (market failure). This problem can be avoided through “innovation communities.” Innovation communities are successful (even though you might assume that free riding would kill them) because innovators get some private rewards that are not shared equally by free riders – the innovations work best for the innovators so they don’t lose competitive advantage by revealing them. “Open source software projects are object lessons that teach us that users can create, produce, diffuse, provide user field support for, update, and use complex products by and for themselves in the context of user innovation communities.”

Why (lead) user innovation can be better than manufacturer-driven innovation

To innovate you need two types of information: 1) what the need is and the context in which it will be applied and 2) how the need has been previously solved. Users have more of 1) and manufacturers have more of 2) and each tends to rely more on what they have. So in solving the same problem a user might come up with a new way of doing something while a manufacturer may come up with a modification to an existing solution.

“Manufacturers have an incentive to develop innovations that utilize their existing capabilities—that are “sustaining” for them. Customers know this, and a customer that is considering switching to new technology is unlikely to request it from a supplier that would consider it to be disruptive” assuming the supplier won’t or can’t do it and fearing the supplier will decrease service in expectation of losing the customerLead user innovations are “significantly more novel than those generated by non-LU methods. They were also found to address more original or newer customer needs, to have significantly higher market share, to have greater potential to develop into an entire product line, and to be more strategically important.”
At 3M “lead user projects were found to generate ideas for new product lines, while traditional market-research methods were found to produce ideas for incremental improvements to existing product lines.”

How firms can make profitable use of user innovation

“Firms can proactively affect the rate and direction of user innovation.”

(1) Produce user-developed innovations for general commercial sale and/or offer custom manufacturing to specific users.

(2) Sell kits of product design tools and/or “product platforms” to ease users’ innovation-related tasks—“toolkits for user innovation design” as is done in the semiconductor industry….Need-intensive subtasks are then assigned to users along with a kit of tools.”

Example:
“StataCorp of College Station, Texas. StataCorp produces and sells Stata, a proprietary software program designed for statistics. It sells the basic system bundled with a number of families of statistical tests and with design tools that enable users to develop new tests for operation on the Stata platform. Many advanced customers freely reveal tests they have developed, other users then visit these sites to download, use, test, comment on, and improve tests, much as users do in open source software communities. StataCorp personnel monitor the activity at user sites, and note the new tests that are of interest to many users. They then bring the most popular tests into their product portfolio as Stata modules. To do this, they rewrite the user’s software code while adhering to the principles pioneered by the user-innovator. They then subject the module to extensive validation testing…. The net result is a symbiotic relationship. User-innovators are publicly credited by Stata for their ideas, and benefit by having their modules professionally tested. StataCorp gains a new commercial test module, rewritten and sold under its own copyright. Add-ons developed by users that are freely revealed will increase StataCorp’s profits more than will equivalent add-ons developed and sold by manufacturers (Jokisch 2001). Similar strategies are pursued by manufacturers of simulator software (Henkel and Thies 2003).

Note, however, that StataCorp, in order to protect its proprietary position, does not reveal the core of its software program to users, and does not allow any user to modify it. This creates problems for those users who need to make modifications to the core in order to solve particular problems they encounter. Users with problems of this nature and users especially concerned about price have the option of turning to non-proprietary free statistical software packages available on the web, such as the “R” project (www.r-project.org). These alternatives are developed and supported by user communities and are available as open source software. The eventual effect of open source software alternatives on the viability of the business models of commercial vendors such as StataCorp and its competitors remains to be seen.”

(3) Sell products or services that are complementary to user-developed innovations. “Opportunities to provide profitable complements are not necessarily obvious at first glance, and providers often reap benefits without being aware of the user innovation for which they are providing a complement.”

Manufacturers should “systematically search for and further develop innovations by lead users.”

The traditional focus on target-market users means that lead users are considered outliers. Market research also usually identifies the need but not user-developed solutions.“Listening to your customers” is not the same thing as searching for lead users (Danneels 2004). Many lead users have no incentive to lead, mislead, or even contact suppliers that might eventually benefit from or be disrupted by their innovations. They are simply solving their own needs via in-house innovation.

Lead users are a much broader category than customers of a specific firm (e.g., in advanced analog markets), and many have incentives that differ from those of customers. Lead users don’t care about whether their innovation is distruptive to the manufacturer.
“user-developed innovations that are most radical (and profitable) relative to conventional thinking often come from lead users in “advanced analog” fields. (users who have related but more extreme needs than any users in the target market).” Example: ABS came from aircraft braking which had more extreme needs than automobile braking.

How to find advanced analog lead users: “Pyramiding” = ask target market lead users to nominate. People with rare interests tend to know others like them.

How to find lead users in target markets: “at specialized sites or events”

One might think that an alternative approach would be to identify lead users before they have innovated but user innovation is likely to be a widely distributed phenomenon, and it would be difficult to predict in advance which users are most likely to develop very valuable innovations.

A video tutorial on identifying lead users: link
Application:
In the 3M experiment 3 or 4–member “lead user teams” from the marketing and technical depts. were coached through a process: “Teams began by identifying important market trends. Then, they engaged in pyramiding to identify lead users with respect to each trend both within the target market and in advanced analog markets. Information from a number of innovating lead users was then combined by the team to create a new product concept and business plan…” (von Hippel, Thomke, and Sonnack 1999).” link to paper

Result:
“Annual sales of LU product ideas generated by the average LU project at 3M are conservatively projected to be $146 million after five years–more than eight times higher than forecast sales for the average contemporaneously conducted “traditional” project. Each funded LU project is projected to create a new major product line for a 3M division. As a direct result, divisions funding LU project ideas are projecting their highest rate of major product line generation in the past 50 years.”

Reflections on market efficiency and the knowledge economy

• Markets become more efficient as the information accessible to transaction participants improves. New means of information aggregation are radically reducing the cost and disrupting the business models of firms that specialize in information collection
• (Foray, D. 2004. Economics of Knowledge. MIT Press.) positions users at the heart of knowledge production. He says that
  one major challenge for management is to capture the knowledge being generated by users “on line” during the process of doing and producing….He discusses implications of the distributed nature of knowledge production among users and others, and notes that the increased capabilities of information and communication technologies tend to reduce innovators’ ability to control the knowledge they create. He proposes that the most effective knowledge management policies and practices will be biased toward knowledge sharing.
• (Weber, S. 2004. The Success of Open Source. Harvard University Press.) The notion of open-sourcing as a strategic organizational decision can be seen as an efficiency choice around distributed innovation, just as outsourcing was an efficiency choice around transactions costs.