Why Companies Are Placing Users at the Core of Their Innovation Strategies

New Book: In his recent edited volume Revolutionizing Innovation, Karim Lakhani brings together the latest thinking around open innovation, users, and communities.
  • Author Interview

Why Users Make the Best Innovators for Your Products

Interview by Dina Gerdeman

Many in business long believed that product innovation sprung from inside their own companies—that is, until economist Eric Arthur von Hippel came along in the late 1970s. Von Hippel proposed that users were as important, if not more important, than producers as drivers of innovation.

Among those who took notice: Harvard Business School Professor Karim Lakhani. As a doctoral student at the Massachusetts Institute of Technology in the late 1990s, he took von Hippel’s class on innovation. After reading Lakhani’s paper describing the rising source of open software communities, von Hippel convinced Lakhani to drop his engineering aspirations and become a scholar of innovation.

Lakhani has devoted much of his research at HBS exploring how communities and contests can be designed to achieve innovative outcomes. Last year, he helped collect several papers exploring user innovation to present during a symposium celebrating von Hippel’s 70th birthday.

Those papers—many of them written by von Hippel’s former students and colleagues—became the bones of the book Revolutionizing Innovation: Users, Communities, and Open Innovation, which was last year edited by Lakhani as well as Dietmar Harhoff, director of the Max Planck Institute for Innovation and Competition in Munich. The book includes 25 original contributions providing an extensive view of user and open innovation by scholars from all over the world in a variety of industries.

As the book underscores, many organizations today rely on users, communities, and open innovation approaches to tackle important technological and business problems. Lakhani points to innovation contests that have solved a wide variety of major challenges from technology for civilian space travel to 100-miles-per-gallon vehicles.

And now a growing number of companies are placing users at the core of their business strategies. Take MUJI, a leading Japanese design retailer, which has created a range of products designed by customers including a car, light fixtures, and sofas. The company has combined user-innovation with crowd-funding by matching good ideas with potential buyers willing to pay in advance to get the products made.

“The field has grown quite a bit,” Lakhani says. “This book provides a concentrated view of the frontier of research in this area.”

Lakhani practices what he preachess, seeking community input for the book cover. The jacket—a simple design with white and yellow lettering over a black background—emerged from more than 60 entries in a design challenge Lakhani ran on the website TopCoder.

We asked Lakhani to discuss the book and the concept of user innovation.

Dina Gerdeman: The book makes a strong case for user innovation. Who should read this book—and what do you hope they take away from it most of all?

Karim Lakhani: There are two main audiences for the book. The first is executives and managers who care about innovation and how to organize the innovation process and how to improve on it. Those folks will see a very clear rationale for open and user innovation, as well as approaches on how to start to bring these concepts within their own organizations.

The other audience is scholars—students of innovation—who want to get a comprehensive view about the latest thinking on open and user innovation.

The book provides a whole view of the various ways in which both companies and governments need to start thinking about open innovation and user innovation. There are many examples throughout the book of companies getting great [problem-solving] results from user innovation.

Gerdeman: The book says: “Users are as important as or more important than producers as sources of innovation in modern societies.” Can you explain how?

Lakhani: Research has clearly shown that users are more likely to come up with functioning, novel sources of innovation. Users will dominate the process of making something new. There are simply many more users than companies. They are more likely to come up with innovations, and there are more of them to come up with something people will pay for.

If you did a comparison of time spent in formal R&D and informal R&D, the user spectrum dominates. There’s a pathway to entrepreneurship. These innovations feed into companies being formed as well. What’s happened in the last 15 years is that users can collaborate and form communities and amplify their innovation processes. That’s the new thing that’s happening, this rise of open communities to create products.

Gerdeman: Can you touch on the implications user innovation has on competition?

Lakhani: In many ways, what the research is showing is that companies can reliably work with external sources of innovation—users, communities, even crowdsourcing contacts—to drive the innovative process. Breakthrough ideas and innovation can come from outside sources, and often they’re cheaper, faster, and better.

"That’s the new thing that’s happening, this rise of open communities to create products"

In many ways, it levels the playing field. Companies may have thought, I just need the smartest people to work for me. The research shows you don’t have to hire all the smart people to have innovation. It allows the outside world to help with innovation and causes companies to excel in other dimensions. Previously, you relied on R&D for success. Now you have to be good at your business model or execution.

So, the company has to figure out two things: How am I going to work with these external sources of innovation? And, at the same time, what else do I need to bring to the table to differentiate myself in the marketplace? If external sources of innovation can reliably produce breakthrough and functional and novel ideas, a company has to find ways to bring those to market. They have to have programs that allow them to systematically work with those sources, invest in those programs.

And, secondly, it’s creating the framework around execution, around brand, around market research that can take these approaches and bring them to market. About 15 years ago, this was viewed as very exotic and different. Now, there are enough examples in the economy—from Wikipedia as an open source and InnoCentive as a crowdsourcing company—so that people are more familiar with this. Now, the challenge for companies is organizational.

Gerdeman: In a world where both user and producer innovation exists, do you think we need to reassess the role of intellectual property?

Lakhani: The role of intellectual property is a very important question. This research community has spent significant effort to try to understand the boundaries of giving away intellectual property for free versus having it closed. We have not reached any formal conclusions. We are seeing possibilities that we need to rethink our intellectual property strategies. It’s really a strategic choice for companies, and it depends on what the company wants to achieve in their business model.

Machine learning is one of the new core technologies that allow for data science. Many companies are relying on it for their advances. Google, Facebook, and Microsoft have recently released machine learning toolkits to the world. This is their secret sauce, and they are open sourcing it because they can benefit from others improving on these technologies.

They also realized that their core asset is really the network and the infrastructure, not so much the algorithms. The algorithms will keep changing and advancing and improving. If they try to lock it down, it will actually hurt them and keep their own efforts away from the mainstream on where research on machine learning is going. They get the benefit of other people using it and improving it. Facebook and everyone else has a lock on the data; the algorithm will change, but no one has access to their data.

Gerdeman: Can you discuss the new methods that are being developed to accommodate the role of users in innovation, including crowdfunding platforms to access funding for innovation?

Lakhani: Crowdfunding in the last seven years has exploded. Crowdfunding is doing three things that are very interesting. One is that it is enabling innovators, often user innovators, to get the funding they need, to do what they need and scale it. Before, you had to go to venture capitalists. Now, you can rely on the world to fund [your project]. Every funder only has to allocate their weekly Starbucks allowance to fund you. It lowers the barrier for entry for innovators to go from prototype to small-scale production.

The second thing it does: It changes the selection process. Before, we relied on the judgment of experts like venture capitalists to decide what, if anything, will be successful. Now, we rely on the actual market to tell us what will be successful before we hit commercialization. A good example is this boom we see in wearables and in hardware, which came about from Kickstarter when the Silicon Valley-based and Boston-based companies would only invest in software.

It becomes, thirdly, a marketing mechanism, as well. You have 100, 1,000, or 10,000 people who are ready to take your product to market and evangelize for it. It’s helpful for companies and entrepreneurs to use as a mechanism to get their products and services out there. There’s a degree of self-importance [when people say] that “my idea is the most important and most unique and people will steal it.” It’s good to invent and come up with a solution, but building it to scale is more important than anything else.

My view is, ideas are cheap, but execution is really hard. Only a few are going to bother.

  • Book Excerpt

Managing Communities and Contests to Innovate with Crowds

from: Revolutionizing Innovation: Users, Communities, and Open Innovation
by Karim R. Lakhani

The promise of crowdsourcing innovation is that many more actors, out- side of the focal organization with an innovation challenge, can partici- pate in the innovation process as opposed to the traditional process of internal hiring and effort exertion. Communities and contests offer two types of institutions to achieve these objectives. In practice, most economic organizations will utilize some sort of hybrid structure that will involve both open crowd-based and traditional organizations (Lakhani and Panetta 2007).

In the realm of communities, Apple presents an interesting model (Lakhani et al. 2013b). Contrary to press accounts about Apple being a closed innovation firm, the firm’s embrace of democratized innovation through open source communities is grounded in economic logic. In the 1990s the firm had significant technical failure with a range of attempts to develop new operating systems. When Steve Jobs returned to Apple, the firm realized that its prowess and advantage laid in industrial design and software interface and not necessarily the inner core working of the operating system. Hence OS X (and now also iOS), the flagship operating systems, were developed through tight integration with open source communities. Apple, unlike Microsoft, made its revenues through hardware sales and not operating system software, and thus the linkage with collaborative communities made logical sense as Apple made its profits from complementary assets related to hardware and services. Today Apple participates in over 200 open source communities, and the firm has found that effective interaction with communities requires the presence of complementary assets that can be combined with the contributions from free and open communities. Apple’s participation is not just about using the output of these communities. Rather, Apple contributes code back to these communities and also utilizes the collective output.

On the other end of the spectrum of the software industry, SAP, the global enterprise resource-planning giant, discovered that its customers wanted to collaborate and interact with each other, and the firm saw significant advantage in hosting those interactions through specialized online platforms. Once enabled, SAP executives noted that its community network was addressing a range of issues, including customer support, new product development, and business process extensions. In 2012 the SAP community network stood at over 2.5 million members. On a monthly basis the com- munity receives 1.2 million visitors and more than 3,000 discussion posts per day are made on the community site. Technical support questions get answered in less than 20 minutes from other community members with more than 85 percent of them deemed “answered” by the poster. Not only does this technical support function of the community lower SAP’s costs, it also tends to be much higher quality as users in the field that have encountered the same problem before can provide direct expert advice on a resolution in place of a specialist backroom operator. SAP also uses the community to develop feature requirements for new product releases with more than 40 percent of new features being developed jointly by community members in various industrial and functional verticals. The community also engages in a range of continuing education related to technologies and products in the SAP portfolio. The social give and take of the community builds strong affiliation with both SAP and other community members; many report that they use their community activity to enhance their own learning and find new job prospects within the SAP ecosystem. In this case the SAP software becomes the core complementary asset that the firm can exploit while continuing to invest in its communities.

Innovation contest platforms are another example of hybrid organizations that have emerged to manage crowds (covering areas as diverse as data science, graphic design, advertisement, software development, and scientific problem solving). These platforms seek to aggregate both demand and supply for contests and contestants (ranging in size from tens of thousands to hundreds of thousands of members). Most organizations may not be able to sustain a large set of external problem solvers to work on their challenges. There may simply not be enough volume of problems to sustain a “custom crowd” for each organization. Hence platforms pro- vide an aggregation and matching mechanism between organizations seeking solutions through contests and participants looking for problems to solve via contests. Interestingly, after a contest is finished, the platforms also invest in significant social activities to provide their solvers with a sense of identity and a means to learn and share knowledge about potential problem-solving approaches. Thus these platforms integrate both a contest and community function within their operations.

Contests and communities represent viable means of managing crowd- based innovation. While there are many instances when these institutions serve as substitutes to internal innovation, the current trend is toward complementary usage alongside with internal efforts. The academic and managerial challenge ahead is to layout the frameworks that enable both traditional and crowd-based institutions for innovation to be utilized in a way that maximizes problem-solving effectiveness for organizations and individuals seeking innovative outcomes.

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