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

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.