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PROF.SSA MARIA ALESSANDRA ROSSI

ALESSANDRA.ROSSI@UNISI.IT

Open innovation and user innovation

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•  Demand is key to innovation not only because it drives diffusion, but also because there often are feedback effects, i.e. technology users may develop inputs to the innovation process

•  The extent to which feedback effects are integrated within firms’

activities depends on the extent to which the firm adopts an ‘open business model’

•  An open business model is based on the relaxation of some or all constraints to access to a firm’s intellectual assets and/or the

integration in the firm’s business of innovations developed outside the firm

•  A typology:

–  Open Innovation

–  User-centered view of innovation –  Free revealing of innovations

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•  From the Oxford English Dictionary to Innocentive Inc.

•  “open innovation” as firms’ positive attitude towards R&D ideas and practices developed outside the firms’ boundaries (Chesbrough)

–  More and more Edisons?

–  Examples: Procter&Gamble obtains 35% of products outside (compared to 20% in 2002), Ely Lilly’s e.Lilly Research Unit

•  “open innovation” as “peer production” (Benkler)

•  The driving factor is a new “architecture of participation” (Tim O’Reilly)

–  ↓ of costs of digital tools, ↓ costs of communication and ↓ barriers to participation to innovation activities

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•  The concept of ‘Open Innovation’ is related to that of decentralized innovation

•  Networks of interaction with competitors, buyers and suppliers are key to emergence of new technologies

–  Innovators do not work alone

–  new ideas spread through networks

•  Competitors learn from each other

•  Decentralized innovation occurs when innovations are not created in a single firm, but benefit from voluntary or

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•  Firms face a choice between:

–  Trying to restrain spillovers as much as possible and adopt a closed business model

–  Adopting an open business model

•  The choice involves a trade-off

–  openness↓ appropriability of the benefits from one’s innovation/ ↑ competition and erodes profits

–  openness↑ rate and/or quality of future innovations

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•  Eric von Hippel (MIT Sloan School of management) is a pioneer in the

study of openness

•  His most famous book is

‘Democratizing Innovation’, MIT Press 2005, also freely available on the web

•  Most of the following material on user-generated innovations is based on his lectures at MIT (MIT

OpenCourseware)

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The mainstream “manufacturer-centered” view:

•  Manufacturers are the developers of new products.

•  They protect their innovations as intellectual property The new, “user-centered” view:

•  Users are the actual developers of many / most new products both physical and information products

•  Users generally freely reveal their innovations.

•  User developed innovations are a major feedstock for products commercialized by manufacturers.

•  User innovation is a “good thing” that increases social welfare.

•  User innovation is steadily increasing as enabling computing and communication technologies improve.

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•  An innovation is a USER innovation when the developer expects to benefit by USING it;

•  An innovation is a MANUFACTURER innovation when the developer expects to benefit by SELLING it.

User innovation is a

common phenomenon in many fields

Source: Von Hippel, 2005

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•  The main driver of user innovation is the NEED FOR A CUSTOM PRODUCT

•  Heterogeneity of needs

–  market segmentation studies (done by cluster analysis): markets

typically divided into about 5 segments; 50% of total variation in need is within-segment variation;

–  implication: many users not satisfied by the product on offer

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•  For “Lead users”

–  The need for a custom product is stronger than for other users –  The need for a custom product emerges earlier than for other

users

•  In other words, their needs foreshadow general demand

•  Lead users innovation tends to take place at the leading edge of markets, where demand is small and uncertain

•  High commercial value of lead user innovation: high benefits from innovation

•  Manufacturers then often commercialize some version of lead user innovations

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•  Decision affected by 3 major factors:

–  Transaction costs (agency costs that influence ability of user to obtain a satisfactory product)

–  # of potential users (if too low, manufacturers not willing to produce)

–  User’s enjoyment of innovation activity

•  Type of innovation affected by:

–  Knowledge stickiness –  Learning by doing

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•  Monitoring costs: costs incurred to monitor the agent to ensure that it follows the interests of the principal;

•  Bonding costs: cost incurred by the agent to commit itself not to act against the principal’s interest;

•  Costs associated with an outcome that does not fully serve the interests of the principal.

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•  Users’ needs may not be adequately served because of the agency costs involved by the divergence of interests

–  The user wants to meet a specific need

–  The manufacturer wants to minimize her effort

•  Manufacturers may incur avoidable costs so as to give quality signals

–  Ex. a user can put a cheap part into an expensive product they own and know the quality is good, while a manufacturer can’t

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•  Users tend to develop Functionally Novel innovations (that require much info on user needs and context)

–  The first sports-nutrition bar

–  The first scientific instrument of a new type

•  Manufacturers tend to develop Dimension of Merit Improvements (that require technical solution

information)

–  A better-tasting sports-nutrition bar

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•  Affects the type of user-developed innovation

–  Stickiness of technological knowledge → ↓ technology design done by users

–  Stickiness of user need information → ↑ user need design done by users

•  Ex.: off-label applications of prescription drugs

•  Knowledge resources are distributed across many users

•  User innovation is not performed by only a few “super-users”

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•  Key to enable “democratization” of innovation because it ↓ costs of duplication

•  Costs of free revealing

–  Potential loss of competitive advantage

–  Potential loss of remuneration for information –  Costs of communication

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•  Why may users freely reveal their innovation?

–  May be unable to hide (at least for a long time)

•  IPRs are never fully effective and spillovers are ubiquitus

•  Many others may be developing similar items

–  May derive some private benefits if they are first to reveal

•  Benefits from free revealing

–  Others may improve on the technology revealed

–  Revealing to a supplier that implements the innovation may increase demand, lowering production (and purchase) costs

–  If the revealed technology may become standard design, the

innovationg user may enjoy intrinsic advantage (especially being first) –  Reputation

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•  Informal information trading may increase the amount of information possessed by firms

•  It does not always pay to informally trade know how

•  Information trading as a prisoner’s dilemma

•  It might confer an advantage over rival firms if it involves a subset of firms

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•  User innovation communities can supplant product development by manufacturers

–  Ex. www.zeroprestige.org (kite surfing)

–  Manufacturers move to a manufacture-only strategy

… But manufacturers can:

•  Sell users access to a platform for innovation

–  Ex. Stata, Harley Davidson

•  Sell user innovations as commercial products

–  Red Hat

•  Sell products that complement user innovations

–  IBM

•  Integrate user innovations into their products

•  Reduce user support costs

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•  Def. Integrated sets of product-design, prototyping and design-testing tools intended for use by end users

•  Ex. Nestlé FoodServices

•  Basic functions:

–  locate product-development tasks where sticky info is

–  Partition product-development tasks into subproblems each drawing on a separate locus of sticky info

•  Key attributes:

–  Enable users to go through complete cycles of trial-and-error –  Offer users a solution space adequate to their needs

–  Are user-friedly

–  Contain libraries of moduled that can be incorporated into custom design

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•  Chesbrough, H.W., 2007. Why companies should have open business models. MIT Sloan Management Review 48 (2), 22–28.

•  Chesbrough, H.W., 2003. Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press, Boston.

•  Lerner, J., Tirole, J., 2005. The economics of technology sharing: open source and beyond. Journal of Economic Perspectives 19 (2), 99–

120.

•  Benkler, Yochai (2006). The Wealth of Networks: How Social Production Transforms Markets and Freedom. New Haven, Conn: Yale University Press. p. 3.

•  Von Hippel, Eric A., Democratizing Innovation. DEMOCRATIZING