Eric von Hipel
copy @ web.mit.edu/evhippel/www/
Copyright © 2005 Eric von Hippel.
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ii
Contents
Contents
1
Attribution . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
. . . . . . . . . . . . . . . . . . . . .
2
3
1 Introduction and Overview . . . . . . . . . . . . . . . . .
3
2 Development of Products by Lead Users
. . . . . . . .
15
3 Why Many Users Want Custom Products . . . . . . . .
23
4 Users' Innovate-or-Buy Decisions
. . . . . . . . . . . .
31
5 Users' Low-Cost Innovation Niches . . . . . . . . . . . .
41
6 Why Users Often Freely Reveal Their Innovations . . .
50
7 Innovation Communities . . . . . . . . . . . . . . . . . .
59
8 Adapting Policy to User Innovation . . . . . . . . . . . .
69
9 Democratizing Innovation . . . . . . . . . . . . . . . . .
77
10 Application: Searching for Lead User Innovations . . .
84
11 Application: Toolkits for User Innovation and Custom
Design . . . . . . . . . . . . . . . . . . . . . . . . . .
93
12 Linking User Innovation to Other Phenomena and Fields105
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
. . . . . . . . . . . . . . . . . . . . . . . . . 116
127
134
SiSU Metadata, document information . . . . . . . . . . . 134
iii
Democratizing Innovation
1
Democratizing Innovation,
Attribution
Eric von Hipel
Dedicated to all who are building the information commons.
1
Democratizing Innovation
Acknowledgements
Networks, John Martin from Verizon, Ben Hyde from the Apache
Foundation, Brian Behlendorf from the Apache Foundation and
Early in my research on the democratization of innovation I was
CollabNet, and Joan Churchill and Susan Hiestand from Lead User
very fortunate to gain five major academic mentors and friends.
Concepts. Thank you so much for the huge (and often humbling)
Nathan Rosenberg, Richard Nelson, Zvi Griliches, Edwin Mans-
insights that your and our field experimentation has provided!
field, and Ann Carter all provided crucial support as I adopted eco-
I am also eager to acknowledge and thank my family for the joy and
nomics as the organizing framework and toolset for my work. Later,
learning they experience and share with me. My wife Jessie is a
I collaborated with a number of wonderful co-authors, all of whom
professional editor and edited my first book in a wonderful way. For
are friends as well: Stan Finkelstein, Nikolaus Franke, Dietmar
this book, however, time devoted to bringing up the children made
Harhoff, Joachim Henkel, Cornelius Herstatt, Ralph Katz, Georg
a renewed editorial collaboration impossible. I hope the reader will
von Krogh, Karim Lakhani, Gary Lilien, Christian Luthje, Pamela
not suffer unduly as a consequence! My children Christiana Dag-
Morrison, William Riggs, John Roberts, Stephan Schrader, Mary
mar and Eric James have watched me work on the book---indeed
Sonnack, Stefan Thomke, Marcie Tyre, and Glen Urban. Other ex-
they could not avoid it as I often write at home. I hope they have
cellent research collaborators and friends of long standing include
been drawing the lesson that academic research can be really fun.
Carliss Baldwin, Sonali Shah, Sarah Slaughter, and Lars Jeppe-
Certainly, that is the lesson I drew from my father, Arthur von Hip-
sen.
pel. He wrote his books in his study upstairs when I was a child and
At some point as interest in a topic grows, there is a transition from
would often come down to the kitchen for a cup of coffee. In transit,
dyadic academic relationships to a real research community. In my
he would throw up his hands and say, to no one in particular, “Why
case, the essential person in enabling that transition was my close
do I choose to work on such difficult problems?” And then he would
friend and colleague Dietmar Harhoff. He began to send wonderful
look deeply happy. Dad, I noticed the smile!
Assistant Professors (Habilitanden) over from his university, Lud-
Finally my warmest thanks to my MIT colleagues and students and
wig Maximilians Universität in Munich, to do collaborative research
also to MIT as an institution. MIT is a really inspiring place to work
with me as MIT Visiting Scholars. They worked on issues related
and learn from others. We all understand the requirements for
to the democratization of innovation while at MIT and then carried
good research and learning, and we all strive to contribute to a
on when they returned to Europe. Now they are training others in
very supportive academic environment. And, of course, new peo-
their turn.
ple are always showing up with new and interesting ideas, so fun
I have also greatly benefited from close contacts with colleagues in
and learning are always being renewed!
industry. As Director of the MIT Innovation Lab, I work together with
senior innovation managers in just a few companies to develop and
try out innovation tools in actual company settings. Close intellec-
tual colleagues and friends of many years standing in this sphere
include Jim Euchner from Pitney-Bowes, Mary Sonnack and Roger
Lacey from 3M, John Wright from IFF, Dave Richards from Nortel
2
Democratizing Innovation
2
Democratizing Innovation
1 Introduction and Overview
3
When I say that innovation is being democratized, I mean that users
4
of products and services---both firms and individual consumers---
are increasingly able to innovate for themselves. User-centered in-
novation processes offer great advantages over the manufacturer-
centric innovation development systems that have been the main-
stay of commerce for hundreds of years. Users that innovate can
develop exactly what they want, rather than relying on manufactur-
ers to act as their (often very imperfect) agents. Moreover, individ-
ual users do not have to develop everything they need on their own:
they can benefit from innovations developed and freely shared by
others.
The trend toward democratization of innovation applies to informa-
5
tion products such as software and also to physical products. As
a quick illustration of the latter, consider the development of high-
performance windsurfing techniques and equipment in Hawaii by
an informal user group. High-performance windsurfing involves ac-
robatics such as jumps and flips and turns in mid-air. Larry Stanley,
a pioneer in high-performance windsurfing, described the develop-
ment of a major innovation in technique and equipment to Sonali
Shah:
In 1978 Jürgen Honscheid came over from West Germany for the
6
first Hawaiian World Cup and discovered jumping, which was new
to him, although Mike Horgan and I were jumping in 1974 and 1975.
There was a new enthusiasm for jumping and we were all trying to
outdo each other by jumping higher and higher. The problem was
that . . . the riders flew off in mid-air because there was no way to
keep the board with you---and as a result you hurt your feet, your
legs, and the board.
Then I remembered the “Chip,” a small experimental board we had
7
built with footstraps, and thought “it's dumb not to use this for jump-
3
Democratizing Innovation
ing.” That's when I first started jumping with footstraps and discov-
The ongoing shift of innovation to users has some very attractive
12
ering controlled flight. I could go so much faster than I ever thought
qualities. It is becoming progressively easier for many users to get
and when you hit a wave it was like a motorcycle rider hitting a
precisely what they want by designing it for themselves. And in-
ramp; you just flew into the air. All of a sudden not only could you
novation by users appears to increase social welfare. At the same
fly into the air, but you could land the thing, and not only that, but
time, the ongoing shift of product-development activities from man-
you could change direction in the air!
ufacturers to users is painful and difficult for many manufacturers.
Open, distributed innovation is “attacking” a major structure of the
8
The whole sport of high-performance windsurfing really started
social division of labor. Many firms and industries must make fun-
from that. As soon as I did it, there were about ten of us who sailed
damental changes to long-held business models in order to adapt.
all the time together and within one or two days there were various
Further, governmental policy and legislation sometimes preferen-
boards out there that had footstraps of various kinds on them, and
tially supports innovation by manufacturers. Considerations of so-
we were all going fast and jumping waves and stuff. It just kind of
cial welfare suggest that this must change. The workings of the
snowballed from there. (Shah 2000)
intellectual property system are of special concern. But despite the
9
By 1998, more than a million people were engaged in windsurf-
difficulties, a democratized and user-centric system of innovation
ing, and a large fraction of the boards sold incorporated the user-
appears well worth striving for.
developed innovations for the high-performance sport.
Users, as the term will be used in this book, are firms or individual
13
10
The user-centered innovation process just illustrated is in sharp
consumers that expect to benefit from using a product or a ser-
contrast to the traditional model, in which products and services
vice. In contrast, manufacturers expect to benefit from selling a
are developed by manufacturers in a closed way, the manufac-
product or a service. A firm or an individual can have different re-
turers using patents, copyrights, and other protections to prevent
lationships to different products or innovations. For example, Boe-
imitators from free riding on their innovation investments. In this
ing is a manufacturer of airplanes, but it is also a user of machine
traditional model, a user's only role is to have needs, which man-
tools. If we were examining innovations developed by Boeing for
ufacturers then identify and fill by designing and producing new
the airplanes it sells, we would consider Boeing a manufacturer-
products. The manufacturer-centric model does fit some fields and
innovator in those cases. But if we were considering innovations in
conditions. However, a growing body of empirical work shows that
metal-forming machinery developed by Boeing for in-house use in
users are the first to develop many and perhaps most new industrial
building airplanes, we would categorize those as user-developed
and consumer products. Further, the contribution of users is grow-
innovations and would categorize Boeing as a user-innovator in
ing steadily larger as a result of continuing advances in computer
those cases.
and communications capabilities.
11
In this book I explain in detail how the emerging process of user-
Innovation user and innovation manufacturer are the two general
14
centric, democratized innovation works. I also explain how innova-
“functional” relationships between innovator and innovation. Users
tion by users provides a very necessary complement to and feed-
are unique in that they alone benefit directly from innovations. All
stock for manufacturer innovation.
others (here lumped under the term “manufacturers”) must sell
4
Democratizing Innovation
innovation-related products or services to users, indirectly or di-
of the majority of users in their populations with respect to an impor-
rectly, in order to profit from innovations. Thus, in order to profit,
tant market trend, and they expect to gain relatively high benefits
inventors must sell or license knowledge related to innovations,
from a solution to the needs they have encountered there. The cor-
and manufacturers must sell products or services incorporating in-
relations found between innovation by users and lead user status
novations. Similarly, suppliers of innovation-related materials or
are highly significant, and the effects are very large.
services---unless they have direct use for the innovations---must
sell the materials or services in order to profit from the innova-
tions.
Since lead users are at the leading edge of the market with respect
20
15
The user and manufacturer categorization of relationships between
to important market trends, one can guess that many of the novel
innovator and innovation can be extended to specific functions, at-
products they develop for their own use will appeal to other users
tributes, or features of products and services. When this is done, it
too and so might provide the basis for products manufacturers
may turn out that different parties are associated with different at-
would wish to commercialize. This turns out to be the case. A num-
tributes of a particular product or service. For example, household-
ber of studies have shown that many of the innovations reported
ers are the users of the switching attribute of a household electric
by lead users are judged to be commercially attractive and/or have
light switch---they use it to turn lights on and off. However, switches
actually been commercialized by manufacturers.
also have other attributes, such as “easy wiring” qualities, that may
be used only by the electricians who install them. Therefore, if
an electrician were to develop an improvement to the installation
attributes of a switch, it would be considered a user-developed in-
Research provides a firm grounding for these empirical findings.
21
novation.
The two defining characteristics of lead users and the likelihood
that they will develop new or modified products have been found
16
A brief overview of the contents of the book follows.
to be highly correlated (Morrison et al. 2004). In addition, it has
17
Development of Products by Lead Users (Chapter 2)
been found that the higher the intensity of lead user characteristics
displayed by an innovator, the greater the commercial attractive-
18
Empirical studies show that many users---from 10 percent to nearly
ness of the innovation that the lead user develops (Franke and von
40 percent---engage in developing or modifying products. About
Hippel 2003a). In figure 1.1, the increased concentration of inno-
half of these studies do not determine representative innovation
vations toward the right indicates that the likelihood of innovating is
frequencies; they were designed for other purposes. Nonetheless,
higher for users having higher lead user index values. The rise in
when taken together, the findings make it very clear that users
average innovation attractiveness as one moves from left to right
are doing a lot of product modification and product development
indicates that innovations developed by lead users tend to be more
in many fields.
commercially attractive. (Innovation attractiveness is the sum of
19
Studies of innovating users (both individuals and firms) show them
the novelty of the innovation and the expected future generality of
to have the characteristics of “lead users.” That is, they are ahead
market demand.)
5
Democratizing Innovation
well enough to induce purchase from and capture significant profits
from a large number of customers. When users' needs are hetero-
geneous, this strategy of “a few sizes fit all” will leave many users
somewhat dissatisfied with the commercial products on offer and
probably will leave some users seriously dissatisfied. In a study of
a sample of users of the security features of Apache web server
software, Franke and von Hippel (2003b) found that users had a
very high heterogeneity of need, and that many had a high willing-
ness to pay to get precisely what they wanted. Nineteen percent of
the users sampled actually innovated to tailor Apache more closely
to their needs. Those who did were found to be significantly more
satisfied.
Users' Innovate-or-Buy Decisions (Chapter 4)
27
22
Even if many users want “exactly right products” and are willing
28
and able to pay for their development, why do users often do this
23
Figure 1.1 User-innovators with stronger “lead user” characteris-
for themselves rather than hire a custom manufacturer to develop
tics develop innovations having higher appeal in the general mar-
a special just-right product for them? After all, custom manufactur-
ketplace. Estimated OLS function: Y = 2.06 + 0.57x, where Y rep-
ers specialize in developing products for one or a few users. Since
resents attractiveness of innovation and x represents lead-user-
these firms are specialists, it is possible that they could design and
ness of respondent. Adjusted R2 = 0.281; p = 0.002; n = 30.
build custom products for individual users or user firms faster, bet-
Source of data: Franke and von Hippel 2003.
ter, or cheaper than users could do this for themselves. Despite
this possibility, several factors can drive users to innovate rather
24
Why Many Users Want Custom Products (Chapter 3)
than buy. Both in the case of user firms and in the case of individ-
25
Why do so many users develop or modify products for their own
ual user-innovators, agency costs play a major role. In the case
use? Users may innovate if and as they want something that is
of individual user-innovators, enjoyment of the innovation process
not available on the market and are able and willing to pay for its
can also be important.
development. It is likely that many users do not find what they
With respect to agency costs, consider that when a user develops
want on the market. Meta-analysis of market-segmentation studies
29
its own custom product that user can be trusted to act in its own best
suggests that users' needs for products are highly heterogeneous
interests. When a user hires a manufacturer to develop a custom
in many fields (Franke and Reisinger 2003).
product, the situation is more complex. The user is then a principal
26
Mass manufacturers tend to follow a strategy of developing prod-
that has hired the custom manufacturer to act as its agent. If the
ucts that are designed to meet the needs of a large market segment
interests of the principal and the agent are not the same, there will
6
Democratizing Innovation
be agency costs. In general terms, agency costs are (1) costs in-
shows in a quantitative way that user firms with unique needs will
curred to monitor the agent to ensure that it (or he or she) follows
always be better off developing new products for themselves. It
the interests of the principal, (2) the cost incurred by the agent to
also shows that development by manufacturers can be the most
commit itself not to act against the principal's interest (the “bonding
economical option when n or more user firms want the same thing.
cost”), and (3) costs associated with an outcome that does not fully
However, when the number of user firms wanting the same thing