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Posted by iBlog on January 6, 2008

For most companies, innovation is a proprietary activity conducted largely inside the organization in a series of closely managed steps. Over the last decade, however, a few consumer product, fashion, and technology businesses have been opening up the product-development process to new ideas hatched outside their walls—from suppliers, independent inventors, and university labs.

Executives in a number of companies are now considering the next step in this trend toward more open innovation.1 For one thing, they are looking at ways to delegate more of the management of innovation to networks of suppliers and independent specialists that interact with each other to cocreate products and services. They also hope to get their customers into the act. If a company could use technology to link these outsiders into its development projects, could it come up with better ideas for new products and develop those ideas more quickly and cheaply than it can today? Suppose that a wireless carrier, say, were to orchestrate the design of a new generation of mobile devices through an open network of interested customers, software engineers, and component suppliers, all working interactively with one another.

This is the model of innovation as a convergence of like-minded parties. Increasing numbers of organizations are now taking that approach: distributed cocreation, to use its technical name. LEGO, for instance, famously invited customers to suggest new models interactively and then financially rewarded the people whose ideas proved marketable. The shirt retailer Threadless sells merchandise online—and now in a physical store, in Chicago—that is designed interactively with the company’s customer base. In the software sector, open-source platforms developed through distributed cocreation, such as the “LAMP” stack (for Linux, Apache, MySQL, and PHP/Perl/Python), have become standard components of the IT infrastructure at many corporations. What facilitates this new approach to innovation is the rise of the Web as a participatory platform. What will drive its adoption by an increasing number of companies is the growing competitive need to uncover many more good ideas for products and to make better and faster use of those ideas.

Distributed cocreation is too new for us to draw definitive conclusions about whether and how companies should implement it. But our research into these online communities and our work with a number of open-innovation pioneers show that it isn’t too soon for senior executives to start seriously examining the possibilities for distributed cocreation or to identify the challenges, such as the ownership of intellectual property and increased operational risk, they face in adopting it.

The new face of innovation

In nearly every sector, many of the ideas and technologies that generate products emerge from a number of participants in the value chain. Boeing designs its aircraft, but suppliers make (and own the intellectual property for) many of the components. Likewise, HP’s computers and Apple’s iPod include hundreds of parts invented and manufactured by companies in more than two dozen countries. In many sectors, suppliers understand the technology and manufacturability of their pieces of the end product better than the OEMs do. Eli Lilly licenses and sells products that other companies develop; high-technology and media giants continually scan the horizon for innovations developed by start-ups and try to acquire whatever seems promising.

The benefits of specialization and collaboration seem obvious today. Clearly, an automaker’s suppliers can make better headlights at lower cost than the OEM can, because specialization promotes focus and innovation. Many companies participate in joint ventures for individual products or marketing packages and collaborate with university labs or specialists. Businesses are increasingly open to insights and ideas gleaned from any source—especially their customers, through call centers, retail data, and focus groups. Collaboration extends in many directions: when companies pursue a new product, many of them consult with contract specialists and suppliers and test prototypes with their customers.

But collaboration looks very different on Wikipedia, the online encyclopedia that represents a true phenomenon on the Internet. Wikipedia is created entirely by its users, not by a corporate-development staff in California. It is a living and continually expanding global reference work, which has expanded in less than seven years to offer more than six million articles in over 250 languages.2

The example of Wikipedia suggests that companies can take even greater advantage of specialization by ceding more control over decisions about the content of products to networks of participants (suppliers, customers, or both) who interact with one another. Does this seem far-fetched? IBM apparently doesn’t think so: it has adopted the open operating system Linux for some of its computer products and systems, drawing on a core code base that is continually improved and enhanced by a massive global community of software developers, only a small fraction of whom work for IBM. In software, open-source packages are gaining such favor that they are cutting into profit margins and drawing market share from proprietary software brands.

Many other examples of cocreation are now under way. One of them, participatory marketing, which encourages customers to help create marketing campaigns, is sometimes more than just a new tactic to attract attention. Approached in the right way, it is also an opportunity to start cocreating products with them. Last year, for instance, Peugeot invited people to submit car designs online and attracted four million page views on its site. The company built a demonstration model of the winning design to exhibit at automotive marketing events and partnered with software developers to get it included in a video game. Even business-to-business companies are starting to cocreate with customers: corporate users of SugarCRM’s customer-relationship-management software customize it to meet the specific needs of their industries.

Companies have three ways to win by adopting distributed cocreation. First, they can capture value from the cocreated product or service itself, as LEGO and Threadless have, by merchandising good ideas gleaned from the network. (In South Korea, the cocreated cosmetic brand Missha has seized a 40 percent market share in its segment.) Second, companies can capture value by providing a complementary product or service. Red Hat, for instance, sells a host of technology services to users of Linux. Third, they can benefit indirectly from the cocreation process—for example, through an enhanced brand or strategic position.

Hurdles ahead

While distributed cocreation does seem promising, it isn’t entirely clear what capabilities companies will need (or how they will organize those capabilities) to make the most of it. Many of the answers will become clear as companies gain greater experience with various open-innovation approaches, including distributed cocreation. But a few challenges are already apparent.

Attracting and motivating cocreators

Since companies must provide the right incentives to the right participants, they should understand what talented contributors find valuable about interacting with a community. Financial incentives may be necessary in some instances, but other participants can be inspired to cocreate by mechanisms like community recognition. Companies will also have to spot hurdles to participation—such as the ease or difficulty of contributing and the time needed to do so—and take steps to minimize any problems. In addition, they may need to implement well-structured paths to coax participants to move from lower to higher levels of participation. Wikipedia, for instance, now has 500 participating administrators who have earned special privileges to prevent edits on certain articles, usually to stop vandals who have targeted them.

Structuring problems for participation

To make it possible for many contributors to participate effectively in a cocreation community, problems should be broken down to let contributors work in parallel on different pieces. Otherwise, it will be impossible for a critical mass of participants to cocreate effectively. A global team of more than 2,000 scientists, for example, participated in the design of the ATLAS particle detector, a complex scientific instrument that will be used to detect and measure subatomic particles in high-energy physics. The effort was disaggregated into many different components and distributed across 165 working groups, which used Internet-based tools to help coordinate the work.3

Governance mechanisms to facilitate cocreation

Communities are productive when they have clear rules, clear leadership, and transparent processes for setting goals and resolving conflicts among members. Sun Microsystems, for instance, developed its Solaris operating system, cocreated with a global community of software developers, in the early 1990s. The company established a board, including two Sun employees and a third member from the larger software community, charged with loosely overseeing the project’s progress. Even then, by the way, the community wanted Sun to relinquish more control.

The leadership must also maintain a cohesive vision, since there is always a risk that community members will “fork” intellectual property and use it to develop their own cocreated product or service. Mozilla, the online application suite distributed by the Mozilla Foundation, was cocreated by a software community.4 As the programs were being developed, two contributing engineers, dissatisfied with the project’s direction, used the Mozilla code to create the Firefox Web browser. Community leaders eventually made it the primary supported browser.

Maintaining quality

Many cocreating online communities assume that “crowds”5 know more than individuals do and can therefore create better products; as the open-source-software expert Eric S. Raymond has said, “Given enough eyeballs, all bugs are shallow.”6 It is far too early to know with certainty if this idea holds true across all kinds of products, but a growing consensus maintains that in software development, at least, distributed cocreation is a ticket to quality. A study published in the European Journal of Information Systems in 2000, for instance, noted that “open-source software often attains quality that outperforms commercial proprietary” approaches.7 What’s more, a December 2005 study published in the scientific journal Nature concluded that Wikipedia’s entries on scientific subjects were generally as accurate as those in the Encyclopædia Britannica.8 Still, some have questioned these conclusions and the accuracy or insights of the entries on which they were based.

A number of cocreated products have crossed a quality threshold to become widely adopted. A survey by Netcraft, an Internet research firm, showed that the cocreated open-source Web-server program Apache runs more than half of all Web sites and that eight of the ten most reliable Internet hosting companies run Linux. While the general thesis that cocreated products are higher in quality is difficult to prove, companies are increasingly willing to rely on them for mission-critical business processes.

Lessons from communities

Although it is still too early to develop useful frameworks for success with cocreation, they will no doubt emerge over the next few years. Meanwhile, some lessons about how to proceed are coming out of both the consumer and the professional online communities.

Participative media supply some of these lessons. Our research suggests that 25 percent of Western Europe’s Internet users now post comments and reviews about consumer products of all kinds (exhibit). User-generated media sites are growing in numbers of visitors and participants by 100 percent a year, traditional sites by perhaps 20 to 30 percent.

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