Lead User Innovation Report

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LEAD USER INNOVATION

Prepared by:

Anissa Moeini

Shawn Goldmintz

Selim Alamgir

Date:

November 23, 2006

Course:

MKTG 4560A- E-Commerce and the Art of High Tech Marketing

Institution:

Schulich School of Business, York University


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TABLE OF CONTENTS

Executive Summary........3

Lead User Definition...4

Historical Context...4

Motivations for Innovation5

How Businesses Are Beneficial to Users...5

How Users Are Beneficial to Businesses..6

Finding Lead Users

In Communities.7

Through Intermediaries10

Using Contests..11

Other Issues With User Innovations

Marketable Value..11

Policy Structure.12

The Changing Business Model.13

The Lack of Resources ....14

The Future of User Innovation.15

Endnotes.16

Appendices

Crossing the Chasm A-1.....18

Range of Lead User Contributions A-218

Nespresso Contest A- 3 ..19


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EXECUTIVE SUMMARY

The lead user concept, developed by Erik Von Hippel, is defined as users whose needs

significantly anticipate requirements of the broader market. These users then innovate around

the existing products to satisfy their unique requirements. This class of users represents a

valuable asset, which has always existed, but is only now becoming more recognized by

business public, mainly through the miracle of internet communication channels.

The diversity of backgrounds and skill sets facilitates endless specific needs generated

by lead users, some incremental, some breakthrough. Break-through innovations prove to be

most valuable, because they represent entirely new product offerings, wherein a company

would have the first mover advantage. These lead users have many motivations to take part in

the production process with the most influential being: Status, Monetary Reward,

Employment, and Enjoyment.

Lead users are useless to companies unless they find a way to communicate and form

relationships with this valuable intellectual capital. The phenomena of organic and facilitated

internet networks have made the lead user concept more widely accepted and exploited.

Additionally, communities form traditionally, and can be skimmed from an esteemed portion

of professional networks.

We will discuss issues pertinent to businesses seeking to find and utilize this important

asset, including: Marketable Value, Policy Structure, lack of resources and also the effect on

the modern business model. Finally we confirm and strengthen the importance of lead user

innovation to the future of the business world.


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cater to this need simply because it forced them to step out of their comfort zones and invest

in the exploration of a riskier unknown.4

Motivations for Innovation

Since users are so different their innovations provide a solution to their own specific needs. A

survey by users of Apache Web Server found that 19% of users had written new code to tailor

the software to their specific purposes.5 The principal motivation for a lead user innovation is

to satisfy a personal need and increase personal quality of life. However, there are other

motivators for user innovation, which can be leveraged to encourage those users who have the

ability to predict needs ahead of segment members to bring forth their ideas. The most

common secondary motivators are: Status: people love to be recognized for their

achievements; Monetary Reward: getting compensated with a portion of the companys

profit; Employment: recruitment and job stability; and Enjoyment: they have fun creating

new things and contributing to brands and companies they love.6

How Business Are Beneficial to Users

Businesses are beneficial to lead users because they provide resources such as technical

infrastructure, back end support, customer bases, marketing expertise, field experience, and

brand image to effectively commercialize their innovation. This is especially true for highly

capital-intensive innovations, which require manufacturer support for any kind of production

growth. Businesses can assume economies of scales much faster than individual lead users,

thus allowing for the total price of the innovation per product to decrease. As a result, the

product can be offered to a greater amount of the lead users community members, allowing

the interest group to grow and to further develop. Businesses offer users the potential to take

their innovation to a higher level. This can result in augmented status, monetary reward, the


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chance of employment or enjoyment.

How Users Are Beneficial to Businesses

Lead users have a higher rate of incremental breakthrough innovation compared to firms due

to the natural access to information to their own segment, and the insights that they have for

the future trends of their industry. This is also attributed to the fact that they have a tendency

to obtain free assistance from fellow community members, an expensive proposition for

manufacturers, taking the shape of formal market research and focus groups.7

A study by 3M, a successful advocate of encouraging lead user innovation, confirmed

that product ideas from lead users generated eight times the sales of ideas generated

internally. The company noted that this is the generally the case because lead users are more

likely to come up with ideas for entire new product lines (breakthrough innovations) rather

than minor improvements.8

Moreover, the adoption of new innovations may be complementary to the resources

already in place in the organization including infrastructure, established brands, existing

manufacturing facilities and distribution channels. This makes the innovation less risky and

more logical to adopt. However, the most attractive aspect of lead user innovation to firms

must be that users ideas have the potential of being effective differentiation tactics, allowing

firms to not only charge premium prices and be industry leaders, but also to prevent

premature commoditization.

9

Firms that realise the benefits of lead users innovations may

decide to allocate market researchers time to developing the methods necessary to find lead

users, to give them the propensity to innovate and to see if anything has to be modified to

make it market worthy instead of pursuing traditional market research techniques.

FINDING LEAD USERS

The breakthrough of recognizing lead users and all they have to offer is but a small part of the


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battle. There are many other aspects of the lead-user innovation phenomena that are integral

to reaping the benefit of this trend. The first step in tapping into the benefits of lead-user

innovation is actually finding them. Knowing where to look, or how to draw in lead-users so

the co-production process can be facilitated is a critical success factor of harnessing lead-user

innovation.

Finding Lead Users: In Communities

A great deal of lead-user innovation can be found in network communities. These

communities form as a result of lead users finding themselves searching for likeminded

people with whom they can share their ideas and perhaps find ways to improve their own

innovations. There are many ways to facilitate and/or foster the growth of these pseudo-

organisations, thus making it necessary to delve into different networks types and how each

one can be coerced into revealing its riches in slightly different ways.

Network products tend to foster their own user communities, for the very same reasons

that lead-user innovation itself fosters communities. Because the users of a network product

get more out of it when the network encompasses as much as possible, network product users

tend to migrate to common areas in which they can learn about and discuss that product.

Tapping into these user-formed communities can be a great way to find lead-users, who after

using the product realise that there was something more that needed to be fulfilled, thus

propelling them to go on and devise a way for this to happen.

The most obvious product that works in this manner would have to be open-source

software. Operating systems like Linux (and increasingly even Apple and Microsoft) let their

source codes become public domain, in an effort to allow users to tailor their computing

experiences to their own specific needs.10 These needs may (and in many cases do)

foreshadow the needs of other users, and are therefore lead-user innovations. For open source


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software, and even other networked products, the most efficient place to locate and entice lead

users is on the internet. User newsgroups and web servers are the most likely place for

companies to find their open source goldmines. Linux and other comparable products tend to

create innovations that range widely between breakthrough and incremental. This is due to the

fact that many of the advances are simply add-ons to existing software that better suit a users

needs, however open source also allows for the creation of completely new programs, though

this type of innovation is rarer.

While users of open source software are getting together to discuss the use of this tool

that has been provided to them by a company, lead-user innovations that came into being

without the express help of a companys product are quite common. The sport of kite surfing

was the product of lead users, who decided that they wanted more from their sportive

endeavours: more speed, more height and more excitement. They devised a method of

connecting a large kite/parachute-like apparatus to something similar to a common surfboard,

and voila, kite surfing was born as a sport. One of the most interesting aspects of the kite

surfing phenomenon was that it did not really take off until someone took the time to foster

the sharing of ideas. An MIT student named Saul Griffith was the one who went out of his

way to create a website where kite surfing enthusiasts could come together and exchange

ideas and learn from each other.11

This user-created website gave rise to a new mini- industry as the innovations on the

site were advanced and popular enough to merit production. Entrepreneurs recognized the

value of this breakthrough innovation and capitalized on its intrinsic value, using online

designs as the basis for what is now a booming business. The newly formed kite surfing

manufacturing company recognises that the innovations of its users are still going to be

valuable as time goes on, and they continue to solicit interesting and fresh ideas to incorporate

into their new products,12

which is what everyone (from corporations to mom-and-pop stores)


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needs to begin to do.

User communities can be established for reasons other then sharing innovations and

can still be used to locate and distil lead-user innovations. The example of the library

information search tool OPAC can be used to shed light on how this can actually happen. The

users of this software are librarians, and through internet-based networks designed for

communication between libraries the changes being made to OPAC systems across the world

were slowly beginning to surface. Eventually it became apparent that many librarians were

making customizations to their OPACs, significantly adding to the functionality and

efficiency of the product.

Lead-user communities seem to be best facilitated on the internet, however it is not an

essential feature of these networks to be internet-based. Locating lead users without an easily

searchable database to learn from is also developing into an important competency for

companies trying to harness user innovations. Surgeons, for example, are extreme innovators,

with an estimated 50% of them making some type of modification to their instruments.13 It

would be useful for suppliers to seek out the users of their products with the best reputations

and ask for their input on the designs of their tools. This concept seems simple enough, and

3M has been a pioneer in integrating it into their surgical tools development process, but

companies in general are notoriously bad at soliciting improvements from their top users.14

Another amazing characteristic of user communities is the diversity of the users

involved. These users have quite divergent backgrounds, but are drawn together by a common

need or want. This diversity allows for simultaneous improvements to go on at once. A good

example of this would be the mountain biking industry. As users involved in different aspects

of the sport come across unique challenges, they apply their knowledge in different and

meaningful ways allowing for ice-gripping tires to be developed simultaneously with a new

carrying rack.15

Not only are the circumstances that these user encounter divergent, but their


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intellectual capital is just as varied. As in the kite surfing example, where innovations ranged

from aerodynamic improvements made by engineers to aesthetic improvements made by

laymen.16

Finding Lead Users: Through Intermediaries

Firms may explore making a connection with lead users by entering relationships with

intermediary firms. Companies solicit the help of such intermediaries due to several reasons,

including that intermediaries have the resources to efficiently find innovators, the complex

nature of the industry requires specific expertise to find users, and intermediaries will likely

yield information far more quickly and cost effectively due to already established networks

and relationships.

There are a wide range of companies offering intermediary services. Typically, one

intermediary will focus on a certain type of innovator. A company that focuses purely on lead

users would be Leaduser.com. They help companies organize lead user idea generation

projects or coach employees to do so themselves. Companies such as Leaduser.com find lead

users through electronic searches, trade journals, and industry contacts. The next step is to

observe the lead users, find out what they are doing and why. An example of this step can be

seen in Nortels, who hired Leaduser.com help them discover the future of wireless data

services.17

They observed users in fields such as aviation, oil fields, and public safety. This is

then usually followed up by a workshop session of several key lead users, which have a wide

range of skills that they can bring to help refine the concepts. Concepts are then made into

workable plans, and usually these workshops generate several potential concept

products/services.

A lot of the effectiveness of this method comes from finding the right people, which is


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what many firms might have a hard time doing. Another reason why companies might prefer

to use an intermediary than to initiate the process themselves is that it provides a controlled

environment where the communication can take place. The company might be hesitant to let

outsiders become intimately connected with the production process at first, and intermediaries

allow for a kind of separation to still exist.

Finding Lead Users: By Using Contests

Contests are an effective medium that firms can use to encourage both incremental and

breakthrough innovation. The key success factors of contests are the definition of the

challenge and the motivation for the reward. Firms need to strike the delicate balance between

giving a specific purpose to entrants without limiting them from showing their true potential.

Moreover, due diligence still plays a vital role in the attraction of lead users as without the

proper branding of the contest the segment will not yield optimal results. As such, extensive

market research must also be done in order to understand how to incentivize the segment so

that optimal applicants can be motivated to not only participate, but to do so whole-heartedly.

Nespressos 2005 Design Contest mandated entrants to imagine the future of coffee

rituals.18 The contest was aimed at the young designers, and the rewards were as follows:

26,000 Euros, an opportunity to have their ideas commercialized, incredible press coverage,

access to an elite network of designers, and an ability to jumpstart their careers.19

In order to

be as successful as Nespresso, firms must perform significant market research to brand their

contests effectively. (See Appendix A-3)

OTHER ISSUES WITH USER INNOVATIONS

It is increasingly important for companies to come out with breakthrough innovations, which


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can be found by tapping into the combined talent of lead users. In doing so, firms must be

prepared to deal with the issues and challenges arising as a result.

Marketable Value

New products that come to market have high failure rates because of the lack of

market. This information is found after investing millions of dollars into market research. The

role of market research information is changing with user innovation. Instead of searching for

consumer insights and spending money on research marketing methods such as ethnography

the company would automatically be provided with the end product. Hence, the question

companies now face is, is the user innovation marketable?

Companies such as Threadless.com integrate customers into the innovation process by

asking them to submit their ideas for a product. It employs a process called collective

customer commitment whereby the firms ask for commitments from customers to purchase a

new product before the companies commence final development and manufacturing.20 There

are less costly product failures and companies do not have to identify a segment on their own.

Market research expenditures turn into sales faster than traditional methods would allow.

User innovations are a product of a user fulfilling their needs. Once that need has been

fulfilled they may not feel the need to market the product to others. Hence, companies will

need to use market research to find markets, even if they are niche markets, which have a

need for the user innovation. The aim is to find a market that is big enough to obtain marginal

gains through the sale of the product. In addition to this, marketers need to see what aspects of

the innovation will be of value. The feature of the product that adds on value should be

marketed as opposed to features that do not. Identifying what customers perceive to be extra

value comes from market research.


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Policy structure

Policy structure plays an important role for innovation. The patent system that is currently in

place, for example, protects the rights of the patent owner for a maximum of 20 years.21

Patents were originally created to reward the innovator by granting him exclusive rights to use

and develop the idea or invention. However, critics of the patent system argue that patents

allow strong industry players to concentrate and consolidate and have high barriers for entry

into the industry. In order to allow room for innovation and the spread of new ideas for the

public good there must be a more competitive environment and one that supports using

existing ideas and technology as a base for development.

In light of the above discussion, there are changes that need to be made for the

innovation policies of countries. Strong property rights need to be in place but they must be

congruent with a user-driven economy. According to Charles Leadbeater, there is a need for

a more balanced approach to intellectual property, one that encourages ideas to flow up and

down the pipeline, from manufacturers but also from and between users. 22 He also

suggests a policy that is more open to social interaction as it is consumers that know what

they want and will contribute to an innovation more than a businessman that lacks consumer

insights. Hence, in order to be successful in the world economy policies should be created to

encourage innovation, support innovation funding and facilitate the networking of

innovation.

A Changing Business Model

We are headed towards a networked knowledge economy, where innovation

processes are distributed.23 Ideas flow back and forth between networks of user innovators,

consumers, communities, experts and companies. With the power shift that accompanies this

network, open innovation challenges the traditional innovation system with regards to the


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issue of property rights. The company is no longer the sole creator of the product and thus

does not hold the property rights to the product, but rather the innovator does. The new

business model will force companies to encourage users to share their contributions. This shift

of power would mean that firms would have to invest more in building relationships with

consumers, opening lines of communications with them and fostering those relationships.

This will result in a complete of structural norms such as financing, investment and budget

allocations. For instance, Von Hippels aforementioned concept of providing consumers with

toolkits in order to help them innovate would cause companies to incur expenses in the short

run. The aim of this is to speed up market commercialization of ideas that provides value to

the network that one operates in. Though ideas have been shared successfully through

consumers special interest community networks, firms will have to develop innovating

marketing techniques foster relationships with their key users and to effectively make up for

the fact that unlike other members of user networks, they are exchanging ideas with the

ultimate goal to make profit 24.

Patty Seybold, author of Outside Innovation and a fan of Von Hippel, suggests

consumers paying to support the innovation product if feasible.25

This has already been done

through community and individual effort on the part of the consumer but businesses may be

able to get the general public to contributing to the development of a user innovation with the

right marketing. All in all, the traditional business model will change in the near future.

The Lack of Resources

A lead user by definition is one who has the ability to recognize the need and then has the

propensity to follow through with the innovation. There are various costs associated with user

innovations, for both the lead user and the manufacturer. It is difficult if not impossible for

great minds to put their creative talent to work when they do not have the right tools. Dr. Von


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Hippel proposes the concept of providing consumers with toolkits in order to overcome this

challenge. It is important for manufactures to give product users appropriate tools so that they

may innovate to their potential26. In doing so, firms must recognize that giving too much

information may result in the users mastery of the manufactures technical knowledge, a loss

of competitive edge and a threat of new entrants into the industry. On the other hand if the

tools are not adequate enough, they can lead to a case of mass customization much like the

Nike ID website wherein users can customize their own shoes to their taste but are not able to

innovate anything new.27 The aim is to allow for innovation and to speed up market

commercialization of ideas that provide value to the network that one operates in, without

setting too many constraints. Hence, companies are seeing a change in their business model as

they cater to consumers in a different way than they traditionally did.

BMW, for example, posted a tool kit designed for telematics and in-car online services

on its website and allowed customers to develop and post their ideas. From approximately one

thousand postings, BMW invited fifteen innovators to its head offices to help reach a

prototype. As such, the company effectively allowed these customer to take on the role of

Head of Market Research, Head of R&D and finally to come in-house as a Manager of

Product Development.28

CONCLUSION: THE FUTURE OF USER INNOVATION

In conclusion, consumers and businesses are working together to come through with

incremental and breakthrough user innovations that might not have been possible if they had

not collaborated. There is a shrinking gap between conventional business practices and

empowering users. The face of market research is morphing and consumers and producers

look more like team mates in the effort to produce better more innovative products. In the

future, consumer interaction with companies will become increasingly integral to the success


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of the firms within their segment. As such, firms will have an increasing role to play in

making their brand loved and building their customer relationship in order to communicate

effectively and share ideas with consumers.

ENDNOTES

1"Innovator" Lexico Publishing Group, 2006

Accessed 22 November 2006.

2Postrel, Virginia, Innovation moves from the laboratory to the bike trail and the kitchen. The New

York Times, April 21, 2005 Accessed 18 November 2006.

3Leadbeater, Charles, The User Innovation Revolution National Consumer Council, London, UK,

2004


4The rise of the creative consumer The Economist, March 10, 2005:


5

Postrel, Virginia, Innovation moves from the laboratory to the bike trail and the kitchen. The NewYork Times, April 21, 2005


6Zappa, Michell, Customer-Made. 2006


7Leadbeater, Charles, The User Innovation Revolution National Consumer Council, London, UK,

2004: Accessed 18 November 2006.

83M. 2006. Accessed 20 November 2006.

9

Moeini, Anissa, E-Commerce and the Art of High Tech Marketing, Professor Detlev Zwick. Classnotes: November 16 2006.


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10Postrel, Virginia. Innovation Moves From Laboratory to the Bike Trail and the Kitchen. New

York Times. 21 April 2005.


11Von Hippel, Eric. Companies Look For Ideas in All the Wrong Places. CIO Insight. 5 June 2005.


12 Piller, Frank. An Interview with Eric Von Hippel. EURAM Newsletter. 20005.



York Times. 21 April 2005.


14Postrel, Virginia.Innovation Moves From Laboratory to the Bike Trail and the Kitchen. New

York Times. 21 April 2005Accessed 20 November 2006.


York Times. 21 April 2005



York Times. 21 April 2005


17Lead User Method Training Video . 6 Minute Video. 2001.


18Trendwatching.com- Customer Made. 2006.< http://www.trendwatching.com/trends/CUSTOMER-

MADE.htm>Accessed 18 November 2006.

19Nestle-Nespresso.com. Official Competition site 2006. < http://www.nespresso.com/design/>


20Ogawa, S. and Frank Piller. Reducing the Risks of New Product Development. MIT Sloan

Management Review (2006). Vol. 47, No. 2, pp. 65-71.

Accessed 21 November 20

21 Schact, Wendy. Patent Reform: Innovation Issues. CRS report for congress. July 2005.


22Leadbeater, Charles. The User Innovation Revolution. National Consumer Council. London, UK,

2004.


23Hautamaki, Antti. Open innovation networks challenge the supplier-centered innovation system.

Sitra. 2006. Accessed 19 November

2006.

24 Trendwatching.com-Customer Made. 2006. Accessed 22 November 2006


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25Seybold, Patty. Issues that consumer-centric execs are facing as customers take control. Outside

Innovation. 15 November 2006. Accessed 19 November 2006.

26 Chari, Narasimha Lead User and Innovation Networks January 11, 2004:


27Design With Heart Nike Co, 2006


28The rise of the creative consumer The Economist, March 10, 2005:


APPENDIX A-1

Fig: Crossing the Chasm

Source:Keeping Early Adopters Engaged After Crossing the Chasm. Spirited Thought. 22

December 2005. Accessed 21 November 2006.< http://www.spiritedthought.com/2005/12/22/keeping-early-adopters-engaged-after-

crossing-the-chasm/>

APPENDIX A-2

Fig: Range of Lead User Contributions (Across Industries)


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Innovations

Samples:User Manufr Suplr Other NA Total

(N)

Scientific

Instruments

77% 23% - - 17 111

Semicon & PC

Crd Process

67% 21% - 12% 6 49

Pultrusion

Process

90% 10% - - - 10

Tractor Shovel

Related

6% 94% - - - 11

Engineering

Plastics

10% 90% - - - 5

Connector

Attaching

Equip

4% 13% 83% - - 12

Sports

Equipment

58% 27% - 15% - 48

APPENDIX A-3

Fig: Nespresso (Nestle) design contest mandate and winning design for Nespresso (In-

care coffee machine)

Source: The Nespresso website 2006< http://www.nespresso.com> Accessed 20

November 2006.


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Lead User Innovation Report