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Open Innovation: Navigating Long Tail Markets by Utilizing the Firm's Periphery for Innovation
Frank T. Piller Chair, RWTH Technology & Innovation Management GroupCo-Director, M.I.T. Smart Customization Group
© tim.rwth-aachen.de
Design
Build
Run
Analyze
Done
• Development of a first solution idea which the developer expects to be suitable
• Development of a thought experiment, simulation, or prototype
• Test of the design under real or simulated conditions
• Analysis of results versus initial idea; evaluation of performance gap, search for errors
Initial Specification: Task / problem definition (need information)
Iterations
(“trial and error”)
Information for problem solving often is in two different domains
customer domain(locus of need
information)
manufacturer domain (locus
of solution information) local
search bias
sticky information
© tim.rwth-aachen.de
Sou
rce:
Nik
eID
.com
5
How to make half a million dollars PROFIT EACH MONTH with no risk, no MBA, no capital
investment, and (almost) no employees
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Threadless: Collective Customer Commitment
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Learning from Threadless
Threadless business model works and is highly profitable
800 submissions/week; 4 new prints/week; 65,000-80,000 shirts
sold/month (18 Mio USD sales in 2006, 35% profit margin, less than 20
employees; 2000 $ pay-off per design to designer)
Observation of 20% of sales allows exact forecasting in fashion industry
(Fisher & Raman 2001)
"Wisdom of crowds" (Surowiecki 2004)
Observation of strong peer orientation (communities for
co-design) in customization co-design toolkits (Piller et al. 2005)
Riding the “Long Tail” may be returned to the “Head of the tail” – the trick is
to differentiate between a digital representation of the product and the
tangible product itself
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Learning from Threadless
Exploratory analysis of customer database (ongoing work)
Most design contributors (about 68 %) are professional designers
Low costs for participation, different participation levels
Most customers also evaluate (NPD process becomes a
relationship marketing tool) (only 3% of customers never evaluated)
Expert evaluation (exploratory) of designs indicates rather limited
design space; high similarity of designs (“dominant design” of this
community)
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How Threadless acts differently
no own R&D, no own market research, no own designers
focus on supporting users to create value
active customer integration
broadcasting of problems –not seeking for creative talents
open participation and distributed problem solving
very efficient screening mechanism
relationship marketing as a side product
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Crowdsourcing (Interactive Value Creation)
"Crowdsourcing represents the act of a company or institution taking a function once performed by employees
and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take
the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole
individuals.“ (Howe 2006)
Crowdsourcing (Interactive Value Creation)
"Crowdsourcing represents the act of a company or institution taking a function once performed by employees
and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take
the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole
individuals.“ (Howe 2006)
© tim.rwth-aachen.de
© tim.rwth-aachen.de
• Context for posting problems– Firms spent 6 months to 2 years trying to solve problems
internally– Offer on average $30,000 for solution– Solutions need to be submitted within ~6 months of initial posting
• How many problems that had not been solved internally were solved (n=166)?– 49 problems (29.5%) were solved– 75 solution awards given
• Participation Patterns:– Average 240 individuals examine detailed problem statement– Average 10 solution submissions per problem– Average time spent ~74 hours by winning solvers
and ~36 hours by non-winning solvers
Karim Lakhani (HBS) found that Innocentive has a VERY efficient mechanism for technical problem solving
© tim.rwth-aachen.de
Leverages distributed and preexisting knowledge
(72.5% reuse)
Interest diversity and solver specialization attracted
helps solves problems
Solvers solve problems that are outside of their own field
of expertise (65% have PhDs in scientific disciplines)
Motivation: Intrinsic motivation (challenge to work on
scientific problems, “proof myself”) and monetary incentive
(award) go together for winning solvers
Efficiency in problem solving is based on re-use of knowledge
And this is highly profitable for companys:
Seekers’ cost (per challenge): $60,000Value generated for firm: $10,300,000 -- ROI: 2175%
And this is highly profitable for companys:
Seekers’ cost (per challenge): $60,000Value generated for firm: $10,300,000 -- ROI: 2175%
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Different approach to organize the innovation process
Commons-based Peer-Production of Innovation (Benkler 2002, 2006; Jegen 2001; Lakhani 2006; Schonfeld 2005)
Open Innovation (Chesbrough 2003, Piller 2002)
“Interaktive Wertschöpfung” (Reichwald & Piller 2006; Piller 2004)
Crowdsourcing (Howe 12006)
Wikinomics (Tapscott 2007)
Alternative approach to hierarchal or market coordination:
Granularity of tasks (micro contributions; specialization, usage of local sticky information)
Problem seeking („broadcasting“)
Efficient solution of coordination problem (self selection, self organization and re-integration, collective „memory“ by openness)
Efficient solution of motivation problem (self motivation: usage!!, add. extrinsic, intrinsic & social motives; peer leadership)
(Partial) openness of resulting property rights
© tim.rwth-aachen.de
In the scorching-hot west Texas plains of Wichita Falls, a paramedic and novice cyclist, Michael Edison participated in his first "Hotter 'N Hell Hundred Miles" bicycle race in 1988.
Texas is famous for its heat, where temperatures during the hundred mile race can soar above 100°F and water stops are 2 or 3 hours apart.
Michael started well back in the pack of the 1000 riders and quickly learned that reaching for a water bottle mounted on his bike frame was potentially dangerous.
"I kept bumping into people, so I was thinking, there's got to be a better way to get a drink," he said.
© tim.rwth-aachen.de
After the race, he returned home and began toying with materials familiar to him from nine years as a paramedic.
He attached medical tubing to an I.V. bag, stuffed the bag into a sock, and sewed the sock onto the back of a T-shirt.
One ride with the contraption sold him on the idea, which he dubbed the CamelBak for its hump-like shape on a cyclist's back.
In 1989, he founded a company making these devices, which he sold in 1995 for $4 million to the Bowes family, which sold it again in 2003 to Bear Steams for $210 million.
© tim.rwth-aachen.de
# of usersperceiving
need
Time
Lead users innovate here
First manufacturer product appears here
based on von Hippel 1988, 2005
“Voice of the customer”methods start here
Users have the advantage of problem-solving in their own use environments as they “do” a desired activity – they are learning by doing.
© tim.rwth-aachen.de
Source: Rogers 1984
An important differentiation: Lead user method is NO market research – and often lead users are NOT customers of the manufacturer
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But the customer revolution continues:
From lead users to user manufacturers ...
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Open Design by Ronen Kadushin
Title of item: Flat Knot Function: fruit bowlCNC version materials: 1mm stainless steel sheet (mirror finish).Dimensions: 55cm x45cm, W 25cm L 45cm H 19cm after folding.Information file format: DXF, DWGInformation output device: CNC laser cutter.Information output medium: 1mm stainless steel sheet, directly from file.User production skill level: intermediate.User modification skill level: high
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fabathome.org
User Manufacturing
Easy-to-operate (and free) design software
(Open) Repositories of designs
Easy-to-access flexible manufacturing technology
[ More information: http://tinyurl.com/yofu2y ]
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A new customer education industry
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User Manufacturers may become your next
competitor – how can you serve (and profit from) user manufacturers in
your industry?
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What could my company (organizational unit) do to hand s.th. out to the periphery
and still make money?
What can we share with users (or competitors)?
What is the real core of our company?
How can we implement organizational practices which prevent a new NIH problem?
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