From self-customized motorcycles to modified software, end-users have the capabilities to develop and diffuse into their market their innovations. Producers have to choose whether to ignore these innovators or adapt their R&D processes to include them as partners.
Innovation is expected to come from the producer of the product. That’s the reason manufacturers have R&D departments. But more and more innovation is emerging not just from the producers but also from users and end-users. For example, many users develop modifications to video games or software that changes the product they originally bought. The same happens with hardware: riders who customize their motorcycles is one example.
The end-user innovation, however, does not necessarily stay with the individual innovator. Instead, the innovator will find ways to share his or her creative changes with other end-users — end-users that are mostly non-innovating. This is known as peer-to-peer diffusion, and through technology and social media is becoming more widespread.
The result, according to new research, is two parallel paradigms of innovation and diffusion in the same marketplace. One is the traditional producer innovation and diffusion paradigm: the producer develops a new product or product feature and sells it in the marketplace. The second is the end-user innovation and diffusion paradigm, in which end-users develop innovations that they diffuse into the marketplace for free (usually) through peer-to-peer diffusion.
The research team identified four types of interactions between these two paradigms or modes of innovation. In the first type of interaction, the producer enables and encourages end-user driven innovation — through a design contest or by sponsoring an innovation-user community, for example. The second type of interaction is in the other direction: the end-user innovation creates spillover (e.g. new ideas) for the producer. In other words, the producer may acquire (for free or perhaps for compensation) a new end-user design.
The last two types of interaction between these two modes of innovation involves the diffusion of the innovation into the marketplace. Traditionally, innovation occurs in-house — in the R&D function of a producer — and is then diffused (for a profit) into the marketplace. As mentioned above, however, there is a second source of new innovation into the marketplace, and that is the end-user.
The third type of interaction is when the end-user innovation complements the producer’s products and features in the marketplace. For example, some software modifications developed by end-users complement and add value to the software developed by producers.
The fourth type of interaction between the two modes of innovation occurs when the end-user innovation competes instead of complementing producer innovations. In this case, the end users have developed modifications, innovations or even full products that can be substituted for the producer’s products and features. One example is in the boating industry, where a growing number of boat enthusiasts are building their own boats.
In this new context, therefore, there are two types of markets: one type in which end-users and producers develop complementary innovations; and one type in which producers find themselves competing with end-users.
In a world in which end-users have the knowledge and resources to develop their own innovations related to a producer’s product, producing firms must make a choice: to fight or to partner.
The traditional path is to ignore user innovations and forge ahead with one’s R&D department. No effort is made to enable or encourage user innovation. Every innovation is intended to emerge from the R&D function. The researchers call this the producer-innovation mode.
The alternative is for producers to have an open innovation approach that encourages, works with and invests in end-user innovation. This is not a one-way relationship. Producers also organize their R&D in order to reap the spillover from user innovations that they can use in further developing their own products. The researchers call this the user-augmented mode.
An excellent example of the user-augmented mode of innovation is Harley-Davidson, which made a commitment to benefit from the innovative customizations by consumers of its motorcycles. Thus, it created a website that allowed users to share their designs and learn from each other. Harley-Davidson also offers custom production of new bikes based on user designs, in an effort to avoid the type of revenue losses that that boat manufacturers, for example, are experiencing due to self-built boats. It also offers post-production parts for users customizing their bikes, further reducing losses.
Which is the right mode for you? Statistical modelling shows that optimally, when the share of innovating end-users is very low, there is no benefit to adopting the user-augmented mode. The contribution, in terms of commercially viable innovations, from the small number of end-users who innovate is so insignificant that it does not make for the additional investment of an open innovation process.
As the number of innovating end-users grows, however, the user-augmented innovation strategy becomes more and more attractive. At a certain tipping point, the “spillover” of end-user innovations into commercially viable innovations is significant enough to make the user-augmented mode more profitable than the closed, in-house R&D-only strategy.
The bottom line: stay alert to what is happening in your end-user community. Is end-user driven innovation growing to an extent where it can become a liability — or an opportunity? Knowing your customers — their needs and their capabilities — is key to understanding when viable and profitable new partnerships can be created, and your research and development function should be redesigned to welcome your new partners.
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- Bocconi University Department of Management & Technology
- Technische Universität München School of Management
- MIT Sloan School of Management
- SDA Bocconi School of Management
- March 2014
- May 2015