Networks of creation How can companies make money by giving away ideas?

IN HIS 1937 essay on "The Nature of the Firm", Ronald Coase, a Nobel Prize winning economist, argued that the cost of transactions sets the boundaries of firms-and that it was more efficient for workers to band together in a company rather than go it alone. Times have changed, but Mr Coase's notion looms larger than ever. Companies still remain a practical way to mobilise workforces, but executives are realising that networks of companies working together are best for generating big ideas and profiting from them. In their book "Platform Leadership", Annabelle Gawer and Michael Cusumano describe how Intel, Microsoft and Cisco have each in their own way orchestrated industry innovation so as to support their own products-and, in the process, established their dominant positions in their respective markets. Of course, every trend needs an accompanying buzz word. The one humming around boardrooms these days is "creation nets". Seen by many as the next evolution of "Open Innovation", networks of creation are sprawling in Asia and starting to spring up in America, too. According to a recent report in McKinsey Quarterly, creation nets are "hundreds and even thousands of participants from diverse institutional settings" that collaborate to create new knowledge. Yet, to many, the definition of creation nets remains unclear. Wikipedia, the user-generated online encyclopaedia, is the prototype practical creation net of the internet age, yet no definition exists so far among its comprehensive entries. Are creation nets a cutting-edge innovation tool, or just common sense? Some executives may be sceptical about the free trade of ideas needed for creation nets to work. Intellectual property is held closely, and the "Closed Innovation" model of hierarchies, transactions, and the "Not Invented Here" mentality persists. But companies that are innovating creatively are reaping benefits. Creation nets, which amplify fundamental principles such as economies of scale and comparative advantage, are helping to make it happen. The scramble for new ideas In 2000, Proctor and Gamble, a consumer goods manufacturer, had a so-called "near death experience." The share price had fallen by more than 50% and in-house innovation was failing to turn out products that met financial goals. It was time to look elsewhere for ideas. "We have 9,000 smart people inside P&G, but there are 1.5m outside the company who are just as good. We had to try to leverage all these people," says Larry Huston, vice president of innovation at P&G. And so research and development soon became a matter of "connect and develop". Within five years, the amount of innovation coming from outside of the company grew from 15% to 52%. P&G developed networks of technology entrepreneurs, suppliers and consultancies around the world to generate ideas, solve problems and make products happen while meeting financial benchmarks. By exchanging hierarchies and a strictly transaction-centric mindset for a more broad focus on relationships and openness to customer wants, products such as the Swiffer Dusters, Mr Clean Magic Eraser, and the Crest SpinBrush came to fruition. P&G started giving back, too. Ideas that it generates that are not picked up internally are available to other firms and competitors after three years. Other companies have seen success incorporating components of the creation-net model into their open innovation philosophy. Eli Lilly, Cisco, Intel and pharmaceutical companies have all adopted

facets of creation nets. In his book Open Innovation, Henry Chesbrough, a professor at Berkeley's Haas School of Business, notes Merck's 2000 annual report in which the company acknowledged that it accounted for 1% of all biomedical research in the world. It said that it must tap companies and universities around the world for access to the other 99% and argued that, "The cascade of knowledge flowing from biotechnology and the unravelling of the human genome-to name only two recent developments-is far too complex for any one company to handle alone." The value of nets If "open innovation" was the buzz word of the 1990s, where do "creation nets" fit? An openinnovation philosophy does not necessarily mean that a company subscribes to the creation-net model. Creation nets must add value. "The main difference between creation nets and open innovation is that the latter centres around a business model, which must both create value and then capture a piece of that value for the business," says Mr Chesbrough. Similar in concept to the old-fashioned company suggestion box, creation nets are a more powerful way to accomplish the same goal of creating incentives for ideas that make the company better. On a micro level, creation nets must begin by deciding what is to be created. They must sense what customers crave and find new ways to solve those problems. Chris Meyer of Monitor Networks, a Boston consultancy, helps establish "WorkNets" to identify global trends on a two-year horizon and develop networks around business goals. "As soon as a network becomes two-way, it has the ability to create," says Mr Meyer. Technology such as wikis, which allow users to share ideas, have proven to be an ideal way of mobilising creation nets in the information age. "They make the web an intelligent, thinking resource," Mr Meyer says. Some companies have even taken to using wikis as in-house virtual suggestion boxes to get employees thinking more creatively and together. Wikipedia is a prime example of the power and drawbacks of a creation net. To be effective-or, in its case, accurate-there must be a regulator who keeps participation "honest" and who prevents the disruptive noise of too many participants from ruining the system. "Most networks need a heartbeat, someone to keep it fresh," says Mr Meyer. Yet, according to John Hagel and John Seely Brown, authors of the McKinsey report, even firms such as InnoCentive, that has created a marketplace connecting researchers to companies, are not creation nets by their definition. "Participants are driven by the opportunity to maximise shortterm cash value of their efforts rather than seeing a potential to get better faster by working with others," write Mr Brown and Mr Hagel. According to them, the Asian model of innovation represents the purest form of creation networking. Be it the benefits of guanxi, the relationship-based business culture that permeates China, or just good strategy, companies in Asia have had the most success with creation nets so far. "A lot of it is happening in the tea houses of Chongqing," says Mr Hagen, referring to China's hub of motorcycle manufacturing. According to Mr Hagen, a set of entrepreneurial motorcycle sellers in China have taken the architecture of Japanese motorcycles and combined loose design guidelines with strict performance guidelines to develop new motorcycles. The company, Chongqing Motorcycle Group, is comprised of 52 subsidiary companies around the world that work on different facets of the product. Such a network is considered a "process network". Other examples include companies

such as Hong Kong's Li & Fung, an apparel manufacturer with a vast network of start-ups. Its supply chain includes more than 10,000 companies. In Taiwan, networks of "original design manufacturers" work to develop electronics. The lack of intellectual property protection in Asia helps to make this possible. "It's very much a trust and handshake kind of business," says Mr Hagen. That can be both a blessing and a curse for creation nets. How to manage? One of the primary problems that is holding back the spread of creation nets is protection of intellectual property. A creation network can be successful if companies are working for mutual benefit. But exchange of ideas requires trust, and with that comes potential for free riders. "It's hard work," Mr Huston says. "You've redesigned your company not as a hierarchy but as a global network." A network that is too cumbersome can spin out of control. Without proper management they tend to fizzle out, and without clear goals outcomes can be uncertain. "You never know what you're going to get," Mr Meyer says. Another problem weighing upon creation nets in Western companies is the lack of a clearly understood definition of the term. Companies tend to have a sense of what creation nets are, but not the intuitive understanding that seems to have taken hold in Asia. According to the McKinsey study, executives tend to think immediately of open-source software like the Linux operating system, which can be freely modified and distributed, when they hear about open innovation. Or they tune out the idea as an uncontrollable model too difficult to be profitable. Other executives think that they have already mastered the methods of open innovation, citing joint ventures with a few business partners. So, where do phrases like "creation nets" and "crowd sourcing" (another favourite) fit on the spectrum between hype and profit? "What's new in this space is how to create value for customers," says Mr Huston. Boasting that during the past two years some aspect of 100 new products were designed outside of the company, Mr Huston argues that his customers have gained a lot. More broadly, Western companies dealing with some Asian firms may be participating unknowingly in creation networks and gaining inadvertently. With technology diminishing Mr Coase's transaction costs, the most innovative way for firms to innovate may be to get caught in the creation net.

http://www.microsoft.com/uk/business/peopleready/resources/networkscreation.mspx

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