Christopher Swanton Cognitive Science

The University of Minnesota IDSC 8711

13 November 2008 Fall 2008

von Hippel, Eric, 1998. Economics of Product Development by Users: The Impact of “Sticky” Local
Information. Management Science 44 (5), 629-644.

In this Management Science paper, von Hippel speculates as to why it might be cost effective and
efficient to allocate application-specific tasks on customized products to the end users rather than the
product developers. This is somewhat surprising since the product developers are considered the
“experts” and better equipped to develop the entire product in a more expedient manner.
von Hippel, however, suggests there are two reasons why this isn’t the case and that, in fact, it
may be more beneficial to drive the focus of the problem solving in the opposite direction – towards the
end users. The first factor comes from the relatively well understood agency theory. On the user side of
the equation, agency-related costs tend to drive do-it-yourselfers, since the cost of outsourcing is too high.
On the other hand agency-theory suggests that the suppliers will suffice in their solution so that they can
offer that solution to as many problems as possible.
The second factor, which is the focus of this article, deals with “sticky” local information. von
Hippel defines stickiness of a given unit of information in a given instance as the incremental expenditure
required to transfer that unit of information to a specified locus in a form usable by a given information
seeker. In other words, sticky information is difficult to accurately convey to another party which is why
it may be more economical to shift the application-specific tasks on customized products to the less
experienced user if their information is more difficult to convey than the manufacturer’s information.
There are three primary reasons outlined in the paper for the existence of stickiness. First, is the
“lack of absorptive capacity,” a rather clever euphemism for when the recipient isn’t able to understand
the received information. The second reason is incomplete or poorly encoded information. And finally,
the third reason for stickiness is a laborious and distant relationship between the information source and
recipient.
It is important to note that stickiness has solutions, though they require financial and temporal
investments. For example, changing tacit knowledge to explicit knowledge with expert systems reduces
information stickiness. Investments in reducing stickiness are typically one-time charges that reduce the
marginal costs of all succeeding information transfers. So, it’s logical to focus on oft transferred
information rather than a one-time information share.
There are four conditions when it may be economical to shift the application-specific portion of
customized products or services to the end user:
1. When the supplier faces heterogeneous demand for a given type of product or services.
2. When agency costs experience by users who outsource design activities are high.
3. When the stickiness of application-specific user information is high.
4. When the stickiness of information held by suppliers is low.
To illustrate the main point of the paper, the author uses two case studies of high-tech firms
involved in mass customization. According to von Hippel, mass customization refers to the “manufacture
of one-of-a-kind, ‘custom’ products via the use of flexible, computer-controlled mass-production
machinery.” An alternative and more general definition of as mass customization is “a business model
that uses a routine approach to efficiently create high variety in products and/or services in response to
customer-define requirements (from Hill, A.V. 2007. The Encyclopedia of Operations Management.
Clamshell Beach Press, Eden Prairie, MN.). The primary question explored in these case studies is: “Who
designs the customized portion of the products that are built using mass customization production
methods?”
The first case study involved Application-Specific Integrated Circuits (APICs), which are
integrated circuits designed and built for a specific application and a specific customer. Historically,
APICs were designed using the “full custom method” which, as the name implies, designs the APIC and
all components from scratch. This method is still used today when maximum performance is a
requirement and/or size is a limitation. However, for the majority of applications, full customization is
prohibitively expensive and technically unnecessary.
In this industry, the APIC manufacturers have the semiconductor design expertise, while the users
of APICs have the application expertise. The information held by the supplier is becoming “unstuck”
through two trends. First was the development of new, more flexible architectures. These architectures
allowed the manufacturers to postpone the customization of the APIC until the very end of the process.
(A more tangible example of postponement is the paint industry, where retailers mix white paint with a
dye to achieve the desired color.) Another architectural change was in the form of increase modularity,
using is a library of standard components put together in a customized design. (If you have ever ordered a
computer online where you can select from a variety of displays, hard drives, mother boards, etc., you’ve
seen modularity at work.)
The second factor un-sticking the information from the supplier was the re-encoding of
information into user friendly toolkits. These toolkits allow the end user to customize their product to
their specific needs without the in-depth knowledge previously required. These specific needs are also
sticky, difficult to convey to the manufacturer. In fact, it is less expensive to develop the toolkits and un-
stick the information for the supplier than to un-stick the unique requirements of the end users, which
supports the authors contention that the customization is pushed in the direction of the user.
The second case study investigated the Computer Telephone Integration (CTI) industry, a field of
specialized computing applications that draw upon both computing and telephony functions to
accomplish a task. An example could be ordering goods via phone or checking a stock brokerage account.
Similar to the APICs study, CTI projects historically involved fully customized solutions involving both
the server software and customer-specific application programs. However, the industry is changing with
the introduction of applications generator software allowing users to develop and maintain their own
application programs. The less experienced end user is providing the customization of the product,
supporting the author’s thesis.
The author concludes the paper reiterating the main point that application-specific portions of the
customized products are increasingly being designed by users, with the aid of standard components and
design toolkits provided by specialist suppliers. Suppliers must, however, continually learn and
understand the needs and abilities of their users in order to supply the users with the tools and
components they need.
For most of the paper, von Hippel’s view is based on the fact that sticky information is a nuisance
and should be unstuck. From an operations strategy or business strategy perspective, an interesting follow
up study would involve a reverse study to determine when sticky information is valuable and where (if
anywhere) firms are trying to make information stickier.

REVIEWED BY JOSEPH PLASEK

“Economics of Product Development by Users: The Impact of ‘Sticky’ Local Information” By Eric von
Hippel
 ‘For a design specialist to design this particular product as well as I can, he would have to know
everything I know about the system – he would have to be me!’
A benefit of specialization is learning by doing. The ability to solve a given type of problem has
been shown to improve with practice in order to develop expertise, which is often done by decomposing a
new problem into sub problems that are similar to previously solved problems. Often times problem
solving is pushed to the users, rather than specialists, because of organizational design to “do it
themselves”, thus motivating users to create solutions that fit exactly with their won circumstances, and
because “sticky” local information exists that is costly to transfer from one site to another in a useable
form.
Stickiness is the incremental expenditure required to transfer that unit of information to a specified
locus in a form usable by a given information seeker. Large contributors to information stickiness are a
lack of absorptive capacity by recipient, incomplete or poorly encoded information, and a laborious and
distant relationship between the information source and recipient. Stickiness is not immutable, but can be
reduced by investments made to the end by reducing the stickiness of a critical form of technical expertise
by investing in converting some of that expertise from tacit knowledge to a more explicit and easily
transferable form of a software “expert system” and/or invest in reducing the stickiness of information of
interest to a particular group of users by encoding it in the form of a remotely accessible computer
database. An investment in unsticking a unit of information is a one-time investment that reduces the
marginal cost of all succeeding transfers of that information, thus the incentive to invest in reducing the
stickiness of a given unit of information will vary according to the number of times that one expects to
transfer it.
Mass customization is a one-of-a-kind, “custom” product manufactured via the use of flexible,
computer-controlled mass-production machinery, thus allowing identical specialized products to be
reproduced on the same production machinery at a much lower cost per unit, if needed, thus custom
products can be created just as cheaply as mass produced products. Software-based instructions can be
used to instruct a service delivery system, like an automated home banking system. Mass
customization offers value when the demand for a final or intermediate good or service is heterogeneous,
some why different from standard offerings. The work of design involves collecting information on the
unique needs of a customer; use of that information to create a customized product design; and
conversion of the design information into a form suitable for driving a given manufacturer’s computerized
production machinery or service delivery system. In developing custom designs, developers find it useful
to have access to standard component parts and standard design tools that will help them to carry out the
trial-and-error cycle of problem-solving work. Full customization is designing everything from scratch,
allowing optimization on some element of interest.

The application-specific portion of the problem-solving work of custom system design is shifting
from supplier to user, as supplier-based expertise is progressively embodied in application generator
toolkits intended for user-based designers. Suppliers have significantly greater incentive to unstuck and
transfer supplier-related information needed by designers than would users to unstuck and transfer
information related to a specific application. Thus, the application-specific portions of customized
products are increasingly being designed by users, with the aid of standard components and design
toolkits provided by specialist suppliers. Agency costs, often represented in the form of lags by suppliers
in responding to user requests for system changes, will be reduced if the application-specific work of
product customization is invested in and conducted by the users. Work at the extreme limits of the
process technology is mediated by the negotiation of different tradeoffs.
The ability to encode unstuck problem-solving expertise in user-relevant language may not have changed
over time, but the ability to offer this translated information conveniently and appropriately connected to
the design work itself certainly has been greatly improved as a result of technological advance.
REVIEWED BY AMIE HAUER

ARTICLE: Von Hippel, E. (1998) Economics of product development by users: the impact of
“sticky” local information. Management Science, Vol. 44, No. 5, pp. 629 - 644, 1998
Key Takeaways:
 Sticky, local information is information that is difficult to transfer to another person and involves a
person having knowledge in a certain area (usually specialized, but could be just deep knowledge of
the system, e.g. an end-user)
 One way to manage sticky information where the cost of transfer is high, is to give the motivation (and
responsibility) for some of the design or use of the system to the persons having the sticky
information (e.g. provide end users with tools allowing them to build interfaces and action
placeholders without having to be "developers")
What is this paper about?
This article discusses a theory of where problems are addressed in supplier-user relations. The authors
argue for two factors that drive problem-solving from the supplier (where "experts" reside) to the users:
(1) agency-related costs and (2) information transfer costs ("sticky" information). The authors use two
“mass-customization” cases to set forth their general argument: application-specific integrated circuits
(ASICs) and computer telephony integration (CTI) systems.
Problem statement and overview
The issue addressed in this paper is that under certain conditions it may be advantageous to give some of
the custom product and service design to users rather than specialists.
For example, Wright (1936) and Arrow (1962) point towards the benefit of practice in problem-solving is
an important aspect for people becoming experts and thus arguing for the case to bring a problem to the
expert for a solution. However, Von Hippel points out that end users are direct beneficiaries and will be
motivated to create their own solution which will exactly fit their need, whereas suppliers (experts) might
be satisified with a solution that is “good enough.”
Less understood is what is known as local, “sticky” information. While local information is anything about
the user that needs to be considered in problem-solving and costs of information transfer are an important
factor in calculating the total cost of problem solving, when costs for information transfer are high, this is
local “sticky” information.
The stickiness of a given unit of information in a given instance in the incremental expenditure required to
transfer that unit of information in a form easily consumable by the receiver. Reasons for “stickiness”
might be the data itself (e.g. the way it is encoded) and/or attributes of information seekers or providers
(e.g. lack of tools or specialized personnel or "technological gatekeepers").
Un-sticking information can be done in different ways, e.g. capturing tacit knowledge by developing
“expert systems” and choosing an encoding form that is suitable for the remote group. The willingness to
make such an investment depends on the number of times such information is expected to be transferred.
(i.e. how necessary is it?)
In summary they propose that allocation of the application-specific portion of problem-solving work related
to custom product and service design to users will be economically attractive for the supplier if (1) the
demands of the customers (users) are heterogeneous; (2) agency costs experienced by users who
outsource design activity are high; (3) the stickiness of the user information is high; and (4) the stickiness
of the suppliers information is low.
Context for empirical inquiry: “mass customized” products
The authors looked at two industries devoted to the production of “mass-customized” products. The first
being the application-specific integrated circuits (ASIC) industry, and the second being the computer
telephony integration (CTI) industry.
Mass-customization generally refers to the manufacture of one-of-a-kind, “custom” products via the use of
flexible, computer-controlled mass-production machinery. The situation in such production is that the
manufacturers (suppliers) of the product and/or the specialist design services are the locus of expertise
with respect to problems common to many designs, whereas users or system designers possess the
deepest understanding of a particular application.
Case #1: Application-Specific Integrated Circuits (ASICs)
The firms that integrated customized ASICs in their products were engineers that typically do not
understand semiconductor device design. To un-stick this need for knowledge of device design new
ASIC architectures were created that reduced the need for specialized information and used easy-to-use
software toolkits.
Case #2: Computer Telephone Integration (CTI) systems
Users typically require customized CTI systems because they must be closely integrated with users firm's
business practices and computerized business systems. The custom CTI programs were historically
developed by specialists at CTI. Today a CTI software product called a "CTI applications generator" is
used to provide users with at least a primitive version of aids for user-based design containing design
tools, prebuilt program modules, and some simulation capacity. The result is that users without the
traditional programming skills, but with good understanding of the functional makeup of the system users
can design their own systems. That is, some of the problem-solving work of custom system design is
shifting from supplier to user.

Von Hippel, Eric (1998). Economics of Product Development by Users: The impact of
“Sticky” Local Information, Management Science, 44, 5, 629-644
Reviewed by SuJung Choi

Summary
In this paper, the author argues that agent-related costs and information transfer costs (“sticky”
local information) will tend drive the locus of problem-solving in the opposite direction. He
examines the actual location of design activities in two fields in which custom products are
produced by “mass-customization” methods: ASICs and CTI. He finds that users rather than
suppliers are the actual designers of the application specific portion of the product types
examined.

Overview
The problem of customizing a product for a customer has evolved in recent years, such that it
may be attractive to assign to the customers some application-specific portions of the work of
custom product and service design. Intuitively, specialists in building a product should own the
process from beginning to end to achieve the highest productivity and quality. Generally, the
higher the level of expertise, the higher the economies of specialization is. Specialists can solve
problems faster and more effectively. But if agency costs and information stickiness are
introduced into the problem, the opposite may be desirable. In this paper, agency costs are
related to the costs of the customers of letting the suppliers partially drive their choices to
accommodate to mass product configurations. Information stickiness is the cost of transferring
information from supplier to customer or vice-versa. Specifically, an environment with the
following characteristics makes product and service design by customers economically
attractive:
(1) The supplier faces heterogeneous demand for a given type of product or service
 (2) Agency costs experienced by users who outsource design activities are high
(3) Information stickiness of application-specific user information necessary to achieve
customization is high
(4) The stickiness of information held by suppliers that is relevant to application-specific
problem-solving is low

Two real examples illustrate the point. These are industries that have heterogeneous demand
(1) and where customers have a high incentive to monitor the design and production process
themselves to ensure the final product meets their specific needs (2). In these cases, the
author found that suppliers transferred information to the customers regarding constraints of the
mass customization manufacturing process and a set of standard and application-specific tools
to assist customers in their design activities. Sometimes customization requires trial-and-error,
and these tools should help to minimize the iterations.

A) The ASIC (Application-specific Integrated Circuit) Industry

ASICs are integrated circuits designed for a specific application. Full customization was done
initially by the supplier. However, recent industry developments caused the information
stickiness of suppliers to decrease significantly (4). First, new manufacturing architectures were
developed that reduced the amount of specialized information necessary to manufacture the
circuits. Second, remaining information was encoded into easy-to-use software toolkits. In
other words, manufacturing knowledge was embodied in software-based design tools that made
it transferable. Furthermore, ASIC customers found it difficult to transfer the information about
their specific needs (3). As one of them testified, “For an ASIC design specialist to design the
ASIC as well as I can, he would have to know everything I know about the system - he would
have to be me!”.

B) CTI (Computer Telephony Integration) Systems

CTI has a similar story. The CTI system consists of a software-based subsystem and a
telephone system that interface to provide services such as phone mail order or airline phone
reservation systems. CTI software enables developers to incorporate basic telephony functions
such as “answer phone” in simple ways. In the last five years (articles from 1998), standard
and application-specific tools have been developed in addition to the basic telephony functions.
These new systems can be run from a PC, incorporate graphical user interfaces, and contain
functions that users are familiar with. The information stickiness of the supplier to customize the
systems was therefore reduced significantly (4). In addition, CTI users say they prefer to design
and make changes to CTI systems themselves because they are unable to describe what they
want to suppliers accurately and completely (3).

In sum the author finds that in CTI as well as in ASICs, the application-specific portion of the
problem-solving work of custom system design is shifting from supplier to user, as supplier-
based expertise is progressively embodied in CTI application generator tool kits intended to for
user-based designers. This shift is because the advantages associated with greater supplier
expertise in CTI system design are outweighed by the costs of transferring application-specific
sticky information from user to supplier, other things being equal.

The author suggests that these examples can be generalized to environments where it makes
sense to carry out problem solving in a site of sticky local information that is less frequently
drawn upon by the problem solvers.

Economics of Product Development by Users: The impact of “Sticky” Local information

 Eric Von Hippel, Management Science
Reviewed by Aravind Chandrasekaran
Summary:

This article investigates the benefits of transferring the application- specific portion of product design to
the users rather than to specialist suppliers. Information stickiness, defined as the incremental
expenditure required for transferring information to customer specific domains, is seen to promote these
customization strategies. The author provides two interesting case studies in support for his arguments.

Patrons of organizational learning literature argue the existence of learning curve effect which is
found to minimize the unit cost of production with increase in the production volume. For example,
Specialists accumulate knowledge with experience that enables them to solve problems at a faster rate
when compared with the novices. This is also referred as “learning by doing” in organizational literature.
So, Is it better to employ specialists for generating a solution? The author provides two distinct
reasons to counter this question. The first reason being the agency-related cost theory which argues that,
specialists provide solutions applicable for a wider range of potential users while the user (novice) would
generate a solution that would exactly match his /her requirement. The second reason is the existence of
difficulties in transferring the information from the specialists to the specific condition of the user or vice
versa. This is referred as Information Stickiness.
Lack of absorptive capacity (defined as the ability to retain knowledge/ information based on
previous experience), poorly encoded information or existence of tacit information and estranged
relationship between the specialists (information source) and the user (recipient) are considered to be the
major contributors of Information stickiness. Ways to reduce stickiness involve converting tacit information
into explicit information using technologies such as expert systems that could retain most of the
information or by providing application specific portion of the problem solving work to be customized by
the user. The incentive to reduce stickiness depends on the number of times that one expects to transfer
information from the specialists to the user. To summarize, Von Hippel suggest that the application
specific customization strategy is attractive if (1) the specialists or the solution provider were to face
heterogeneous demand for a given product or service (2) the user experiences a very high agency cost if
he were to let specialists design the product or service (3) the stickiness of application specific
information is high (it is difficult to transfer user requirements because of tacitness) and (4) the stickiness
of the information held by the solution provider relevant to the specific problem is low.
To study the economics of product development by the users, the author selected two distinct
mass customization industries namely the application specific integrated circuit industry (ASIC) and the
Computer telephony integration (CTI) system industry. Data were collected through semistructured
interviews held with several experts belonging to these industries. Mass customization strategy involves
the ability of achieving differentiated products in a cost effective manner. The question that is explored in
these two case studies is “who designs the customized portion of the products that are built using mass
customization production methods?” It is seen that the specialists or the supplier would have expertise
with respect to problems common to many designs while the user or the system designers possesses the
deepest understanding of a particular application. The case studies discuss the conditions during which it
is economical to have a portion of product developed by the user.

ASIC Case:
Application specific integrated circuits (ASIC) are ICs built for specific application and for a
specific customer. The early days of IC manufacturing involved the specialists designing customized
chips for individual applications. However, technical considerations in the form of full customized chip
designs required specialists or the suppliers to gain considerable knowledge regarding the application
process. This made IC designers to shift the customization phase to the users who are well aware of the
requirements. Technological advancements in the form of Standard Cell designs, Gate arrays designs
and field programmable chip (PLD) facilitate custom designing (unsticking) the chips from a combination
of physical devices pre-designed by the manufacturing experts. They permit faster and economic designs
of the required architecture by the user itself which has resulted in increased market shares for these
technologies.

Computer Telephony Integration (CTI):

The CTI refers to a field of specialized computing applications that utilizes both computer and
telephony functions to perform a task. Examples include Ordering of goods via telephone, retrieving
account information from a bank etc. The CTI system consist of two major subsystems namely the CTI
server software and the customer specific application program. The CTI server software does not require
any customization and is used as an interface that virtualizes the telephone network to perform the
required task. The custom specific CTI programs have traditionally been developed by specialists but are
now seen to be designed by the user due to the cost of transferring application specific sticky information
from the user to the supplier. The arrival of new software product called CTI applications generator has
made custom design possible as it contains pre-built program modules and simulation capabilities that
promotes user based designs.
In both of these cases, the application specific portions of customized product are being designed
by the user itself due to the economies of scale discussed earlier. The cost of transferring application
specific information from the user to the specialists is extremely high in these cases which in turn promote
these customization efforts.
An interesting research question that could follow this study is whether the concept of stickiness can
explain failure to transfer best practices across organizations? This is an important question poised in
operations management domain. Szulanski (2003) in his recent book on “Sticky Knowledge: Barriers to
knowing in the firm” utilizes the concept of stickiness to answer this question. In effect, he also clarifies
the relationship between stickiness and firm performance which is another interesting contribution to OM
literature.
Economics of Product Development by Users: The Impact of “Sticky” Local Information
Eric von Hippel
Reviewed by Vaughn Steele

Using a couple companies that mass customize products as models, problem solving in a
manufacturing and implementation of fabricated parts is presented and discussed. Specifically, two
factors are involved in such problem solving. First, the problem is solved by either the producer or the
consumer of the product, whichever benefits more from such problem solving. If the consumer needs to
specialize something that would only benefit them and not an entire sector of consumers of that product,
the consumer specializes their problem solving to fit their needs. On the other hand, if a wide range of
consumers need similar specialization, the producer will change it’s product to fit the needs of many
customers. Therefore, the problem solving is best done by those that most benefit from the solution (in
the first example the consumer benefits more than the producer for their specialized produce and in the
second example the producer benefits more, by selling more products, than does one individual
consumer).
The second factor at work in problem solving in this environment is what is called ‘sticky’
knowledge. Stickiness was presented as being representative of how easily transferred problem solving
knowledge to the location in which a particular problem needed to be solved; very difficult transfer equals
high sticky knowledge and easy transfer equal low sticky knowledge. von Hippel suggest three reasons
for sticky knowledge: 1) lack of absorptive capacities by the problem solver. This can be described when
someone tries to explain advanced physics to someone who doesn’t have an advanced physics
background, they just don’t have the tools to understand and absorb the information and make use of it.
2) incomplete or poorly encoded information. This second reason could be piggybacked on the first
reason because when the background knowledge needed is not sufficient encoding of important
knowledge is almost impossible. 3) Sticky knowledge is increased when the location of the problem to be
solved and the needed problem solver is great, the stickiness is greatly increased only because the
difficulty of transfer increases due to the distance.
Much of the rest of the paper is on economics of business and how specific businesses combat
sticky knowledge is discussed. Different companies producing different products for different customers
combat the sticky knowledge slightly differently. This sticky knowledge combat follows the above
mentioned rules of how sticky knowledge is produced and these companies use problem specific
techniques to find solutions. Because the application-specific integrated circuit and computer telephony
integration industries are complicated and described with specifics that would interest individuals seeking
to solve similar specific problems were discussed, I’ll try to create an example of sticky knowledge that is
closer to home for most of us.
An example we all should be able to relate to is the use of computers. In order to operate a
computer at a sufficient level of expertise to work through graduate school, one needs to unpack some
knowledge about computers. When we were just starting to work with computers our knowledge was
quite limited and thus somewhat sticky. However, the basic tools of navigating specific software can be
embedded within the software it self (e.g. that little Microsoft word wizard that pops up the first time using
the application). Other knowledge such as typing and navigating the internet can easily be learned with a
little training. Now most of the basic problems and knowledge needed to run a computer has become
unstuck for most of us. However, my father is having a very difficult time with certain basic aspects of
computer navigation and use. This could represent the fact that he just doesn’t have absorptive qualities
to understand things I tell him to do over the phone so his computer will ‘work’. There are still areas in
which computer knowledge is still sticky. If our computer were to come down with a virus and we were
unable to sweep it off our computer, we may need to enlist the knowledge of a computer expert to help
us. Depending on whom we choose (maybe someone in our department or the Geek Squad could help
us), the level of sticky knowledge and difficulty of problem resolution has increased to a level we are now
no longer able to solve. We must enlist the help of others to solve the problem. It might be the case that
we would be able to solve this virus problem on our own if we’d paid more attention to how to sweep our
computer. Unfortunately, we didn’t pay close attention to how to do this and we did not encode the
necessary information for keeping our computer virus free. What if our computer completely froze and
there was nothing we, or our experts who helped us with the virus, could to do fix the problem? We would
probably need to go to the manufacturer to find the solution. This would increase the stickiness of the
situation because more than likely the manufacturer is not located in our city. This distance and difficulty
in communication of possible solutions increases stickiness. Manufacturers of computers are working at
solving this problem by increasing on-line problem solving solutions and help lines to troubleshoot basic
computer problems for consumers. As the severity of our computer problem increases, the potential
stickiness of our problem solving increases as well. Hopefully, this example helps to explain sticky
knowledge, how it is produced and some ways to alleviate the stickiness.

Von Hippel, Eric (1998). Economics of Product Development by Users: The Impact of
“Sticky” Local Information. Management Science, 44(5), pp. 629-644.

Reviewed by Aurelio Alonso

1. Problem Statement and Overview

In this paper, the author consider why it might indeed be attractive under some conditions to
allocate the application-specific portion of the problem solving work of custom product and
service design to users rather than to specialist suppliers. Then he sets the context for our
empirical study of this question and explores the locus of design-related problem-solving in
two industries devoted to the production of “mass customized” products and services.

Arrow in 1962 has termed “learning by doing”, that means in a problem-solving, the ability to
solve a given problem has been shown to improve with practice. Thus, economies of
specialization would tend to bring all problems of any given type to appropriate specialists
for a solution.

One of the factors is generally understood, and involves various kinds of agency related
costs, that might drive directed beneficiaries of a new product or service design to “do it
themselves”. The second factor is less well understood and involves the impact of what we
call “sticky” local information on the locus problem-solving.

The author defines stickiness of a given unit of information in a given instance as the
incremental expenditure required to transfer that unit of information to a specified locus in a
form useable by a given information seeker. When this cost is low the information stickiness
is low; when it is high stickiness is high (Von Hippel 1994).

The link between information stickiness and the locus of problem-solving activities involves 2
elements. First, the stickiness of a given unit of information is not immutable. Second, an
investment in unsticking a unit of information is a one-time investment that reduces the
marginal cost of all succeeding transfers of that information.

The author sum up then, he proposes that allocation of the application-specific portion of the
problem-solving work of custom product and service design to users will be economically
attractive for a supplier when: 1)the supplier faces heterogeneous demand for a given type
of product or service, 2) agency costs experienced by users who outsource design activities
are high, 3) the stickiness of application-specific user information is high, and 4) the
stickiness of information held by suppliers that relevant to application-specific is low.

2. Context for Empirical Inquire: “Mass Customized” Products

Two industries, application-specific integrated circuit (ASIC), and computer telephony
integration (CTI) were chosen as appropriate for our present purpose because both focus on
the production of customized products rather than standard ones, and because both are of
substantial size, with many custom product variations being designed and produced.

Mass customization generally refers to the manufacture of one-of-a-kind, “custom” products

via the use of flexible, computer-controlled mass-production machinery. Relatively recently,
the introduction of computer-instructed process equipment has opened the way to producing
one-of-a-kind products at mass production prices.
Mass customization offers value when the demand for a final or intermediate good or
service is heterogeneous.

3. Application-Specific Integrated Circuits (ASICs)

ASICs are integrated circuits that are design and built for a specific application, and for
specific customer.

Integrated circuits in general, and ASICs in particular, are generally built upon the surface of
a thin, flat wafer of silicon crystal by a process involving deposition of successive very thin
layers of semiconducting and insulating materials in a very precise patterns. Integrated
circuit components can be built using a number of different “ techonologies” such as bipolar
and metal oxide semiconductor (MOS).

Today, ASICs with 10,000 gates is considered small, and one with 500,000 gates is
considered large, and one with 1.3 million useable gates (recently developed by IBM) is
considered to be a leading edge.

Full customization enables designers to achieve high performance because it gives them
the freedom to mutually adjust each circuit element and the demands that will be placed
upon it. This ability to make interdependent choices regarding physical device design and
circuit design is the strength of customization.

The reduction of amount of supplier-based information required by an ASIC chip designer

was achieved via the development of three new ASIC architectures that are: gate arrays,
standard cell ASICs, and field programmable devices (PLDs).

Gate array ASICs are based on standard “semifinished” chips that are then customized into
finished ASICs.

Standard cell ASICs are designed from predesigned and pretested circuit modules
contained in a “library” made available to circuit designers.

Field programmable logic devices are built as standard semifinished chips that are then
customized into a finished ASIC.

Each of the three chip architecture just described involves building custom ASICs from
combinations of physical devices that have been predesigned by manufactories experts.

In addition, gate array, standard cell, and filed programmable ASIC chips can all be
designed much more quickly and cheaply than fully customized chips. This is because, in
contrast with full-custom design, the physical devices incorporated on the chips have all
been predesigned and pretested in these architectures.

The advantages ASIC manufactures might gain by switching from manufacturer-based

design model to a user-based design model for ASIC design were initially not clear to other
ASICs manufactures with whom LSI founders discussed their planned approach.

Data on industry structure in the ASICs field support the view that manufacturers should
have significantly greater incentive to unstuck and transfer manufacturer-related information
needed by every ASIC designer than would users to unstick and transfer information related
to a specific application.

4. Computer Telephony Integration (CTI) Systems

CTI refers to a field of specialized computing applications that draw upon both computing
and telephony functions to accomplish a task. Users typically require customized CTI
systems because these must be closely integrated with user firm’s typically nonstandard
business practices and computerized business systems.

Current systems can assist in or carry out complex transactions which may involve multiple
interactions among computing and telephony systems.

From the beginnings of the filed until about five years ago, a CTI system consisted of two
major subsystems: (1) CTI server software; (2) customer-specific application programs used
to implement a customized CTI system.

System descriptions generated by CTI specialists typically consist of a private language of

interconnected functional modules that make unambiguous sense to a particular firm’s
group of expert programmers but that do not necessarily make sense to users or to other
expert CTI programmers.

Suppliers designed application more suitable for nonspecialist end users. These have been
made easy for nonspecialists to use in three important ways. First, they are designed to be
run on ordinary personal computers. Second, they incorporated object oriented
programming and graphical user interface. Third, the functions of the objects used in these
applications generators have been selected to mirror activity modules that are familiar to
end users.

Application generators of the type just described enable users without traditional
programming skills, but with a good understanding of the functional makeup of the system
they are trying to create, to develop relatively simple custom CTI systems, primarily of the
type known as interactive voice response systems.

In sum we see that CTI as we did in ASICs, that the application-specific portion of the
problem solving work of custom system design is shifting from supplier to user, as supplier-
based expertise is progressively embodied in CTI application generator toolkits intended to
for user-based designers.

5. Discussion
 The author examined in this paper the locus problem-solving work related to the design of
customized products in two fields, ASICs and CTI. In both, the author found an identical
pattern: the application-specific portions of customized products are increasingly being
designed by users, with the aid of standard components and design toolkits provided by
specialist suppliers.

With respect to sticky information transfer costs, note that only the problem-solving work
associated with chip customization requires access to application-specific “sticky”
information in each case and this is the precisely the portion of the design work that we find
has been shifted to users. With respect to agency considerations, note that chances for
opportunism are reduced, also so agency costs are reduced, if the party that invests in a
task is the one that is more certain of the nature and reliability of the information being
acquired from others.

The author can anecdotally report that experts in these two industries whom we have
interviewed do tend to spontaneously explain the shift of product customization to users in
terms of both agency costs and sticky information transfer costs. Examples:

1. Sticky information effects in ASICs are reported to be strongly presented in, for example,
the design of high-end computer workstations.
2. As an example of an agency in the ASICs field, leading-edge users report that silicon
foundries tend to rate solution space they offer somewhat conservatively.
3. Sticky information effects are manifested in CTI when users say they prefer to design
and make changes to their CTI systems themselves because they are unable to
describe what they want to suppliers accurately so a supplier-developed system will
predictably require multiple revisions before it fits the need.
4. Agency effects are typically manifested in CTI in the form of lags by suppliers in
responding to user request for system changes.

Also as the author discussed in the paper, variation is expected in the locus of innovation as
a function of the location of sticky information required by the product developers. Incentives
to develop individual toolkits items will vary with respect to these dimensions. Therefore we
would expected that innovation histories of toolkits will reveal that some toolkits elements
are designed by “lead” users who have an especially high need for those particular elements
coupled with specially rich information regarding them, and others by toolkit suppliers.

Von Hippel, Eric (1998). Economics of Product Development by Users: The Impact of
“Sticky” Local Information. Management Science, 44(5), pp. 629-644.

Reviewed by Young Ok Kwon

Keynote: Von Hippel argues that agency-related costs and information transfer costs (“sticky
local information) will drive he locus of problem-solving toward those who have no expertise,
not specialist for a solution. He explored the locus of deign-related problem-solving in two
fields (Application-Specific Integrated Circuits and Computer Telephony Integration systems),
and found that the application-specific portions of customized products are increasingly being
designed by users.
Generally, the higher the level of expertise is, the higher the economies of specialization is. So,
problem-solvers with expertise in problems of a given type are able to solve that type of
problem much more rapidly than can novices. However, he proposes that agency costs and
information stickiness will lead to the opposite of this generally accepted concept.

Agency cost is related to the costs of the customers of letting the suppliers partially drive their
choice to accommodate to mass product configurations. The stickiness of a given unit of
information in a given instance can be defined as the incremental expenditure required to
transfer a unit of information to a specified locus in a form useable by a given information
seeker. Stickiness can be caused by attributes of the information itself or by attributes of the
information seekers or the information providers, or by attributes of the relationship between
information source and recipient.

Allocation of the application-specific portion of the problem-solving work to non-experts will be

economically attractive for a supplier when: 1) the supplier faces heterogeneous demand for a
given type of product or service, 2) agency cost experienced by users who outsource design
activities are high, 3) the stickiness of application-specific user information is high, and 4) the
stickiness of information held by suppliers that is relevant to such problem solving is low.

Two industries are chosen for empirical studies because both focus on the production of
customized products and both are of substantial size, with many custom product variations
being designed and produces. The author found that suppliers transferred information to the
customers regarding the constraints of the supplier’s mass customization process, and a set of
standard tools and components are supplied to users that can help them in their application
specific design activities.

Application-Specific Integrated Circuits (ASICs)

Full customization was done initially by suppliers, but the development of new ASICs
architectures and the development of software design toolkits have unstuck the supplier-based
information required to design a custom ASIC. Therefore, the application-specific portion of
custom ASIC design activities was shift from manufacture-based designers to user-based
designers. The costs of transferring application-specific sticky information from user to
manufacturer were grater that the advantage associated with greater manufacturer expertise.

Computer Telephony Integration (CTI) Systems

CTI application generator toolkits are developed for user-based designers. The information
stickiness of supplier to customize the systems was therefore reduced significantly. And CTI
users prefer to design and make changes to CTI systems themselves because they are unable to
describe what they want to suppliers accurately and completely. Suppliers should have
significantly greater incentive to unstuck and transfer supplier-related information than specific
application-related information.
In conclusion, product and service customization by users will be found to be a very general
phenomenon. And firms can to an increasing extent get the benefits if expert supplier provide
the standard portions of the design, and users provide the application-specific portions.

Eric von Hippel, Economics of Product Development by Users: the Impact of “Sticky” Local
Information.
Reviewed by Esam Sharafuddin
In his article entitled “Economics of Product Development by Users: the Impact of ‘Sticky’ Local
Information, Hippel argues that because of agency-related costs and the cost of information transfer, the
locus of problem-solving will shift from specialists to the users who directly benefit from a solution. He
illustrates his argument by providing two examples: application-specific integrated circuits (ASICs) and
computer telephony integration (CTI).
In problem-solving, the ability to solve the same problem improves with practice in which the solver
discovers and distinguishes solutions that work from other solutions with increased ability to decompose
problems into subproblems; consequently, the specialist solves the same type of problem rapidly which is
a form of reward from the “economics of specialization”. However, there are factors which might prove
otherwise – problem solving by users who benefit from such solution. The first factor is based on the “do
it yourself” by users to provide a solution that actually works well for their needs versus generic “good
enough” solutions by specialists to solve a wider range of potential users. The second factor lies in the
“sticky” local information in which the transfer of information from its origin to specific problem-solving may
be high. This stickiness is defined as the cost of transferring a unit of information to a specified locus
which might be high due to lack of absorptive capacity by recipient, poorly encoded information or distant
relationship between the source and recipient of the information. The link between information stickiness
and the locus of problem-solving involves two elements. First, the stickiness of information is not
immutable and rather can be reduced by investments made to that end. Second, the unsticking of one
unit of information is a one-time investment that reduces the marginal cost of all succeeding transfers of
information. A lower stickiness cost will shift the locus to the user which will be most applicable for
problems in which suppliers face heterogeneous demand for a given type of product/service, high agency
costs, high stickiness of application-specific use information and low stickiness of information held by
suppliers relevant to application-specific problem solving.
Being of substantial size, ASICs and CTI were chosen since they are appropriate examples of mass
customization (vs. standard ones) in which a manufacturer of one-of-a-kind custom produce products
using flexible computer-controlled mass-production machinery. With the use of computers, equipments
follow software instructions which can be adjusted to new specifications and each item can be unique as
per the specifications of the customer. This is especially the case when the demand for a good or service
is heterogeneous in which the specialists are the locus of expertise with respect to problems common to
many designs and the user possess the understanding of a particular application. Therefore, the
information to be transferred from suppliers are: constraints which determine the limits as well as the
preexisting capability built into a system for which mass customized production are achievable and tools
which consists of trail-and-error cycle consisting of four steps: designing the experiment, building of
apparatus to conduct experiments, running the experiment, and analyzing results. To develop their
custom design, developers should have access to standard component parts and design tools for
carrying out the trial-and-error cycle.
ASICs are integrated circuits designed for specific application and for specific customer and they contain
semiconducting and electronic components (transistors and capacitors) built on a layered thin flat wafer of
silicon crystal. ASICs used to be built by connecting the electric components on a circuit board, but
currently, they are built more quickly connecting hundreds of thousands of logic gates. ASICs are fully
customized allowing designers to adjust circuit elements and thus achieving higher performance, yet,
causing a barrier to user sites (with no knowledge of how circuits work) who might want to build and
customize ASICs. However, there have been two trends to unstick the supplier-based information
required to design customized ASICs: new ASIC structures with reduced specialized information and
encoding of the remaining information in easy-to-use software toolkits. There are three architectures to
allow circuit engineer to design an ASIC with customized functionality: gate arrays which are semi-
finished and customization is realized by designing and fabricating one or two final connections; standard
cells predesigned and pretested in a library of converters, microprocessors and other electronic
components and customization is achieved by specifying how they should be connected and field
programmable logic devices which are semi-finished and customization is done by converting the chip to
ASIC by programming it. The software-based process is depicted schematically which begins by creating
a functional description, converting it into a description of interconnections, running the model (by users)
using a simulation tool, transferring the corrected logical description to other software tools, resending
the information for re-simulations and finally the revised design is sent to the manufacturer. The
unsticking of ASICs have greater incentive to suppliers than to users since it provides a level of freedom
for users to customize ASICs to their needs and manufacturers have significant role in building them
identical to the users’ designs for which the supplier expertise is outweighed by the cost of transferring
information to users.
CTIs combine telephony and computer technologies together to accomplish a task and usually consists of
a CTI server software and customer-specific application programs. The server implements application
programming interface (API) that virtualizes the underlying network eliminating the need by users to
understand technical details (of switches and other equipments...etc) and enables applications
developers to incorporate basic telephony functions. The CTI application generator works in conjunction
with CTI server software which contains design tools, prebuilt program modules and simulation capability
to give users a realistic test for developing CTIs. Suppliers design application generators more suitable for
end users made easy since they can be run on personal computers with object-oriented programming
and graphical user interface which mirror activity modules that are familiar to end users. Therefore,
application generators allow users without programming knowledge to build their own CTIs as per their
functional requirements. Similar to ASICs, suppliers have significantly greater incentive to unstuck the
transfer supplier-related information needed by CTI designers than would users to unstuck and transfer
information related to a specific application.
As explained in ASICs and CTIs, the application specific portion of customized products is designed by
users while suppliers provide standard components in which economies of specializations are outweighed
by differentials in sticky information transfer costs. In addition, agency costs are reduced if the
application-specific work is conducted by users. However, based on author’s interview with specialists of
these industries, the explanation is provided in terms of both agency costs and sticky information transfer
costs. Examples of AsIC sticky information effects for computer workstation is applied to leading-edge
graphical application in which system designers are doing ASICs themselves to provide optimal design by
creatively applying the solution space with the demand of the leading-edge application. Another example
is the agency effect in ASICs in to the incentive driving the silicon foundries (proclaimed within limits that
are higher than the actual limits) is that they want to be able to produce designs with lower costs for which
the user would contact the manufacturer (if there is a need beyond the proclaimed limit) to negotiate
different tradeoffs. An example of sticky information in CTI is the users admitting their inability to describe
their needs to suppliers accurately and completely. The agency effect example in CTIs are depicted in
the form of lags by suppliers in responding to user requests for system changes which may be due to
understaffing in suppliers’ firms or due to economized resources by waiting for service requests to
accumulate form a given user in order to be able to do them all at once.
The shift to user-custom designed phenomenon is applicable to other products as well in which users
combine standard products and services to create a customized system. Yet, the locus of design may
shift back and forth depending on some factors in some products, although others may appear to have a
trend towards user-based design. An example of variable factors is heterogeneity of demand for a product
which may decrease if standards are tightened within a field and increase if they are loosened again.
The primary irreversible factor is the technological advances in computer hardware and software. It is
noteworthy that suppliers who intend to switch to a user-based design may need to modify their strategies
for appropriation of innovation-related benefits. Studies show that sources of innovation vary as a
function of expected innovation-related benefits and the locus of innovation can be thought of as a
function of location of sticky information. Innovation may imply more than just the development of toolkits
as some toolkits are developed by lead users and suppliers should search both user and supplier
locations for the innovations that enable them to build effective toolkits to users. Making toolsets
available to customer designers will standardize these tools to be widely-used and will eventually break
the tie between specific suppliers’ production process and users who can utilize these toolset for that
supplier’s specific production process. For better effective standard tools, suppliers should have a better
understanding of their users’ needs and should learn how much of a customized product should be
provided for users as standard components.

Economics of Product Development by Users: The impact of “Sticky” Local

Information - Eric Von Hippel

Review by Shweta Singh

Motivation behind the paper is to understand the benefits of transferring “application specific portions of
product design to user rather than specialists. Hippel argues that we tend to assume that specialists are
better than novices(direct users) in solving problems. So does is it better employ experts to solve
problems or should it be done directly by
users?

Experts are assumed to be better in their domain as they accumulate knowledge over time through
practice; what as John Seely Brown would argue as “epistemology of practice” or as Erickson would
argue as “deliberate practice”. With the help of “learning by doing” (in Clark’s term -situated cognition)
they are able to solve problems faster than novices. Hippel gives two reasons to refute the belief that it
does not necessarily mean that experts are better in providing user specific solutions, than direct users of
products. These reasons are :-
a) Agency related cost - This means that specialists provide solutions which are “good enough” and
applicable to a wide range of applicable users. On the other hand direct beneficiaries would generate
solutions that are applicable exactly right for his/her own situation and circumstances.
b) Sticky Local Information - This means, cost involved in transferring information from specialist to user
and vice versa. To understand it better, to solve a problem all needed information and problem solving
capabilities have to be brought to a single point and then to move it around, when the cost of this transfer
is costly is referred to as “sticky” information. Three major contributors of information stickiness are: 1)
Lack of ability to retain information (also known as absorptive capacities of recipients). For example if
someone is trying to give information to the other person, that person may not be fully able to absorb this
information due to lack of complementary information or background knowledge. 2) Incomplete of poorly
encoded information. This reason links to the first one, if background knowledge is not present, it is
almost impossible to get perfect information encoding. 3) Distant relationship between information source
and recipients. This means that when the distance between the users who have to exchange information
in more, information becomes stickier or it is more difficult to transfer information due to difficulties
involved in transfer aroused due to user distance.
Thus Hippel suggest that allocation of “application specific portion of work” to users will be economically
attractive to supplier when :-

“1) The supplier faces heterogeneous demand for a given type of product or service
(2) Agency costs experienced by users who outsource design activities are high
(3) Information stickiness of application-specific user information necessary to achieve customization is
high
(4) The stickiness of information held by suppliers that is relevant to application-specific problem-solving
is low”

To study the economics of product development, Hippel gives example from two industries; application
specific integrated circuit industry (ASIC) and the Computer telephony integration (CTI) system industry.
These two industries were chosen as they both focus on production of customized products and also
because of their substantial size(so as to give opportunities for variations in experiments)..Mass
customization, which is often referred as, “manufacture of one- of- a- kind custom products via use of
flexible computer controlled ,mass production machinery.”, is involved in these industries. Both these
companies producing different product fact the problem of “sticky information. However the problem of
combating with “sticky information” is dealt differently with both these industries and is shown in the
examples given below.

ASIC (Application Specific Integrated Circuits) Case:

ASIC are integrated circuits which are designed for specific application and for specific customer. In the
earlier days of integrated circuit industry, chips were designed by specialists for specific application and
customer. However recent developments have caused the information stickiness of suppliers to
decrease. It is achieved by reducing the amount of specialized knowledge needed to manufacture the
chips, making information encoding easier, and knowledge more transferable (by encoding information in
easy to use software packages)

CTI (Computer Telephony Integration) Systems Case

Computer Telephony Integration refers to specialized field that depends and relates both computer and
telephony to do a certain task. Simple example of CTI could be using phone to order goods from mail
order. Earlier, the custom specific CTI programs have been developed by specialists but gradually the
shift has moved towards user designing these programs . Reason for this shift is the cost of transferring
application “sticky” specific information from user to supplier. Thus, CTI has dealt with the problem of
sticky information by introducing new software product called CTI applications generator, which promotes
user based design and to help user to design so that it may become easier for them to get what they want
from suppliers.

In conclusion, it can be seen that in both these industries, focus is shifting from specialists to user in
“application specific portion of product design or problem solving”. Such a pattern is emerging due to the
high cost of transferring “sticky” information from users to experts (suppliers). This also means that the
agency cost would be reduced if application specific portion of product design is done by users rather
than specialists.