Companies open path to customer innovation

November 18, 2005, The Age Organisations are going to those they serve in the quest for ideas for new products, writes Joshua Gans. IT WAS only a few years ago that a colleague told me a sorry tale. He and his eight-year-old son were enthusiastic Lego builders. His son took considerable initiative and came up with some innovative designs for a new Lego product. He even carefully wrote out the instructions. Eagerly they were sent to Lego with the hopes, not of money, but of the satisfaction of making a contribution to the company they had loved for so long. And the reply: a legal letter asserting Lego's intellectual property over all such things and the aggressive response they could expect if they ever tried to profit from these designs. It was against this backdrop that I was thrilled with the news of a seeming seachange in Lego's approach. Lego has announced the first winners of its Lego Factory contest. Eight Lego customers had designs selected for actual production as Lego sets. Not only this, but each received (or shared if their designs were bundled) 5 per cent of the revenue from sales of the sets. Now this is more like it. Lego has turned from an inward-looking company to one that actively looks externally for new ideas. You can even download a 3D Designer kit (for free) to assist you in developing ideas for Lego. In so doing, they bring the wealth of creativity from their own customers to their organisation. And, moreover, these are the very customers who will end up buying products: who better to engage in product design? The phenomenon — whereby manufacturers look to customers or users for product development ideas — has been termed "user-based innovation" by Eric von Hippel. And it is not just toys where this is being employed as an active strategy. It all began with scientific instruments. Some innovative manufacturers noticed that scientists built their own tools, used them and then told no one else! The manufacturers searched for those ideas and commercialised them. The scientists already had their requisite reward from solving their own problem; the rest was bonus.

User-based innovation is a way of finding Rembrandts in someone else's attic. In their 1999 book, Kevin Rivette and David Klein had suggested that companies had good intellectual property in their own attics. Von Hippel notes that they exist elsewhere too. But that is just the beginning. How many would-be innovators might build more widely applicable user-based innovations if given the encouragement? In his book Democratizing Innovation , von Hippel shows companies how this can be done. No stranger to innovation himself (he played a key role in the invention of the fax and the founding of Lotus), von Hippel considers the ways in which companies might access the ideas of users. Methods differ from industry to industry: from holding freewheeling conferences, to visiting customer sites to examine what they are doing, to offering toolkits.

3M conducted a systematic search for user-based solutions. Looking back it found that annual sales generated by one of these were eight times the sales of products developed traditionally. In a world where eight out of 10 new products fail, this is a significant change in the risk-return balance. Google, following Apple's recent footsteps, has made it easier for tailored user-solutions. In its sidebar, Google allows developers to create little programs to provide specific internet or desktop searches. This follows on from Apple's Dashboard, which allows others to create similar programs. In contrast to Lego, the innovations of others fit with these products rather than become the intellectual property of the manufacturer. Lego customers are invited to continue submitting designs and posting them. But once posted, they become public knowledge and Lego reserves the right to use them in its products. Nonetheless, these strategies indicate an interesting new dimension to innovation. Your customers don't have to be technical experts to provide you with a flow of profitable product ideas. They just need engagement, a few tools and an opportunity for glory.
Joshua Gans is professor of management (information economics) at Melbourne Business School and associate director of the Intellectual Property Research Institute of Australia.

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