tech
june 2008
The next step
in open innovation
The creation of knowledge, products, and services by online communities of companies and consumers is still in its earliest stages. Who knows where it will lead?
Jacques Bughin, Michael Chui, and Brad Johnson
Article at a glance
The Internet and new social-networking technologies are allowing companies and their customers to interact with unprecedented levels of richness. Some leading
organizations are using this opportunity to draw customers into the heart of the product-development process.
Cocreating products and services with customers, however, is uncertain territory, fraught with challenges and questions—for instance, who owns the resulting intellectual property? Nonetheless, smart companies are now beginning to encourage their customers to help them develop the products and services consumers really want.
For most companies, innovation is a proprietary activity conducted largely inside
the organization in a series of closely managed steps. Over the last decade, however, afew consumer product, fashion, and technology businesses have been opening upthe product-development process to new ideas hatched outside their walls—fromsuppliers, independent inventors, and university labs.
Executives in a number of companies are now considering the next step in this trend
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For one thing, they are looking at ways to delegate toward more open innovation.
more of the management of innovation to networks of suppliers and independent specialists that interact with each other to cocreate products and services. They also hope to get their customers into the act. If a company could use technology to link these outsiders into its development projects, could it come up with better ideas for new products and develop those ideas more quickly and cheaply than it can today? Suppose that a wireless carrier, say, were to orchestrate the design of a new generation of mobile devices through an open network of interested customers, software engineers, and component suppliers, all working interactively with one another.
This is the model of innovation as a convergence of like-minded parties. Increasingnumbers of organizations are now taking that approach: distributed cocreation, touse its technical name. LEGO, for instance, famously invited customers to suggestnew models interactively and then financially rewarded the people whose ideas
proved marketable. The shirt retailer Threadless sells merchandise online—and nowin a physical store, in Chicago—that is designed interactively with the company’scustomer base. In the software sector, open-source platforms developed throughdistributed cocreation, such as the “LAMP” stack (for Linux, Apache, MySQL, andPHP/Perl/Python), have become standard components of the IT infrastructure atmany corporations. What facilitates this new approach to innovation is the rise ofthe Web as a participatory platform. What will drive its adoption by an increasingnumber of companies is the growing competitive need to uncover many more goodideas for products and to make better and faster use of those ideas.
Distributed cocreation is too new for us to draw definitive conclusions about
whether and how companies should implement it. But our research into these onlinecommunities and our work with a number of open-innovation pioneers show that itisn’t too soon for senior executives to start seriously examining the possibilities fordistributed cocreation or to identify the challenges, such as the ownership ofintellectual property and increased operational risk, they face in adopting it.
The new face of innovation
In nearly every sector, many of the ideas and technologies that generate productsemerge from a number of participants in the value chain. Boeing designs its aircraft,
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but suppliers make (and own the intellectual property for) many of the components.Likewise, HP’s computers and Apple’s iPod include hundreds of parts invented andmanufactured by companies in more than two dozen countries. In many sectors,suppliers understand the technology and manufacturability of their pieces of theend product better than the OEMs do. Eli Lilly licenses and sells products that othercompanies develop; high-technology and media giants continually scan the horizonfor innovations developed by start-ups and try to acquire whatever seemspromising.
The benefits of specialization and collaboration seem obvious today. Clearly, anautomaker’s suppliers can make better headlights at lower cost than the OEM can,because specialization promotes focus and innovation. Many companies participatein joint ventures for individual products or marketing packages and collaboratewith university labs or specialists. Businesses are increasingly open to insights andideas gleaned from any source—especially their customers, through call centers,retail data, and focus groups. Collaboration extends in many directions: whencompanies pursue a new product, many of them consult with contract specialistsand suppliers and test prototypes with their customers.
But collaboration looks very different on Wikipedia, the online encyclopedia that represents a true phenomenon on the Internet. Wikipedia is created entirely by its users, not by a corporate-development staff in California. It is a living and
continually expanding global reference work, which has expanded in less than seven
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years to offer more than six million articles in over 250 languages.
The example of Wikipedia suggests that companies can take even greater advantageof specialization by ceding more control over decisions about the content of
products to networks of participants (suppliers, customers, or both) who interactwith one another. Does this seem far-fetched? IBM apparently doesn’t think so: it hasadopted the open operating system Linux for some of its computer products andsystems, drawing on a core code base that is continually improved and enhanced bya massive global community of software developers, only a small fraction of whomwork for IBM. In software, open-source packages are gaining such favor that theyare cutting into profit margins and drawing market share from proprietary softwarebrands.
Many other examples of cocreation are now under way. One of them, participatorymarketing, which encourages customers to help create marketing campaigns, issometimes more than just a new tactic to attract attention. Approached in the rightway, it is also an opportunity to start cocreating products with them. Last year, forinstance, Peugeot invited people to submit car designs online and attracted fourmillion page views on its site. The company built a demonstration model of thewinning design to exhibit at automotive marketing events and partnered with
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software developers to get it included in a video game. Even business-to-businesscompanies are starting to cocreate with customers: corporate users of SugarCRM’scustomer-relationship-management software customize it to meet the specific needsof their industries.
Companies have three ways to win by adopting distributed cocreation. First, theycan capture value from the cocreated product or service itself, as LEGO and
Threadless have, by merchandising good ideas gleaned from the network. (In SouthKorea, the cocreated cosmetic brand Missha has seized a 40 percent market share inits segment.) Second, companies can capture value by providing a complementaryproduct or service. Red Hat, for instance, sells a host of technology services to usersof Linux. Third, they can benefit indirectly from the cocreation process—forexample, through an enhanced brand or strategic position.
Hurdles ahead
While distributed cocreation does seem promising, it isn’t entirely clear whatcapabilities companies will need (or how they will organize those capabilities) to
make the most of it. Many of the answers will become clear as companies gain greaterexperience with various open-innovation approaches, including distributedcocreation. But a few challenges are already apparent.
Attracting and motivating cocreators
Since companies must provide the right incentives to the right participants, theyshould understand what talented contributors find valuable about interacting witha community. Financial incentives may be necessary in some instances, but otherparticipants can be inspired to cocreate by mechanisms like community recognition.Companies will also have to spot hurdles to participation—such as the ease or
difficulty of contributing and the time needed to do so—and take steps to minimizeany problems. In addition, they may need to implement well-structured paths tocoax participants to move from lower to higher levels of participation. Wikipedia,for instance, now has 500 participating administrators who have earned specialprivileges to prevent edits on certain articles, usually to stop vandals who havetargeted them.
Structuring problems for participation
To make it possible for many contributors to participate effectively in a cocreation community, problems should be broken down to let contributors work in parallel on different pieces. Otherwise, it will be impossible for a critical mass of participants to cocreate effectively. A global team of more than 2,000 scientists, for example, participated in the design of the ATLAS particle detector, a complex scientific instrument that will be used to detect and measure subatomic particles in
high-energy physics. The effort was disaggregated into many different components
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and distributed across 165 working groups, which used Internet-based tools to help coordinate the work.3
Governance mechanisms to facilitate cocreation
Communities are productive when they have clear rules, clear leadership, and
transparent processes for setting goals and resolving conflicts among members. SunMicrosystems, for instance, developed its Solaris operating system, cocreated with aglobal community of software developers, in the early 1990s. The companyestablished a board, including two Sun employees and a third member from thelarger software community, charged with loosely overseeing the project’s progress.Even then, by the way, the community wanted Sun to relinquish more control.The leadership must also maintain a cohesive vision, since there is always a risk thatcommunity members will “fork” intellectual property and use it to develop theirown cocreated product or service. Mozilla, the online application suite distributed
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As theby the Mozilla Foundation, was cocreated by a software community.
programs were being developed, two contributing engineers, dissatisfied with theproject’s direction, used the Mozilla code to create the Firefox Web browser.Community leaders eventually made it the primary supported browser.
Maintaining quality
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Many cocreating online communities assume that “crowds” know more than
individuals do and can therefore create better products; as the open-source-software
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It is expert Eric S. Raymond has said, “Given enough eyeballs, all bugs are shallow.”
far too early to know with certainty if this idea holds true across all kinds of
products, but a growing consensus maintains that in software development, at least, distributed cocreation is a ticket to quality. A study published in the European
Journal of Information Systems in 2000, for instance, noted that “open-sourcesoftware often attains quality that outperforms commercial proprietary”approaches.7 What’s more, a December 2005 study published in the scientificjournal Nature concluded that Wikipedia’s entries on scientific subjects weregenerally as accurate as those in the Encyclopædia Britannica . 8 Still, some have questioned these conclusions and the accuracy or insights of the entries on which they were based.
A number of cocreated products have crossed a quality threshold to become widely adopted. A survey by Netcraft, an Internet research firm, showed that the cocreated open-source Web-server program Apache runs more than half of all Web sites and that eight of the ten most reliable Internet hosting companies run Linux. While the general thesis that cocreated products are higher in quality is difficult to prove, companies are increasingly willing to rely on them for mission-critical business processes.
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Lessons from communities
Although it is still too early to develop useful frameworks for success with
cocreation, they will no doubt emerge over the next few years. Meanwhile, some lessons about how to proceed are coming out of both the consumer and the professional online communities.
Participative media supply some of these lessons. Our research suggests that 25percent of Western Europe’s Internet users now post comments and reviews aboutconsumer products of all kinds (exhibit). User-generated media sites are growing innumbers of visitors and participants by 100 percent a year, traditional sites byperhaps 20 to 30 percent.
EXHIBITWired feedback
These numbers suggest that people are more and more willing to participate withcompanies online and that companies can tap into that willingness today. To give anexample, in the online environment Second Life, where participants assume
three-dimensional likenesses called avatars and interact digitally with each other,approximately one participant in ten is cocreating with companies—for example,testing prototypes or helping to design new products and services. We expect thatpercentage to rise. At present, Second Life has few brands (virtual destinations,within the site, created by companies well known in the offline world), and
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participants generally don’t know how to interact with them. In fact, during ourrecent research on the behavior of Second Life participants, we found that only fourin ten members know about the possibility of cocreating with their favorite brands.When they do become aware of this, 60 percent of them say they would be willing toexperiment with cocreation.
Research that we and others have conducted on consumers participating in onlinecommunities demonstrates that most cocreators recognize that the brand—notthey—will own the resulting intellectual property. Why then do they get involved?Rewards and fame were certainly motivators, but participants are largely interestedin making a contribution and seeing it become a reality. An important factor we’vefound in our Second Life study is the extent to which participants are willing to trustbrands. In choosing between competing ones, brand affinity is the most importantfactor for users willing to cocreate, and 40 percent of would-be cocreators will refuse
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to cocreate with companies they don’t like or trust.
Our research also suggests that companies will need a combination of incentives to encourage consumer participation. In a recent analysis of user-generated video sites,10 we found that participants had various nonfinancial motives, such as fame,fun, and altruism. This insight has been confirmed by the Second Life research,which found that only one-third of the users who cocreate with brands do so for afinancial reward. Furthermore, people who seek to increase their online fame oftenexpend considerable effort enlisting others to join their networks in hopes ofincreasing the size of the audience, thereby helping to create a larger pool of
participants for cocreation itself. One key seems to be attracting participants with asmany kinds of motives as possible, so that they reinforce each other. Of course,incentives might have to evolve if cocreation reached the limits of individual“volunteerism.” Communities could, for instance, start paying participants fortheir contributions or actively promote their reputations outside thecommunity—say, in marketing campaigns.
In professional online communities, trust and affinity are important. At the MyelinRepair Foundation (MRF), for example, scientists from five universities have
accepted a complex IP-sharing agreement that will let MRF retain the rights to licensediscoveries to pharmaceutical companies. This novel medical-research model is
based on cocreation among a closed group of researchers who aim to develop a drugthat will treat multiple sclerosis (MS) by promoting the repair of myelin, the coatingsurrounding the nerve fibers that MS affects. MRF hopes to complete its workwithin five years—75 percent faster than the time required by current researchmodels—and half of the royalties will be put back into the foundation to financefuture projects. Since the researchers started work, in 2004, they have identified tentargets and three therapeutic candidates, developed 11 tools to study Myelin, andpublished nearly 20 scientific articles.
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Cocreation through evolution Companies do not have to reconceive their business systems to start experimentingwith distributed cocreation. In many cases, the first step is to identify where it mayalready have spouted within the company. At LEGO, for example, the executive teamrecognized the possibilities in part because of the success of a product launched in1998: Mindstorms, programmable bricks originally developed as an educationaltool through a partnership with the MIT Media Lab. A remarkable community ofMindstorms enthusiasts—adults as well as children—embraced the product andbegan to share designs online. This success prompted LEGO’s executives to considerhow the company could use its online LEGO Gallery to harness the creative efforts ofcustomers to develop ideas or products in its main toy-brick business.Companies have other ways as well to experiment with cocreation by using existingsystems or resources. When the telecom operator BT decided to allow third-partysoftware developers to create applications for BT’s network (a variant approach tococreation), it could take advantage of the fact that its internal software developerswere already familiar with the practices of open-source software and were designingstandardized Web interfaces for many of its existing business applications.Even the most advanced businesses are just taking the first few steps on a long path toward distributed cocreation. Companies should experiment with this new approach to learn both how to use it successfully and more about its long-term significance. Pioneers may have ideas about opportunities to capture value from distributed cocreation, but fresh ones will appear. To benefit from them, companies should be flexible about all aspects of these experiments. About the AuthorsJacques Bughin is a director in McKinsey’s Brussels office, Michael Chui is a consultant in the San Francisco office, and Brad Johnson is a principal in the Silicon Valley office. The authors wish to thank their McKinsey colleagues Markus Löffler, James Manyika, Nathan Marston, Andy Miller,and Roger Roberts for their contributions to this article.Notes1A number of books and articles discuss how companies are adopting open innovation. Four particularly useful sources are C. K. Prahalad and M. S. Krishnan, The New Age of Innovation: Driving Co-created Value through Global Networks, McGraw-Hill, 2008; Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology, Boston: Harvard Business School Press, 2003; Henry Chesbrough, Open Business Models: How to Thrive in the New Innovation Landscape, Boston: Harvard Business School Press, 2006; and Eric von Hippel, Democratizing Innovation, Cambridge, MA: MIT Press, 2005.2The English-language version recently passed two million articles, compared with only 120,000 for the Encyclopædia Britannica. We researched the design project in collaboration with the Oxford Internet Institute. For more information, seePhilipp Tuertscher, “The ATLAS Collaboration: A Distributed Problem-Solving Network in Big Science,”http://www.oii.ox.ac.uk, 2007.37
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See Lenny T. Mendonca and Robert Sutton, “Succeeding at open-source innovation: An interview with Mozilla’sMitchell Baker,” mckinseyquarterly.com, January 2008.
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See Renée Dye, “The promise of prediction markets: A roundtable,” mckinseyquarterly.com, April 2008.
Eric S. Raymond, The Cathedral & the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary,Sebastopol, CA: O’Reilly, 1999.
Jan Ljungberg, “Open source movements as a model for organising,” European Journal of Information Systems,2000, Volume 9, Number 4, pp. 208–16.
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Jim Giles, “Internet encyclopaedias go head to head,” Nature, 2005, Volume 438, Number 7070, pp. 900–1.
9Paul Alpar and Steffen Blaschke, Web 2.0 - Eine empirische Bestandsaufnahme, Wiesbaden, Germany:
Vieweg+Teubner, 2008.
Jacques R. Bughin, “How companies can make the most of user-generated content,” mckinseyquarterly.com,August 2007.
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“How companies make the most of user-generated content ”
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