MITPressLog

Talking Innovation

The OpenBusiness blog posted an interview with Eric von Hippel, author of Democratizing Innovation.  They discussed how corporations are making use of  new user-centered innovation to improve the design and manufacturing of new products and services.  In the interview, von Hippel describes what the democratization of innovation means for traditional business models and how larger corporations can adopt the practices of smaller ones to get ahead:

OB: In your book you highlight that the modus operandi of businesses is changing and give as an example Open Source development. And even though it seems a great example of democratized innovation the question remains how business models work, if the core product – software – is distributed for free. What will drive innovation in this space?

Eric von Hippel: I think in the first place motivations are non-commercial. Users who innovate do so basically because they have a need that they cannot fill with available commercial products. Their major reward is the in-house use of what they have developed and recognition by their peers. Innovators in the open-source field gain reputation by publicly reporting their innovations. Its true the core product is free, but its wrong to assume that this means there is no economic activity. Just look at the case of the Apache server, which is used by major corporations. They pay developers to participate in the process, because they benefit from the product. To put it differently: economic activity moves from the Microsoft layer – controlling every step in the development and distribution process in a closed way – to the Open Source or Linux layer. It is still economic activity, just the business models are different.

The entire interview can be read here.

Lessons from 2005

2005 was quite a year.  Yossi Sheffi, Director of MIT's Center for Transportation and Logistics and author of The Resilient Enterprise:  Overcoming Vulnerability for Competitive Advantage, has some helpful tips for companies and business leaders who want to avoid many of the painful disruptions that plagued businesses and communities in 2005.  Looking forward to 2006, Sheffi warns that we must be resilient, flexible, and we must not only prepare for the unexpected, we must expect it. 

The year that started with the Christmas 2004 tsunami, continued with the London bombing, Hurricanes Katrina and Rita and the devastating earthquake on the Pakistan-India border. The year ended with Russia abruptly halting the natural gas supply to Europe because its price dispute with the Ukraine. At the onset of 2006,the critical message to businesses worldwide is: your survival may depend on how prepared you are for the unexpected. In the next few years businesses should learn not only to expect the unexpected, but to get ready for it.

At a minimum, companies should review their safety stock policies for parts and finished products, their supplier relationships and the extent to which they have access to redundant capacity. They should also make sure that their information and detection systems are such that they can discover an unfolding problem quickly and act on it - be it a failing supplier, deteriorating labor relations, a worsening political climate, or meteorological warnings. Given the expected potential disruptions that are currently in the news, including a possible avian flu pandemic and the continuing threat of more terrorist attacks, and those that are unexpected and may take the business community and the government by surprise, enterprises should take bolder steps to increase their resiliency. Leading companies are reviewing their entire supply chains to determine whether the ability to respond flexibility in a crisis situation is built into the extended enterprise.

Companies can take a number of steps this direction. For example, they can redesign products and processes for postponement - stocking parts and semi-finished products, so they can be finished into any one of several variants - depending on where and when demand materializes. Companies can also reduce the number of parts they use in their various products, as well as standardize parts and processes so they can be interchangeable.

Stock-ing Stuffers

It is the time of year when holiday shoppers rush around to try to get last minute gifts for friends and family.  Nothing is more frustrating than navigating the partking lots and crowds and lines in the malls and grocery stores only to find the item you want - the video game or the roast you planned to cook for dinner - is out of stock.  Remember all the disappointed children when the stores ran out of Cabbage Patch Dolls in the 1980s?  According to Alison Maitlands recent article (subscription) in the Financial Times, this year's hot item is Microsoft's Xbox 360 game - which sold out in November in the US and just after it's December release in the UK.  The game is so popular that it is reportedly getting nearly three times the retail price on ebay.

How can stores and manufactures minimize these shortages?  And are the companies that produce popular products not predicting demand properly or are they creating a shortage themselves in order to increase popularity?  Maitland spoke with Yossi Sheffi, a supply chain expert and author of The Resilient Enterprise: Overcoming Vulnerablity for Competitive Advantage about the shortcomings of supply chain systems:

A company that has concurrent production processes - performing many development tasks in parallel - can react faster to changing demand. "This also means that it can recover faster from a disruption because its business processes are concurrent and the various functions are accustomed to co-operating with each other," he says. A responsive supply chain depends on good communication and co-operation between all its participants. "It is only as strong as the weakest link. That is why it is so difficult."

Companies that do it well have an in-built culture of flexibility, with a free flow of information, says Prof Sheffi. "Toyota displays continuous production reports in its plants. Dell updates managers hourly on production. UPS keeps the vast reaches of its network in constant cellphone communication."

Communication between buyers and sellers can help companies avoid the "bullwhip effect", whereby minor variations in consumer demand create bigger and bigger fluctuations in orders and inventory levels further up the supply chain. This can be caused, say, when a company does not inform a supplier that an order increase is due to temporary disruption at another supplier. The first supplier assumes customer demandis growing and overreactsby increasing capacity or ordering more from its own suppliers in anticipation.

Job Hopping, Modularity, and Innovation in the Silicon Valley

Over the years, the Silicon Valley has been through many booms, busts, and bubbles, but, as Virginia Postrel points our in her "Economic Scene" column in yesterday's New York Times, the area has been able to maintain an impressive and innovative business environment.  With all that's gone on in the economy, how have they managing to do this? 

It was widely thought that the Silicon Valley's success story can be credited to talented employees switching jobs often—this job hopping fosters innovation.  Postrel spoke with James B. Rebitzer, and economist at Case Western Reserve University about the phenomenon.  Rebitzer found that:

When employees jump from company to company, they take their knowledge with them. "The innovation from one firm will tend to bleed over into other firms,"  Professor Rebitzer explained. For a given company, "it's hard to capture the returns on your innovation," he went on.  "From an economics perspective, that should hamper innovation."

He found a possible answer to the puzzle in the work of two management scholars, Carliss Y. Baldwin and Kim B. Clark. In their  book Design Rules: The Power of Modularity, they argued that when there is a lot of technological uncertainty, the fastest way to find the best solution is to permit lots of independent experiments. That requires modular designs rather than tightly integrated systems.

Thomas Kochan Weighs in on GM Layoffs

Thomas Kochan, author of the newly published MIT Press book Restoring the American Dream, was quoted in a Christian Science Monitor article about the recently announced layoffs at GM. 30,000 workers will be laid off and multiple factories will be closed due mainly to GM's competition with Asian car markets.

"No individual company can solve these problems on its own. We're just breaking the social contract again," said Kochan in acknowledging that many large companies are facing a similar problem. "It's not that these employers are mean spirited. They're facing an enormous problem."

Restoring the American Dream offers a plan for how business, labor, government, and workers can come together to make the changes that will allow Americans to benefit from the new economy.

Read the Christian Science Monitor article in its entirety:

http://www.csmonitor.com/2005/1122/p01s01-ussc.html

Lego Innovates Designs

Recently, Lego has turned from a protective and inward looking company who threatened to sue builders who altered the designs of their kits to one that actively looks to its customers for new ideas.  They have just announced the first eight winners of their Lego Factory contest.  The designs were created using Lego’s 3D Designer Kit and will be produced and sold as kits (the winner receiving 5% of the revenue from sales of their kit). 

In an article in The Age, Joshua Gans looks at why Lego made the switch to allowing customers to participate in product design and how this phenomenon of manufacturers looking to customers for development ideas has gotten so popular:

In his book Democratizing Innovation, [Eric] 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.

Foreseeing a Fiscal Crisis

Syndicated columnist and Providence Journal writer Froma Harrop recently weighed in on the fiscal obstacles ahead of Ben Bernanke, President Bush's nominee for the chairmanship of the Federal Reserve, echoing sentiments displayed by Laurence Kotlikoff and Scott Burns in their book The Coming Generational Storm.

America should prepare for a big fat war between the generations. It's going to be ugly. On one side is the baby-boom generation, which retires and claims a ton of government benefits. On the other are younger workers, forced to fund those benefits plus pay the bills their elders left them.

When the war comes, the Federal Reserve chairman will have to be general. That person will likely be Bush nominee Ben Bernanke. The question is, for which side will he fight?

[snip]

The political reality is that the baby-boom generation expects to see the nice government handouts its retired parents enjoyed, and then some. Younger workers expect to be taxed at today's lower rates. One group will be very disappointed — or perhaps both groups — because there is no way the Candyland economics of today can go on.

The whole alarming future is nicely mapped out in a book, The Coming Generational Storm, by Boston University economist Laurence Kotlikoff and Scott Burns, a personal-finance columnist at The Dallas Morning News.

Kotlikoff and Burns clearly sympathize with younger Americans and Americans not yet born, who will be paying both our bills and their own. "Does it feel better," the authors write, "if those unknown victims of our rapacity are someone else's children and the children of those children and the children of those children of those children?"

The full column appeared in the Seattle Times on November 1 and is available here.

Minimizing Business Disruption

As we’ve seen with the recent onslaught of hurricanes hitting the Southern United States, disruption is everywhere.  These disruptions are not limited to the area where they occur, but frequently cause problems for the complex structures and systems of today’s businesses throughout the globe.  The business section of the current issue of The Economist looks at this issue in "When Lighting Strikes" and finds that many larger companies, such as UPS, Boeing, and Wal-Mart, have realized that they must prepare for disruptions, but many smaller companies, even when given time to prepare, have not:

This week yet another hurricane swept across the southern states of America. Every time a Katrina, Rita or Wilma wreaks her havoc, firms around the world worry that a vital supplier may have been knocked out of their increasingly global supply chains. In a recent survey by Harris Interactive, a polling firm, and FM Global, an American property insurer, financial executives in Britain and North America said that the top threat to their revenues came not from terrorism or natural disasters directly, but from a breakdown in their supply chain.

[snip]

For businesses around the Gulf, property damage is the least of their worries. Relatively cheap techniques now minimise the damage: using top-quality roof fastenings, for example. The biggest challenge during this year's spate of hurricanes has been keeping in touch with employees forced to flee to new locations. Mobile phones proved unreliable as masts were blown down, and Boeing, Southwest Airlines and UPS are among those companies that have modified their procedures as a result, relying more on e-mails, hot lines and their own websites to keep in touch with distant employees.

While most big companies are continually refining their business continuity plans, many smaller firms are not. Recent research by AXA, a European insurer, found that 46% of small and medium-sized businesses in Britain do not have a business continuity plan of any sort, despite being alerted again to the risks of disruption by this summer's terrorist bombings in London. For some, the task is too daunting; the risks too universal. They prefer, says AXA's Douglas Barnett, to assume “they can deal with disruptions as and when they happen.”

In a book published this month (The Resilient Enterprise by Yossi Sheffi; MIT Press), the author, a professor of engineering systems at MIT, gives some guidance to firms that are shy of examining these risks. “Large-scale disruptions”, he says, “rarely take place without any warning ”. By carefully monitoring and analysing near-misses, the airline industry has avoided many a crash. Likewise, says Mr Sheffi, “learning from small incidents can help organisations correct the conditions that lead to accidents.” Lightning can strike twice in New Mexico.

Harnessing the Passion of Consumers

Consumers often know more about products and services they use than the companies who produce them do.  They know what they need or want these things for and know what works and what might need a little improvement.  It makes sense that smart companies would listen to their most passionate  consumers in order to efficiently make improvements on their products and services.  In the current (October 2005) issue of Business 2.0, Georgia Flight asks MIT Professor and innovation guru Eric von Hippel (author of Democratizing Innovation) how companies might use this enthusiasm and knowledge about products that consumers have to their advantage:

To channel consumer enthusiasm effectively, MIT professor Eric von Hippel recommends that companies design toolkits that let users create customized products within specific parameters set by the company. Pioneers in this approach include food industry supplier International Flavors & Fragrances, whose toolkits enable its customers to modify specific flavors, which IFF then manufactures. BMW has been using a Web-based toolkit to solicit ideas for two years, with as many as 15 consumer-innovated designs finding their way into in-car online services now in the prototype stage. Roomba vacuum maker iRobot recently got wind of users modifying the cleaning devices by mounting wireless webcams on the machines and using them to monitor their houses from work. Now the company is considering releasing toolkits to see what else users can come up with.

The tricky part for companies isn’t discovering whether such passion for their products exists—if eBay (EBAY) has taught us anything, it’s that there are enthusiasts for just about everything—but where those customers can be found. In his book Democratizing Innovation, von Hippel says that “users on the leading edge of a target market often congregate at specialized events or sites that manufacturers can easily identify.” This involves more than ad hoc tactics such as shoe companies staking out inner-city basketball courts or automakers flocking to conventions where drivers flaunt their modifications; it’s also about continuously mining specialized search engines like Technorati and Daypop for postings relevant to their businesses. It’s about creating “brand community” sites where enthusiasts feel welcome, and making sure employees learn to apply the user innovations posted there.

If you don’t find your passionate customers, you may be blindsided by them. Von Hippel sees user communities innovating independently of manufacturers. “If customers really want something, they won’t wait for you anymore,” he says. Witness the tragicomedy that is the music business: Paralyzed by its fear of digital piracy, the industry refused to embrace online distribution. Consumers got tired of waiting, and in the absence of authorized alternatives, the unprotected MP3 emerged as the most popular file format, while distributed file-sharing networks provided access to music that fans weren’t allowed to buy through legitimate online channels.

LINK to the entire article

Prior Preparation Prevents Problems

Often, it is not until something actually goes wrong that we realize what could have been done to prevent it.  And by then, of course, it is too late.  In the business section of yesterday's New York Times, Roger Lowenstein looks at the examples of companies overcoming disaster (or not) in Yossi Sheffi's The Resilient Enterprise and finds solutions that could have lessened the impact of Hurricane Katrina and the "botched" response that followed:

There was the thunderstorm in Albuquerque, the port strike on the West Coast, the Quake in Kobe, Japan.  There was bankruptcy, terrorism and theft.  There was foot-and-mouth disease, toxic chemical reaction, product tampering (Tylenol) and product failure (Firestone/Ford Explorer, and the flawed Pentium chip). 

Engineer that he is, Professor Sheffi calls them "high-impact/low-probability disruptions."  That means they happen infrequently but are a real pain when they do.  None is likely to befall any one company at any given year.  But something from his "Catalog of Catastrophes" will surely happen to  somebody.  Over the years, General Motors has suffered virtually every type of disaster—even a tornado.  (At least nature does not play favorites: Toyota has also had it's share).

Professor Sheffi's focus is on what companies can do to avoid disaster, and to minimize the effect and quickly return to business as usual when one occurs.  Government, he observes in an aside, is focused only on the first priority—preventing disaster.  In a passage that after New Orleans seems spookily prophetic, he quotes Stephen E. Glynn, a senior fellow at the Concil on Foreign Relations, saying, "The U.S. government has not worked out protocols for how to restart the trade and transportations system after an event. . . . For managers—and mayors—who hope not to be caught flat-footed  after the next Katrina, this books has much to offer.  When the author writes that a resilient culture "may be the real secret" to preparedness, the weary residents of New Orleans will surely relate.

LINK to the entire review.