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How Crowdsourced Innovation Models Evolutionize Idea Creation

document Open Innovation

HOW CROWDSOURCED INNOVATION MODELS EVOLUTIONIZE IDEA CREATION

Michael Gebert

University of Glamorgan, Munich University of Applied Sciences 28.06.2012

How Crowdsourced Innovation Models Evolutionize Idea Creation Introduction The key challenge faced by organizations in the creation of sustainable competitive advantage is innovation of a business model. Findings from an IBM study in 2006 showed that around sixty percent of chief executive officers said that they would have to make adjustments in their businesses within a span of two years. When the same study was carried out by IBM in 2010, CEOs were still busy grappling with ways in which this could be well realized. This evolution was described as: “Previously, CEOs recognized the need for innovation of business models, but today they are working hard to find the right creative leadership to produce such an innovation. In the past, they said they needed to be closer to customers; today they need to go further and bring customers in their companies.” (IBM, 2010) The value of an organization is increasingly derived from its intellectual assets in the knowledge-based economy. Innovation is a paramount challenge of creating value through engagement of stakeholders in design activities in sustainable business models. Therefore the main question facing an organization’s management is: How to create business opportunities and value from knowledge that resides within individuals and organizations? Another critical element of innovating a business model is the execution, i.e. the implementation and management of the new design. The execution of a business model involves the undivided attention and participation of a wide variety of stakeholders in implementing the plan and motivating all stakeholders.

In this paper the authors will look at how crowdsourced innovation models can evolutionize idea creation. This will be accomplished by defining crowdsourcing as a business term, a comparison between crowdsourcing and a traditional business model, and a holistic view on the crowdsourcing process. Crowdsourcing in a business context Crowdsourcing can be understood as the act of a company taking specific functions once performed by its employees and outsourcing it to an undefined (large) network of individuals in the form of an open call. The important prerequisite is the use of the open call format and the wide network of potential contributors, (Howe, 2006). This idea has been actively discussed in the communication information technology sector as investigated by various scholars. Levy (1997) stated that the basis of crowdsourcing is usually the framework of collective intelligence. This is from the idea that knowledge is the most accurate when it contains contributions from a wide population. Surowiecki (2004) says that the concept of collective intelligence has been popularized as the wisdom of the crowds, and therefore defines crowdsourcing as an instrument for gathering collective intelligence for specific tasks. Crowdsourcing is related to other ideas such as co-creation (Prahalad and Ramaswamy, 2000), user innovation (Von Hippel, 2002), and open innovation (Chesbrough, 2003). It involves the use of a large number of people in the information and technology sector to work as a unit inorder to achieve a desired objective (Aitamurto, Leiponen & Tee, 2011). Outsourcing is one of the forms of participatory social media. Other forms of participatory social media are open-source production, blogging, and sites sharing video and photos. Outsourcing is unique in the sense that it employs an organization participant relationship, where the company

is involved in a top-down management process to seek a bottom-up, open contribution by users in an online community. “Crowd sourcing can be classified into four types namely peer vetted creative production, broadcast search, discovery of knowledge and management, and distributed human intelligence tasking” as per Capitalizing on Complexity: Insights from the Global Chief (Executive Study, 2010). Crowdsourcing and Business Models “A business model is the sum of how a company selects its customers, defines and differentiates its offerings (or feedback), defines the tasks it will execute itself and those to be out sourced, outlines its resources, goes to the market, creates utility for business customers and captures profits. It is a complete system for delivering utility to customers and earning a profit from that given activity” (Slywotzky, 1995). The concept of a business model has become of great importance in the current competitive business environment. The preferred approach in the management of successful companies to cope with the dynamic business environment is the introduction of new business ideas and concepts. The concept of business model can also be used as unit of strategic analysis focused on the current business environment that is relevant (Porter, 1980). Therefore, a business model is a coherent framework for value creation to convert potential inputs trough customers and markets into economic output (Slywotzky, 1995). All business organizations are shaped by a specific business model whether explicitly considered or implicitly embodied in the act of innovation. Chesbrough ( 2002 pp.529-555) argues that firms need to understand the cognitive role of a business model, in order to commercialize technology in ways that will allow to capture value: “The two most important functions of a business model are

creation of value and value capture”. Slywotzky (1995) argues that a business model stands for a conceptual tool that contains a set of elements and their relationships in form of a business design on “how a company selects customers, defines and differentiates its offerings, defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers, and captures profit”. Firms use term to describe a wide range of their formal and informal aspects, including its strategies, purposes, offerings, organizational structures, infrastructure, trading practices, processes and policies of operation( Mintzberg, Stragic Planning, 1990, Thompson, 2010 ). A firm’s success will always depend on an exceptional business model more than excellent operation, or products and services. Some of the most prominent and often cited objectives for investigation on business models include the following:  to understand the key elements and mechanisms in a specific business domain, as well as their relationships (Osterwalder & Pigneur, 2002),  to communicate and share the understanding of a business model among business or technology stakeholders (Gordijn & Akkermans, 2001b),  to design the information and communication sys- tems supporting the business model (Eriksson & Penker, 2000),  to experiment with innovative business concepts in order to determine if current business models can easily adapt to them (Eriksson & Penker, 2000) and assess the viability of new business initiatives (Weill & Vitale, 2001),  to change and improve the current business model (Eriksson & Penker, 2000; Osterwalder & Pigneur, 2002).

Across industries certain organizations have been consistent in producing sterling performance due to their superior business models. Examples of such organizations include Dell computers, Wal-Mart Stores, Google, South West Airlines, and Nucor Steel Company. As a prerequirement for a good business model the following will be put into consideration (Linder JC & Cantell, 2000; Magretta J, 2002):  Identify what is needed in the market  Consider the value of the proposed product  Narrowing specific customer group to target group  Structure of the cost  Capture of value it creates in the chain  Position and activities in the value chain  Revenue generation  Profit margins targeted  Identifying a network of effects that can be utilized to deliver more value to customer  Competitive strategy, which should include identification of competitors and complementors. A reliable business model incorporates many principles including those of finance, economics, operations, entrepreneurship, marketing and strategy (Chesbrough, 2007). Crowdsourcing and innovative modeling Traditional R&D has been about getting a small number of brilliant people together developing a new product or solving a problem (Roussel, 1991). In crowdsourcing many people are used to conduct research to develop a new product or solve a problem. In the traditional method

innovation was concerned with the prediction of future needs of the customers or market but in crowd sourcing organizations use the customers themselves to identify their needs and predict future markets. The crowdsourcing model is better compared to the traditional method since as the world is increasing in complexity and connectivity it is also proving harder to predict customer needs and market (Sydow, 2000, Ahlberg, 2010). The tests and preference of consumers change faster than before. In addition, new technologies occur at a faster rate causing much of the traditional R&D obsolete (Christensen, 1997/1999.) New organizational designs have emerged due to the growth of Internet and social media. These have allowed cooperation and communication between growing large groups of persons. The result of it all is that we have been brought closer to the idea of hive mind, which the traditional structures cannot match. Traditional models offer a set of valuable concepts: customers and competitors (industry), the offering (generic strategy), activities and organisation (the value chain), the resource-base (resources) and the source of resources and production inputs (factor markets and sourcing), as well as the process by which a business model evolves (in longitudinal processes affected by cognitive limitations and norms and values) (Mosakowski & McKelvey, 1997; Chatterjee, 1998). However complexity and technological development speed sets limitations for the organzational process to filter, select and respond accordingly.

The new crowdsourced innovation model There are a number of new ideas in open innovation models. The first difference is that in traditional innovation external knowledge played a supplementary role. Innovation was focused within the organization Chesbrough (2002). In this closed innovation szenario, a company

generates, develops and commercializes its own ideas. This philosophy of self-reliance dominated the R&D operations of many leading industrial corporations for most of the 20th century (West III & Meyer, 1997). In the model of open innovation, firms commercialize external (as well as internal) ideas by deploying outside (as well as in-house) pathways to the market. Specifically, companies can commercialize internal ideas through channels outside of their current businesses in order to generate value for the organization (Sawhney, Prandelli & Verona, 2003; Wolpert, 2002). Those who started the idea of including external knowledge were Bell Laboratories followed by several R&D laboratories that imitated the organization of Bell (Chesbrough, 2003). The question of the balance between external and internal innovation sources has not been fully addressed, even by the later theories of absorptive capacity. In open innovation, external information is equally as important as internal knowledge, the main concern of the traditional method of innovation and R&D (Tidd, 2009). Secondly, in open innovation paradigm there is centrality of the business model. In the traditional method little or no attention was given to the business model in planning for innovation. Instead the focus was on securing the best and most intelligent resources. This was done in the believe that this high class talent would be able to come up with the best innovation that could easily penetrate the market as long as funding for research was provided. In open innovation, organizations seek for bright people both within and outside to provide leadership in business modeling (Chesbrough, 2003). In turn crowd sourcing suggests that inventive output from within the organization is not bound to the current business model, but instead have a chance to go to the market through a number of channels.

Thirdly, open innovation differs from traditional innovation in a sense that the former assumed that there were no errors of measurements in the analysis of the research and design projects (Chesbrough, 2004). Analysis and evaluation is done in-line with the business model of the company. Once a R&D project was cancelled, it was final, and there was no any reason to lead to the notion that there was a systematic error that led to the abortion of the idea. Management of the innovation processes was mainly done to minimize the chances finding false positive errors (Cooper, 1992). The possibility of false negative error occurring was not in any way a concern. This means that firms lacked processes for managing false or negative R&D ideas. The business is treated as a cognitive device in open innovation. This cognitive device will always focus on analysis and evaluation of R&D projects inside the organization (Chesbrough & Rosenbloom, 2002). As cognitive tool, the business model will favor those projects that fit in the business model only. This kind of method uses mostly subjective measures instead of relying on pure objectives and therefore permits biases. As firms struggle to cut down the probabilities of false positive occurring, the alert companies must also include additional techniques to manage false negatives. This enables them to extract the right value from them and identify new business models and markets from them. The fourth difference is that traditional models gave little recognition to external shopping for knowledge and technology. A firm would only go out to seek for external knowledge in order to benefit internal R&D, manufacturing and sales. In open technology, allowing technologies to flow outward permits firms to let internal technologies that lack clear path to market seek such path outside the firm. In doing so, the internal businesses of the organization will then compete with these external paths to the market for new technologies. These external channels to market include ventures, licensing, and spin-offs that can create value. According to Bower (1970) these

channels have to be managed as real options as opposed to the traditional approach of allocating budgets to projects using the net present value. The next difference lies in the assumptions of the underlying knowledge of the environment. Traditional model did not acknowledge the importance of abundant knowledge. In the traditional model of innovation, critical knowledge is scarce and difficult to get, and dangerous to rely upon. Useful knowledge is widely distributed and of high quality in open innovation method. These external sources of knowledge are critical even to the most capable and sophisticated R&D firms. Merck (2000) annual report explains that although the organization is highly respected for it superb internal research: “Merck accounts for 1% of the biomedical research globally. To tap into the remaining 99%, we must actively reach out to institutions of higher learning, research institutions, and companies globally to bring the best technology and potential products into Merck. The cascade of knowledge flowing from biotechnology and the unraveling of human genome-to name only two recent developments-is far too complex for any company to handle single handedly” (Merck 2000, Page 8). It is important to note that these external sources extent beyond institutions of higher learning and national laboratories to specialized small firms, retired technical staff, graduate students, startup companies, and individual inventors. The new and proactive role for management of intellectual property (IP) right in the open innovation model is also an area of contrast. Though certain industrial firms find practice of IP to be hardly new, traditional models treated IP as a by-product of innovation and therefore the use of IP was defensive. This allowed firms to practice their internal technologies without being disturbed by the external IP. In open innovation IP becomes an important element of innovation, since there is regular flow of IP in- and outside the firm (Chesbrough, 2003). This can facilitate

the use of markets to exchange valuable knowledge and to generate additional value to qualified stakeholders. Lastly the most controversial area of contrast is the emergence of intermediaries in innovation markets. Initially intermediaries have dominated areas to do with technology but currently they play a direct role in innovation as a whole. The last distinguishing point in this discussion is that in open innovation there have been developments of new and varying metrics for assessing the performance of the innovation process in a firm (Lewrick, Peisl, Raeside, Omar, 2007). While open innovation borrows greatly from the traditional model, it differs in distinctive areas and interpretations of the traditional model. In this judgment it is sufficient to warrant consideration as a new way of understanding innovation.

Conclusion Close observation of current research show that the majority of business models is inward focused (Huizingh, 2010), and vertically integrated as discussed by Chandler (1990). Yet there is a clear understanding that organizations have to adapt to a new and yet not well understood business model based on tapping on the mind of many. While the contours of open innovation are obscure it is clear that any in-depth understanding will need a new perspective that is focused externally. This will require involving actions of all stakeholders in a widely distributed innovation environment. Such a new model will require a close study of innovation activities in all dimensions (Peisl, Schmied 2009) of the organization from different levels. It is likely to follow an evolutionary path in existing organizations, but will also provide the basis for disruptive innovation in established or start-up organizations, the crowdsourced innovation business model.

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Eriksson H and Penker M (2000) Business Modeling with UML – Business Patterns at Work. John-Wiley & Sons, New York. Gordijn J. and Akkermans J.M. (2001a) A conceptual Value Modeling Approach for eBusiness Development. In Proceedings of First International Conference on Knowledge Capture (K-CAP 2001), Workshop WS2 Knowl- edge in eBusiness (GORDIJN J and AKKERMANS JM, Eds), pp 27–34. Howe, J. 2006. “Crowdsourcing: A Definition.” Blog. Crowdsourcing, online [available] http://crowdsourcing.typepad.com/cs/2006/06/crowdsourcing_a.html. [accessed 13, December, 2011] Howe, J. 2006. The Rise of Crowdsourcing. Wired 14 (6). Huizingh, E.K.R.E., Open innovation: State of the art and future perspectives. Technovation (2010), doi:10.1016/ j.technovation.2010.10.002 Levy, P. 1997. Collective Intelligence: Mankind's Emerging World in Cyberspace Cambridge: Perseus Books, Lewrick, M., Peisl, T., Raeside R. and Omar M. 2007 Assessment of Innovation Styles to Create Innovation Driven Enterprises Linder J.C., Cantrell S. (2000) Changing business models: surveying the Landscape. Working Paper, Accenture Institute for Strategic Change. Magnusson, P. R. 2009. Exploring the contributions of involving ordinary users in ideation of technology-based services. Journal of Product Innovation Management, 26(5), 578-593. Magretta J. 2002 Why business models matter. Harvard Business Review (May 2002), 86–92.

Mosakowski E., Mckelvey B. 1997 Predicting rent generation in competence-based competition. In Competence-based Strategic Man- agement (HEENE A and SANCHEZ R, Eds), John Wiley, Chichester. Osterwalder A., Pigneur Y. 2002 An ebusiness model ontology for modeling eBusiness. In Proceedings of 15th Bled Electronic Commerce Conference – eReality: Constructing the eEconomy, Bled, Slovenia, June 17 – 19, 2002 (LOEBBECKE C, WIGARD RT, GRICAR J, Pucihar A. and Lenart G., Eds), pp 75–91. Poetz, M. K., Schreier, M. 2011. The value of crowdsourcing: Can users really compete with professionals in generating new product ideas? Journal of Product Innovation Management (forthcoming). Prahalad, C. K, Ramaswamy, V. 1999. Co-Opting Customer Competence. Harvard Business Review 79-87 M. Sawhney, E. Prandelli and G. Verona, “The Power of Innomediation,” MIT Sloan Management Review 44 (winter 2003): 77-82; and J.D. Wolpert, “Breaking Out of the Innovation Box,” Harvard Business Review 80 (August 2002): 76-83.

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Von Hippel, E. and Katz, R. 2002. Shifting Innovation to Users Via Toolkits, Management Science, 48(7), 821-833. Weill P., Vitale M.R. 2001 Place to Space: Migrating to eBusiness Models. Harvard Business School Press, Boston. West III, P. G. and Meyer, D. 1997. Communicated Knowledge: A Learning Foundation. International Journal of Organizational Analysis, Vol. 5, No. 1, pp. 25-58

Summary In this paper the author will look at how crowdsourced innovation models can evolutionize idea creation. This will be accomplished by defining crowdsourcing as a business term, a comparison between crowdsourcing and a traditional business model, and a holistic view on the crowdsourcing process.

Description The key challenge faced by organizations in the creation of sustainable competitive advantage is innovation of a business model. Findings from an IBM study in 2006 showed that around sixty percent of chief executive officers said that they would have to make adjustments in their businesses within a span of two years. When the same study was carried out by IBM in 2010, CEOs were still busy grappling with ways in which this could be well realized. In this paper the author will look at how crowdsourced innovation models can evolutionize idea creation.

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Posted by Michael Gebert

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