Outside Innovation

Interesting perspective... although while reading I thought that more insight on relationships and networks might have helped the thesis...

Markets or Communities? The Best Ways to Manage Outside Innovation — HBS Working Knowledge

No one organization can monopolize knowledge in any given field. That's why modern companies must develop a new expertise: the ability to attract novel solutions to difficult or unanticipated problems from outside sources around the world. A conversation with Harvard Business School professor Karim R. Lakhani on the keys to managing distributed innovation. Key concepts include:

• Many organizations find they cannot monopolize knowledge in any given field of endeavor.
• Firms need to consider three key factors in deciding to pursue either a community- or market-based external innovation model.
• Successful models developed by Apple, InnoCentive, SAP, and TopCoder create incentives for many entrants to generate a variety of products and services on a platform. The firm's role is to define the boundaries of the platform and then encourage entry and innovation by outsiders.

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Q: Your article, written with Kevin Boudreau, presents companies with a framework to think about how to organize outside innovators, such as the decision to follow a community/collaboration model versus a markets/competition approach. What are the lessons you hope that readers will take away?

A: Firms need to consider three key factors in deciding between pursuing a community- or a market-based innovation model:

1. The nature of the innovation problem at hand. Where the firm is in its technology life cycle may drive its choices. Mature technologies are amenable to markets, while nascent technologies can be better developed through communities.
2. The motivation of the external innovators. Those motivated by extrinsic rewards like money and career may choose markets. Those motivated by intrinsic motivations like intellectual challenge and identity may prefer community.
3. The business model embraced by the firm. As soon as a firm decides to open up for innovation, it transforms itself from a strictly product or service business into a platform business. Depending on the type of platform business model (integrated, product, or two-sided), the host firm has a choice about the amount of control it exerts over outside innovators. While markets and communities coexist in all three platform business models, there is a tendency for communities to prefer platforms that exert less control, and for external innovators in markets to trade off tight control for a larger share of the profits.</P,>

Markets or Communities? The Best Ways to Manage Outside Innovation — HBS Working Knowledge