Innovation is a tricky business. Consider a newfangled wireless communication gizmo like the Treo smartphone. How can PalmOne figure out whether it's worth making such a novel, specialized product? How can a prospective customer decide whether it's worth buying?
The two questions are related. Clearly, the product isn't worth making unless it's worth buying. But it's hard to predict what demand will be for a genuine innovation, given that the product is, by definition, unlike what's already available. So back in 1986, Eric von Hippel, a prof at MIT's Sloan School of Management, offered a way to think about innovation in the guise of a formula: b = (v x r) - c - d.
The b stands for the customer's benefit, which ultimately determines demand. This being a business school formula, think of that customer as a firm considering whether to deploy a new product or process. The company would calculate b this way: How much of its business (dollar volume, or v) would the innovation apply to? How much would this new technology increase the profit margin (rate of profit, r) of that business? What's the change cost (c) of switching? And what's the loss in "old benefits" (d) when the company abandons its current way of doing things?
If users can master the changes, dump their old junk, and use the innovation to make big bucks, then, well, prosperity beckons. That's progress.
What's interesting about von Hippel's equation is that the right-hand side divides into two parts, one representing velocity, the other representing drag. They point to tendencies that tug at all businesses. Tech moguls like to focus on the high-volume, high-margin realm of (v x r). But as they become established, they try to protect their existing market by raising the cost of change (-c -d).
There was a time when velocity and drag could coexist within the same business plan. Now they're becoming mutually exclusive. Why? Because the playing field itself is changing: Innovation, once rare and precious, is becoming a commodity.
Back in the 20th century, US companies followed a straight-and-narrow, readily commercializable path. The National Science Foundation made a research breakthrough. Acronym Inc. took the results to its lab and conceived a product. Engineering built the guts. Design put a shell around it. Marketing slapped on a brand. Then the company rolled out its baby amid much fanfare.
Today, this process has become accelerated, fragmented, and submerged in a worldwide sea of online activity. The corporation, once a rock-solid fortress owned by Ivy League oligarchs, is now a flimsy billboard for its global shareholders. It gravitates toward high growth and return on investment, while desperately fleeing any work that can be commoditized, even brain work. Meanwhile, enterprises are outgunned by customers, suppliers, ex-employees, trade groups, regulators, analysts, bloggers - all connected, all communicating.
What happens when the Wikipedia approach outpaces the Britannica model of in-house R&D? When Google delivers answers to questions formerly tackled by a team of expensive employees? When a blogger does a better job of helping customers than a help desk?
What happens is that the drag part of von Hippel's equation becomes very tempting. Forget about making new stuff - try to scare everyone into sticking with the old stuff. Eliminate in-house R&D and shut out competitors with proprietary formats, brand-specific training, and loyalty programs. Play the intellectual property game like a caffeine-addled twitch kid. And above all, sue. If you can't win, sue anyway: The aim is to create a pervasive atmosphere of deterrence, a sense that your industry is grim and hostile, like an oil field surrounded by bayonets.
The alternative is to embrace pure velocity, with or without a path to profit. Accept a world in which transaction costs approach zero. Transform customer attention, energy, and creativity into something other customers will pay for. Turn every desktop into a node in a globe-spanning distributed processing rig.
Google is the class act here, but there's also Blogger, Flickr, Second Life, Skype, Technorati, Wikipedia, and practically everything that calls itself open source - a host of innovative enterprises scrambling to wring value out of a zillion mouseclicks.
If the choice is between barbwired bottlenecks and open, electronic collaboration, the latter is clearly preferable - open innovation is here to stay. Not only does it harness the brain power of the multitudes but it has the capacity to take innovation out of its traditional corporate domain. In that - not in profit margins - may lie its ultimate effect: making us all one big, happy R&D lab.
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Bipolar Innovation
