Markets or Communities? The Best Ways to Manage Outside Innovation

In the recent articles I have written about open innovation. In an Harvard Business School newsletter, I read the following → statements about key factors for a firm to consider in the decision towards the implementation of a community-based innovation model:

  • 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.
  • 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.
  • 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.“ – says Karim R. Lakhani

However, he also mentions Apple, and its market for iPhone applications, as a good example, and Boing as a bad example.

Practical Experience

Following my practical experiences, the important part behind his first point is not so much the question, wether the technology is nascent. From my point of view it is more important to look into the market-knowledge, which your company has.

If the  technological space is known to you, and if you have a lot of information about customer needs, it is perhaps easier to go and develop the product strait ahead. However, if you neither know the technology nor the market requirements, you need to learn first. In this situation it is easier to open the gates, and to invite others to participate.

For me, the given motivation of the innovators is also not so important as it seems to be to the above author. For me is more important that you design your open innovation project in a way that you consider the motivation of the participants correctly.

For instance the Apple App Store is designed in a way that it allows participants to earn benefits, being it payments, or being it visibility. On the other hand it is quite easy to participate in this store, so that the upfront investment is small enough to support learning-by-doing, or participation of individuals or by small companies. These small participants form a large community. The size of the community, on the other hand, attracts larger participants.

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