The sources of Innovation by Eric von Hippel

The book covers many concepts that are starting to float around open innovation. Von Hippel discusses different sources of innovation and provides an economic explanation for it. Many of the concepts that he develops in this future work can be seen in a beginning stage in this book.

The most exiting chapter are based on his discussion on informal trading of know-how and how to shift the functional source of innovation. Both can be interpreted as the initial stage of what later become free revealing in the open source community and the implementation of toolkits for user innovation.

The book covers many concepts that are important in the field of user innovation and in a sense to open innovation. It is easy to read and an important reference for people involved in the innovation field, regardless if you are a practitioner or a researcher.

Next is a brief summary and thought on each chapter of the book.

Ch1: Overview

Introductory chapter of the book that briefly explains the topic to be discuss in the book. In most of his early work, von Hippel can could see that the traditional wisdom that manufacturers are the only innovators is not true, innovation can come from many different sources and different industry innovate from different sources or funnels. All the reasons and implication for this are covers in detail in the other chapters.

An important aspect to understand is what innovation by users is, to make it clear von Hippel users the example of Boing the airplane manufacturer. Their business is to develop airplanes and to do so they use machineries that work with steal and many other products. If Boing create an innovative plane then they are seen as manufacturer innovators, but if they innovate in a way to handle the steal to create their planes, then they are user innovators.

Ch2: Users as Innovators

Manufacturers are believed to be the major force for developing innovative products, the enhancements that this products have are also attributed to the manufacturers. The general wisdom on innovation dictates this, but innovations in certain industries are not originated by manufactures but by users that have a need and develop a prototype to satisfy that need.

Von Hippel shows how users have created prototypes that are later developed by manufacturers. To prove this von Hippel analyses 3 industries and take products that had major influences from users. The first case is based on scientific instruments. He show how the scientific community created different products so that they could improve their research. He found out that scientist would develop a prototype and would reveal the prototype to the community. In the first step of this case study, von Hippel show that the initial product was developed by users, most of the major and minor changes that the product have over the years were also developed by users and later adopted by manufacturers. Finally in this industry von Hippel could see that the diffusion of the innovation was freely revealed by the creator through conferences or academic papers. This is possible because the community in this industry is characterized on this, they write and present their work to the community and they benefit from this, but can this same free revealing apply to other industries? The other two case studies try to figure this out.

For the other case study, von Hippel analyses the industries of semiconductor and printed circuit board assembly. He also finds that novel equipment and usage for them are developed by users of the products and not by the manufacturer. The users develop innovative techniques for the products and those are later adopted by the manufacturers. The percentage of users develop innovation in this two fields are lower than in the previous case but it still account to more than 60% of the times. This implies that user innovation can be seen in different industries, and the interaction between users and manufacturers is important so that innovation can occur in an industry. The second part of these cases focus on the diffusion of the innovation. In the previous case the diffusion was lead by the user that developed the innovation but in these two cases the diffusion is done primarily by the manufacturer once it is adopted by them. Free revealing by the users was not found to be significant in these cases, maybe because having those innovations would provide the users with a competitive advantage over their competitors.

This chapter focus on innovation lead by users by proving that in certain field innovation is mainly done by users. The importance of this is that provide an understanding on where innovation comes from and both innovation managers and research most understand this.

Ch3: Variations in the Functional Source of Innovation

In this chapter von Hippel analyses six industries and determines who the main driver of innovation is. The purpose of this is to acknowledge that innovation can come from different sources. From the six cases 3 had the manufacturers as the main driver, 2 had suppliers as the main driver and 1 had users as the main driver. In one of the case he identify that some of the major innovation in that industry was possible by manufacturing combining force for it development. Von Hippel had never seen this type of collaboration that now it is quite common.

Ch4: The functional source of Innovation as an Economic Phenomenon

The previous chapters have shown that innovation can occur from different sources. In this chapter von Hippel explains his hypothesis on why this occurs. He state that a firm will innovate in field when their analyses lead them to expect an attractive rent. This hypothesis is based on Schumpeter argument that successful innovators are rewarded with a temporary monopoly control over what they have created, meaning that they have economic rents from their innovation.

For von Hippel’s hypothesis to be able to predict the functional source of innovation it most follows these preconditions: (1) changing the functional relationships with the innovation must be difficult, and (2) it must be difficult for innovators to capture rent from licensing their innovation.

The rest of this chapter focus on proving that both precondition exist in real life. To prove the first precondition he shows how costly it is for user to become manufacturers, he argues how the cost is not always in the favor of the user. He acknowledge that there is not much theoretical prove of this condition but his arguments are still valid.

For the second precondition he argues how inefficiency of the patent system in some industry makes the second precondition real and the view that innovators have towards the patent system. He thoroughly explains how the patent system works and discusses two industries, one where the patent system fails (semiconductors) and one where it works (pharmaceutical).

After discussing the patent system he also argues how trade secrets and know-hows also affect the difficulty of innovators to capture rent from licensing their innovation. With these explanations he successfully proves that both preconditions exist and his hypothesis can be tested.

Ch5: Testing the relationship between the Functional Sources of Innovation and the Expected Innovation Rents

After theorizing his hypothesis, von Hippel demonstrates the hypothesis through 5 empirical studies. He uses five cases mention in the previous chapters, the other 4 cases that have been mention where not used because of the lack of data. For the empirical analysis von Hippel develops a framework that allow him to assess the relative ability to establish monopoly control, relative innovation related output, relative cost of innovating and the relative amount of displace sales. With this he is able to determine what functional source is able to be the dominant developer of innovation. The five cases proved his hypothesis and provide a view on how the source can be determined.

The findings cannot be fully generalized but it provides a preview of how future research in this area can determine the source.

Ch6: Cooperation between rivals: the informal trading of technical know-how

Von Hippel set to explain the conditions that let firm trade there know-how with others. He analyses the mini mill steal industry. In this he found that most firms informally trade their know-how with other regardless if they are competitors. Von Hippel also found that keeping the secret was not a viable alternative because it was easily reveal with plant visit and other activities that where normally conducted to attract customer or in the industry gathering. Also most engineers would seek help from each other. The main reason for the informal trade was because the know-how that was transferred in most cases didn’t provide a competitive advantage since the engineers of the other firms would probably be able to come with an independent solution with a bit more of time and fund.

After understanding the behavior of the mini mill industry, von Hippel tried to find other industry where this informal trading also happened. He found that in the aerospace industry, information trading of know-how was common when there was no bidding for a government contract. The only moment that the informal trading of know-how would stop was when the government would request bids for a contract. The explanation for this is that the time that takes competitors to develop an independent solution for their problems is valuable for a firm when bidding for a contract.

To explain the reason for this informal trading from an economical point of view von Hippel uses the Prisoner Dilemma approach. He believes that this shows certain condition when informal trading is feasible, even if not all industry do it. At the end of the chapter he compares this method with joint R&D development and cross-licensing. He explains that informal trading has the advantage of letting the trade be decided by individual engineers that only trade with others that can provide then with help in the future if needed.

Ch7: Shifting the Functional Source of Innovation

Manufacturers have the possibility of shifting the source of innovation by controlling the product design. If the manufacturer creates a product that is easy to modify then they can incentive user innovation since users will be a able to get higher rents from products that are easier to modify. To prove this von Hippel analyses the clinical chemistry auto analyzers industry.

In the chemistry auto analyzers industry there are three main firms. The Du Pont products are very difficult to modify where the products from the other two companies (Technicon and Abbott Laboratories) are not. By researching on medial papers that use a machine form these companies von Hippel can prove that there is higher user innovation in articles based on machines from Technicon or Abbott Laboratories than on articles based on machines from Du Pont.

The next section of the chapter focuses on determining if there is a market for user-developed test methods and user-developed hardware. Also by analyzing the capabilities of the machines and the users of it, von Hippel can prove that there is commercial value on user developed test methods and hardware. He also shows that Technician was initially developed based on user innovation and that is one explanation why they support user innovation. Most of the changes that Technicon machines had were based on user innovation. In the case of Du Pont, their machines haven’t changed much and their innovation has always been based on producer innovation.

Ch8: Predicting the Source of Innovation: Lead Users

Most of the new products are being developed by understanding the needs of the users of that product. Marketers create focus groups and surveys to see their needs and try to come for solutions for them. The problem with this approach is that regular users don’t know what they need. In an industry that has many changes, taking this approach is not feasible if the firm wants its products to be competitive.

Von Hippel proposes the utilization of the Lead User approach. A lead user is a user that has current needs that are moth or year a head of the needs of regular users. These users are also characterized by being benefited from a solution for that needs. The advantage of using lead users for new product development is that the producer not only will get a need that other will have but will probably find a prototype for a solution to this need.

To prove his hypothesis on lead users von Hippel analyses the computer-aided-design (CAD) products and set to find the lead users of that industry. To do so he first identifies an important trend and then identifies the lead users. He creates a group with the lead users and comes with a concept. He prepares two other concepts based on existing solutions and a solution based on the normal marketing research of consulting users. He creates a survey and asks users of CAD to choose what concept they would be more attracted to buy. The concept developed by lead users always has a higher acceptance rate than the other, even when changing the price above or below the other concepts. This means that the lead user approach is a viable way to develop new products that will provide a solution to needs that customers will have in the future.

The book can be found here

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