Motivation in Open Innovation - An Exploratory Study on User Innovators

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction
1.1 Motivation
1.2 Structure

2 From Closed to Open Innovation
2.1 Definition of Innovation
2.2 The Implementation of Innovation
2.2.1 The Innovation Process
2.2.2 Closed Innovation
2.2.3 Open Innovation
2.3 Reasons for the Emergence of Open Innovation
2.3.1 Manufacturer-Based View
2.3.2 User-Based View
2.4 Integration of Open Innovation
2.4.1 User Tool Kits
2.4.2 Lead User Search

3 Fundamentals of Motivation
3.1 Definition of Motivation
3.2 Classification of Motives
3.2.1 Intrinsic Motives
3.2.2 Extrinsic Motives
3.2.3 Social Motives
3.3 Theories of Motivation
3.3.1 Content Theories
3.3.2 Process Theories

4 Costs in the Innovate-or-Buy Decision
4.1 Transaction Costs
4.2 Agency Costs
4.3 Opportunity Costs
4.3.1 Opportunity Costs of Innovating
4.3.2 Opportunity Costs of Not Innovating

5 Motivation in Open Source Software
5.1 Motives of Open Source Software Programmers
5.1.1 Intrinsic Motives
5.1.2 Extrinsic Motives
5.1.3 Social Motives
5.2 Economics of Open Source Model by LERNER/TIROLE
5.3 Investors and Donators Model by FRANCK/JUNGWIRTH

6 Exploratory Empirical Study
6.1 Study Design
6.2 Sources of Data
6.2.1 User Tool Kits: The Case of Spreadshirt
6.2.2 Lead User Search: The Case of Threadless
6.3 Data Generation
6.3.1 Research Approach
6.3.2 Outcome
6.4 Analysis of Motives
6.4.1 Intrinsic Motives
6.4.1.1 Enjoyment
6.4.1.2 Freedom and Control
6.4.1.3 Learning and Intellectual Stimulation
6.4.1.4 Summary
6.4.2 Extrinsic Motives
6.4.2.1 Own Use
6.4.2.2 Monetary Compensation
6.4.2.3 Job Opportunities
6.4.2.4 Summary
6.4.3 Social Motives
6.4.3.1 Community Affiliation
6.4.3.2 Reputation
6.4.3.3 Feedback
6.4.3.4 Summary
6.5 Costs in the Innovate-or-Buy Decision
6.5.1 Transaction Costs
6.5.2 Agency Costs
6.5.3 Opportunity Costs
6.6 Application of Theoretical Models from Open Source Software
6.6.1 Economics of Open Source Model by LERNER/TIROLE
6.6.1.1 Immediate Benefits
6.6.1.2 Immediate Costs
6.6.1.3 Delayed Benefits
6.6.1.4 Delayed Costs
6.6.1.5 Summary
6.6.2 Investors and Donators Model by FRANCK/JUNGWIRTH
6.6.2.1 Investors
6.6.2.2 Donators
6.7 Discussion of Results

7 Conclusion

List of Appendices

Bibliography

List of Figures

Figure 1: The Innovation Process according to HAUSCHILDT

Figure 2: Forms of Interaction and Cooperation between Manufacturers and Customers in the Innovation Process

Figure 3: Innovations by Lead Users Precede Equivalent Commercial Products

Figure 4: MASLOW’s Hierarchy of Human Needs

Figure 5: VROOM’s VIE-Model

Figure 6: Value Chain for a Spreadshirt Product

Figure 7: Value Chain for a Threadless Product

List of Tables

Table 1: The Impact of Transaction Costs on Innovate-or-Buy Decisions for Stressed - Skin Panels by SLAUGHTER (1993)

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

Shorter product life cycles, high product flop rates and an increasing heterogeneity of consumer needs have recently put considerable pressure on the innovation activities of manufacturers. The collaboration with users in open innovation processes has been promoted as a powerful approach for companies to succeed in today’s competitive environment. However, little is known about what drives these user innovators to contribute their time and effort to the creation of new products. Most studies in this field have been restricted to open source software. Yet, a deep understanding of the motivation of user innovators represents an important first step for manufacturers to improve the nature of this type of cooperation. Besides, it enables companies to develop incentive systems that ensure the user’s continuous input for new product development.

Therefore, this report will investigate the motivational profiles of user innovators from a manufacturer’s point of view. Since lead users and tool kit users can to a very high extent be involved in the firm’s innovation process, this report will focus on the integration of those two types of users. The analysis will be supported by two exploratory case studies of Spreadshirt and Threadless, two companies which have successfully based their business models on the integration of user innovators. The report will identify the most important factors controlling user innovators’ motivation and will derive suggestions on how manufacturers can address these points in order to tap the full potential of user innovation for their new product development.

1.1 Motivation

In fact, individuals outside firms innovate frequently and have been the source of important innovations in several product categories studied to date. Hence, a thorough understanding of these user innovators’ motivation has been of special interest to practitioners and academics for two primary reasons.

First, modern information and communication technologies such as the internet have fundamentally changed the atmosphere and surrounding of user innovation, making it a much broader and richer source of creativity and ideas for manufacturers. Never before has it been easier and cheaper for firms to interact with customers and to integrate them into their operations. This report represents a unique chance to examine how selected state-of-the-art enterprises already exploit this opportunity and set standards for the many firms that are yet to react to these altered conditions.

Second, from the academic point of view the motivation of user innovators is a subject on which only little research has been conducted. By now, most studies have focused almost exclusively on open source programmers. Consequently, the need for an extensive exploration of the issue beyond open source has recently been expressed by several sources.^[1] Thus, the report at hand can serve as a foundation for more comprehensive investigation and theory building in the future.

I would like to thank the user innovators of Spreadshirt and Threadless for generously sharing their thoughts and providing valuable insights during the interviews conducted for this report. Support from the Chair of Strategic Management and Organization at Leipzig Graduate School of Management, namely from Prof. Dr. Kathrin Möslein and doctoral candidate Emilio Matthaei, is gratefully acknowledged.

1.2 Structure

Including this opening part the report encompasses seven chapters which are structured as follows. The subsequent chapter introduces the concept of the open innovation process and gives reasons for its emergence. Next, two strategies for manufacturers to integrate user innovations by searching for lead users and providing tool kits will be examined.

Chapter 3 will contain an overview over the motivational theory relevant to the context of open innovation. It will classify motives potentially driving the extent and frequency of a user’s innovation activities. This part will also deal with the impact of these expected benefits on content and process theories of motivation.

Since a user is supposed to not only estimate the benefits but also the expenditures of his innovation activities, chapter 4 will assess several kinds of costs associated with the user’s innovate-or-buy decision. These will include transaction costs, agency costs and opportunity costs.

Next is a reference to motivation in open source software in chapter 5. First, a summary concerning the programmers’ most dominant motives as found by recent studies will be given. Second, two motivational models explaining the programmers’ behaviour will be presented.

Chapter 6 will encompass an exploratory empirical study on the motivation of user innovators linked to the companies Spreadshirt and Threadless. First, the general design of the study will be outlined before details concerning the actual data generation are going to be disclosed. Following is a categorization of the motives of the participants of the study according to the patterns identified in chapter 3. Similarly, the various costs discussed in chapter 4 will be assessed. All benefits and costs experienced by the interviewed user innovators will then be combined with the help of the motivational models from open source software presented in chapter 5. Finally, the major findings of the study are going to be summarized.

C hapter 7 concludes by deriving implications for manufacturers intending to integrate user innovators into their operations. This final part discusses the limitations of the report and names areas for future research.

2 From Closed to Open Innovation

This chapter will give a general overview over recent developments regarding open innovation. The first section defines the term innovation and classifies its most important categories. Section 2.2 deals with the nature of the innovation process and introduces the concepts of closed and open innovation. Following is an examination of the trend towards users as a source of innovation in section 2.3. Finally, two strategies for manufacturers regarding the integration of user innovations will be discussed in section 2.4.

2.1 Definition of Innovation

Innovation has been at the heart of economic theory from the time it was first introduced as a key element in SCHUMPETER’s theory of economic development. SCHUMPETER (1934) defined innovation as the introduction of new combinations referring to products, product quality, production processes, markets and organizational structures.^[2] PORTER (1990) later extended this area of application to a “new way of doing things that is commercialized“^[3].

Regarding the impact of an innovation, one can distinguish between incremental and radical or disruptive innovations.^[4] While the former encompass rather small improvements of products or processes, the latter denote fundamental changes which render existing knowledge obsolete and therefore cause SCHUMPETER’s so-called “creative destruction”.^[5]

2.2 The Implementation of Innovation

PICOT/REICHWALD et al. (2003) argue that one important way to diminish the notorious scarcity of resources lies in innovation, enabling the manufacturer to employ resources in a more effective and efficient way.^[6] Numerous studies indicate that especially product innovations have contributed significantly to the sustainable success of many enterprises.^[7] Consequently, DRUCKER (1998) concludes that “today no one needs to be convinced that innovation is important – intense competition, along with fast changing markets and technologies, has made sure of that. How to innovate is the key question”^[8]. For this reason, the next three subsections will focus on concepts associated with the most basic implementation of innovation.

2.2.1 The Innovation Process

Following HAUSCHILDT (1997), an innovation is the result of a process which consists of a set of activities and a sequence of events.^[9] As figure 1 illustrates, the innovation process begins with an idea and ends with the innovation's adoption to practice.

Figure 1 : The Innovation Process according to HAUSCHILDT

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Source: Following HAUSCHILDT (1997), pp. 19ff.

Implementing the innovation process often calls for huge investments involving a considerable amount of risk.^[10] Recent research studies proved high failure rates in new product commercialization.^[11] Additionally, ever shorter product life cycles and an increasing heterogeneity of consumer needs put considerable pressure on the innovating enterprises.^[12]

Therefore, one of the major challenges for innovating enterprises is to reduce the market-related and technological uncertainties inherent to the early stages of the innovation process. THOMKE (2003) argues that in order to do so firms require two kinds of information: need and solution information.^[13] Need information refers to the wants and wishes of current or potential customers and is most likely to be acquired in the surrounding of the final user. Solution information in turn addresses the issue of how these customer needs can be satisfied best and in this way serves as a basis for the activities of product developers in the innovation process.

There exist two general approaches for an enterprise to obtain need and solution information: Closed and open innovation. Both concepts will be analyzed in the following two sections.

2.2.2 Closed Innovation

A setting in which all activities concerning the innovation process are performed internally by the manufacturer is called closed innovation. The enterprise gains need information via different kinds of market research. As far as the subsequent generation of solution information is concerned, the manufacturer relies exclusively on internal resources such as researchers and developers, engineers as well as product managers.^[14] This course of action corresponds to the widely known “find a need and fill it” – methodology on which the existence of huge innovation laboratories of many firms has been based.^[15]

The explanation for this “manufacturing-active paradigm“^[16] is twofold: On the one hand, closed innovation allows the manufacturers to benefit from cost advantages because every step from the development to the distribution of the innovation takes place in a fully integrated in-house process. On the other hand, the manufacturer ensures the appropriability of all profits because by using patents, copyrights and other forms of protecting intellectual property he can keep competitors and third parties from copying or imitating his innovation.^[17]

2.2.3 Open Innovation

The second approach towards the innovation process is to build up interactive relationships with external partners along all phases of the innovation process. In this way, enterprises follow an organizational pattern of cooperation which has been observed in all parts of the value chain.^[18] This strategic concept of partly or fully externalizing the innovation process has been spread as “open innovation” by CHESBOROUGH (2003).^[19] LAURSEN/SALTER (2004) define open innovation as “cooperation for innovation within wide horizontal and vertical networks of universities, start-ups, suppliers, customers, and competitors”^[20].

Joining forces with these external partners often facilitates a firm’s access to need information, since the direct contact with distributors and customers can present a more reliable source of information than conventional market research. Besides, open innovation may enlarge an enterprise’s capacity for the generation of solution information due to additional resources of knowledge and creativity supplied by third parties.^[21] As an overall result, open innovation allows firms to reduce the risk associated with investments in innovation activities.

Interestingly, one of the major resources in an open innovation process can be the knowledge of users.^[22] VON HIPPEL (2005) defines users as “firms or individual consumers that expect to benefit from using a product or a service”^[23]. This is due to the fact that users do not only possess need information, but can also take an active role in the generation of solution information. Indeed, REICHWALD/PILLER (2005)’s understanding of open innovation concentrates exclusively on the cooperation of manufacturers and users or customers.^[24] They distinguish different modes of collaboration between these two groups which are shown in figure 2.

Figure 2 : Forms of Interaction and Cooperation between Manufacturers and Customers in the Innovation Process

illustration not visible in this excerpt

Source: REICHWALD/PILLER (2005), p. 9 following DAHAN/HAUSER (2002), p. 336.

While the first mode of the model at hand is fully in line with the approach used in the closed innovation process, the remaining modes follow the path of open innovation, granting increasing importance to the customer’s participation in the innovation process. When subsequently referring to the concept of open innovation, this report will take the user-centred view of REICHWALD/PILLER (2005). Furthermore, it will concentrate specifically on those interactions belonging to the third mode of the model, since these represent the settings in which the customer is most actively involved in the innovation process because he also takes part in the generation of solution information. Section 2.3 will take a closer look at the trend towards open innovation in general, before user tool kits and lead user searches will be introduced as major options for manufacturers to integrate user innovators in section 2.4.

2.3 Reasons for the Emergence of Open Innovation

Innovation by users is not a new movement. According to ENOS (1962), the largest part of innovations in oil refining stemmed from user firms.^[25] Equally, FREEMAN (1968) showed that user firms were of crucial importance regarding the development of chemical production processes.^[26] Similar patterns were found by VON HIPPEL (1988) in the fields of scientific instrument innovations as well as in semiconductor processing.^[27] An overview of recent studies concerning user innovation is given in appendix I. The next two subsections will discuss the increased importance of open innovation from the manufacturer’s and the user’s perspective.

2.3.1 Manufacturer-Based View

It has only been recently that large enterprises such as Adidas, Audi, BMW, Eli Lily and Procter & Gamble started setting up organizational infrastructures for open innovation.^[28] While improved information and communication technologies have certainly supported the manufacturers’ proactive approach towards open innovation,^[29] the latest developments can also be attributed to two further causes.

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^[1] Cf. REICHWALD, R./IHL, C. et al. (2004), p. 17 and PILLER, F. T. (2005), pp. 10ff.

^[2] Cf. SCHUMPETER, J. A. (1934), p. 66.

^[3] PORTER, M. E. (1990), p. 780.

^[4] Cf. VAHS, D./BURMESTER, R. (2002), p. 83.

^[5] Cf. SCHUMPETER, J. A. (1950), pp. 83ff.

^[6] Cf. PICOT, A./REICHWALD, R. et al. (2003), p. 24.

^[7] Cf. CHANEY, P. K./DEVINNEY, T. M. (1992), pp. 874ff. and DEBRUYNE, M./MOENART, R. et al. (2002), pp. 159ff.

^[8] DRUCKER, P. F. (1998), p. 149.

^[9] Cf. HAUSCHILDT, J. (1997), pp. 19ff.

^[10] Cf. OGAWA, S./PILLER, F. T. (2005), p. 1.

^[11] Cf. BALACHANDRA, R./FRIAR, J.H. (1997), pp. 276ff. and TOLLIN, K. (2002), pp. 427ff.

^[12] Cf. CHRISTENSEN, C. M. (2000), pp. 165ff.

^[13] Cf. THOMKE, S. (2003), p. 23.

^[14] Cf. REICHWALD, R./PILLER, F. T. (2005), p. 4.

^[15] Cf. BAKER, E. (2006), p. 14.

^[16] VON HIPPEL, E. (1978), p. 40.

^[17] Cf. VON HIPPEL, E. (2005b), p. 452.

^[18] Cf. PICOT, A./REICHWALD, R. et al. (2003), p. 289.

^[19] Cf. CHESBOROUGH, H. (2003), pp. 35ff.

^[20] Cf. LAURSEN, K./SALTER, A. (2004), p. 3.

^[21] Cf. PILLER, F. T. (2005), p. 4.

^[22] Cf. PRAHALAD, C.K./RAMASWAMY, V. (2004), pp. 7ff.

^[23] Cf. VON HIPPEL, E. (2005), p. 3.

^[24] Cf. REICHWALD, R./PILLER, F. T. (2005), pp. 6ff.

^[25] Cf. ENOS, J. L. (1962), p. 234.

^[26] Cf. FREEMAN, C. (1968), p. 2957.

^[27] Cf. VON HIPPEL, E. (1988), pp. 11ff.

^[28] Cf. PILLER, F. T. (2005), p. 7.

^[29] Cf. NAMBISAN, S. (2002), pp. 392f.