Design patterns #3 – Open and Long Tail

There is an image of the inventor as the lone tinkerer, jealously guarding their ideas and keeping their work ‘top secret’. This attitude has carried over into the boardroom, backed up with the concept of intellectual capital as a key resource. How may businesses today focus their innovation efforts on the capture and protection of Intellectual Property?

Today’s post continues my summary of business model patterns put forwards in Business Model Generation, focusing on open innovation and the long tail model for reaching out to customers.

Open Innovation

When Henry Chesborough challenged the notion of self reliance, the idea that we don’t need to come up with all the ideas by ourselves, he was met with some resistance. An initial look at definitions of open innovation can be a bit confusing. There is a lot of talk about internal and external paths to market, or about sourcing ideas externally. Here it is in simple terms:

“You don’t need to have all the ideas yourself, you just need to figure out how to use them”

There are essentially two key approaches to open innovation, often referred to as Outside In and Inside Out. Again, here it is in simple terms:

  • Outside In: It’s okay to source ideas from outside the organisation, as long as you figure out how to pay for them and use them effectively. That last bit about paying for the ideas you source can be a real stumbling block for corporate attempts at crowd sourcing, see below.
  • Inside Out: One person’s trash is another person’s treasure. It’s okay to sell off ideas you haven’t been able to make work internally, sometimes others will find a way where you failed. This mostly seems to work with patents being sold externally, as businesses generally don’t seem to have figured out how else to retain a stake in their ideas. Glaxo Smith Kline is cited as an example of a business selling off patents they don’t have capacity to exploit, but which others might.

A quick note on crowd sourcing. I’ve seen a lot of businesses treat the outside world as some sort of free resource for ideas. This doesn’t work. Putting out a non targeted request for solving your company’s problems, particularly with no obvious intention of paying for it, is unlikely to work. Ask yourself, “would this work if I walked outside my office and asked a bunch of random people in the street?”. If the answer is no, you probably need to work out your approach a little more.

Two really great examples are given for companies finding channels which work when sourcing ideas externally, InnoCentive and Procter and Gamble. Here are the main channels for getting that gold:

  • Innovation Competitions: part of the InnoCentive core business model, seekers post a challenge (and a cash prize) with solvers competing to win first place. There are variants which reward second and third place entrants, or which set about forming teams to collaborate and put forwards collective answers. But the central idea is to run a competition and purchase the best idea(s).
  • Research Partnerships: P&G and others are using formal research relationships with universities as a source of breakthrough ideas or short term access to expert consulting. Others set up R&D labs staffed by multiple organisations. In either case contractual arrangements for risk and gain share are likely to feature high on the agenda, with particular focus on IP retention and licensing arrangements. Personally, I don’t see anything new here but it is worth mentioning as an obvious channel for acquiring ideas.
  • Alumni Programs: P&G have extended access to their internal suggestion box to retired employees, again not particularly innovative but worth mentioning as surprisingly few businesses really manage to retain effective links with their alumni.

Other work has been done around what sort of collaborative structures work well both within and between organisations, particularly in the field of social network analysis. Not much has been done around what sort of business structures can be setup to generate and exploit ideas (as far as I can tell), particularly around virtual organisation structures. For example, we have discussion forums and collaborative communities for creating ideas and we have crowd funding networks starting to form in order to take business plans to market … but there isn’t much to turn an idea into a business plan. We’re still to frightened of letting go of our precious ideas and learning how to share the profits equitably. I’ll come back to this in a later post.

Long Tail

The long tail is that part of mass production that tends towards a market size of one. Up until recently, a particular problem with the supply chain (particularly with products) was with the good old fashioned economy of scale. For most products, it simply isn’t viable to run a production line for a market size of one. Even exotic cars tend to prefer 20 or so as their minimum order. So who are the challengers?

  • Customisation: take a vanilla product and provide a way to personalise it. Works well with t-shirts, mugs, photo frames and other products finished off with a cheaply uploadable image provided by the end user.
  • Pledge first, ship later: crowd funding initiatives post a product concept, to be shipped once a critical mass of buyers have pledged cold hard cash.
  • Pay now, ship later: catalogue sales of old and e-business in general has this a a core principle, pay up front and we’ll ship it to you real soon. Amazing what reducing the cash flow cycle will do for profits.

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