Professor's Baldwin and von Hipple IV A
Before the Christmas break we were reviewing a paper from Professor's Carliss Baldwin and Eric von Hipple. Our review was comprehensive as the majority of the material is pertinent to both the development of People, Ideas & Objects software and associated Community of Independent Service Providers, (CISP) and the innovative oil and gas producer. The title of the paper "Modelling a Paradigm Shift: From Producer Innovation to User and Open Collaborative Innovation". To date there are three blog posts reviewing this paper here, here and here. Reintroducing this work by reviewing the three posts, re-highlighting the papers abstract, and finally adding some of the papers definitions will help refresh our memory of this very pertinent work.
In this paper we assess the economic viability of innovation by producers relative to two increasingly important alternative models: innovations by single user individuals or firms, and open collaborative innovation projects. We analyze the design costs and architectures and communication costs associated with each model. We conclude that innovation by individual users and also open collaborative innovation increasingly compete with - and may displace – producer innovation in many parts of the economy. We argue that a transition from producer innovation to open single user and open collaborative innovation is desirable in terms of social welfare, and so worthy of support by policymakers.We see the value that this paper has to this community, not only in defining how this community operates, but also the validity for the CISP participants investing their careers, and how the innovative oil and gas producer can approach the scope of their organizational constraints. I expect to have the next installment of this paper completed within the next week. This involves the review of their analysis of the three different models of innovation, or section 3 "Where is each model viable."
It may also be of value to review our 2010 budget to see how the user within the CISP generates their own economic value. They are compensated for their work in designing and contributing to the development of the software. And secondly, their use of the finished software application is available to them as members of the CISP, free of charge. Their use of the software is part of the value adding services they provide to their innovative oil and gas clients. People, Ideas & Objects generates our Fees and Penalties from the producers that benefit from this software. These charges are assessed based on our business model.
Baldwin & von Hipple's Definitions
A single use innovator is a single firm or individual that creates an innovation in order to use it.
A producer innovator is a single, non-collaborating firm.
An open collaborative innovation project involves contributors who share the work of generating a design and also reveal the outputs from their individuals and collective design efforts openly for anyone to use. The defining properties of this model are twofold: (1) the participants are not rivals with respect to the innovative design (otherwise they would not collaborate) and (2) they do not individually or collectively plan to sell products or services incorporating the innovation or intellectual property rights related to it. An example of such a project is an open source software project.
A design is a set of instructions that specify how to produce a novel product or service.
A given mode of innovation is viable with respect to a particular innovation opportunity if the innovator or each participant in a group of innovators finds it worthwhile to incur the requisite costs to gain the anticipated value of the innovation. By focusing on anticipated benefits and costs we assume that potential innovators are rational actors who can forecast the likely effects of their design effort and choose whether or not to expend the effort (Simon, 1981; Langlois, 1986b; Jensen and Meckling, 1994; Scott, 2001).
Our definitions of viability is related to: the contracting view of economic organizations; to the concept of solvency in finance; and to the concept of equilibrium in institutional game theory.
In contracting literature, firms and other organizations are viewed as a "nexus of contracts,", that is, a set of voluntary agreements (Alchian and Demsetz, 1972; Jensen and Meckling, 1976; Fama and Jensen, 1983a, b; Demsetz, 1988; Hart, 1995). For the firm or organization to continue in existence, each party must perceive himself or herself to be better off with the contracting relationship than outside of it.
We define an innovation opportunity as the opportunity to create a new design. With respect to a particular innovation opportunity, each of the three models of innovation may be viable or not, depending on the benefits and costs flowing to the actors.
In terms of benefits, we define the value of an innovation, V, as the benefit that a party expects to gain from converting an innovation opportunity into a new design - the recipe - and then turning the design into a useful product, process or service.
Each innovation opportunity has four generic costs: design cost, communication cost, production cost and transaction cost.
Design cost, d, is the cost of creating the design for an innovation.
- The cost of identifying the functional requirements (that is, what the design is supposed to do);
- The cost of dividing the overall problem into sub-problems, which can be solved separately;
- The cost of solving the sub-problems;
- the cost of recombining the sub-problems' solutions into a functioning whole.
Communication cost, c, is the cost of transferring design related information among participants in different organizations during the design process.
Production cost, u, is the cost of carrying out the design instructions to produce the specified good or service.
Transaction cost, t, is the cost of establishing property rights and engaging in compensated exchanges of property.
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