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By Eric von Hippel
MIT Press $29.95 /£19.95

Working out where great ideas come from is one of the big puzzles of modern management. Corporate research laboratories and in-house product development groups are only part of the answer. Breakthrough products and processes can come from start-ups, competitors, university campuses and rank-and-file employees.

Eric von Hippel, a professor of management of innovation at the Massachusetts Institute of Technology, has spent three decades studying the role played by customers in shaping new products. The fruits of his labours are nicely summarised in Democratizing Innovation, a useful primer on what he calls "user-centered innovation".

For example, practitioners of extreme sports, from windsurfing to ice-climbing, play a significant role in the development of equipment subsequently mass-produced by manufacturers. Surgical equipment companies are often led towards new products by surgeons who operate, literally and figuratively, at the cutting edge.

These customers are a breed apart. While most of us are happy to use products off the shelf, a minority wants customised equipment to push the boundaries of their hobby or profession. Such "lead users" sometimes go to custom manufacturers to get exactly what they want. More often they tinker with commercially available products. Smart manufacturers take notice.

So what, you might think. Are not Prof von Hippel's lead users just a reincarnation of the "prosumers" - pro-active consumers - identified 20 years ago by Philip Kotler, a marketing professor at Kellogg School of Management? Is it not common sense for companies to stay close to their most demanding customers?

Yes, but Democratizing Innovation goes further than Kotler ever did, arguing that "users are the first to develop many, and perhaps most, new industrial and commercial products". This being so, competitive advantage might be expected to flow to manufacturers who systematically harvest this crop of ideas.

For example, 3M, the industrial products group, has had programmes in place since 1996 to harness ideas generated by lead users. After crunching the numbers, von Hippel found that "lead-user-developed product concepts" at 3M were likely to be more novel, enjoy higher market share, have greater potential to develop into an entire product line and be more strategically important.

Mass-producing products developed by lead users is only one possible approach. Alternatives include selling toolkits with which customers can build their own creations, or developing products that complement user innovations.

This latter strategy is useful in circumstances where - to the consternation of economists - lead users give away their innovations. Thus the Linux operating system was developed by members of the open-source software community, many of whom are lead users of computing power. Since Linux is freely available, commercial software companies are unable to sell proprietary versions. Instead, they have responded with software and services that complement Linux.

The toolkits approach has been used by companies including International Flavors & Fragrances, which supplies customers with the tools to design their own food flavours. Product development is left to users who are, of course, in the best position to know exactly what they want.

These examples turn on its head the traditional division of labour between producer and consumer. Manufacturers are supposed to develop and produce goods. Customers are supposed to consume. Democratizing Innovation shows that the flow of ideas and expertise is more complex. Value is often "co-created" by producer and consumer.

Perhaps wisely, Prof von Hippel chooses not to delve into the literature of co-creation. This allows him to keep the book short (at 200 pages) and palatably sweet. Readers who find their interest piqued might also take a look at CK Prahalad and Venkat Ramaswamy's The Future of Competition (2004), which tackles co-creation of value head-on.

Other useful complements include Experimentation Matters, by Stefan Thomke, Harvard Business School professor and sometime von Hippel collaborator; and Open Innovation, by Henry Chesbrough, now at the University of California at Berkeley. The common theme is that innovation and value creation are more complex than we like to think.

This has profound implications not only for corporate management but also for public policy. If the goal of policy is to increase social welfare by encouraging innovation - and if user-generated innovation really is more successful than other types - then rules and regulations should encourage this activity. At issue here is patent law, legal constraints on product modification and tax breaks for research and development. Why should manufacturers get all the incentives when users do such valuable work?

This is heavyweight stuff. And, despite its brevity, Democratizing Innovation is a heavyweight book, written with the lightness of touch you might expect from a regular contributor to the journal Management Science. But where innovation comes from and how value gets created are heavy questions for all companies in all industries. No innovation means no valued added, and ultimately no profits.

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