Prof. h.c. Ralf Reichwald

Technische Universität München

WSIS 2^nd Phase Tunis 2005-

Ordre des Ingénieurs Tunisiens (OIT)

17 Novembre 2005

Interactive Value Creation and Open Innovation

The Role of Engineers in Bridging the Digital Divide

Four basic questions

1. What is the real Chance for Individualization of Products and for an interactive value creation?

2. What means Decentralization and local production in Miniplants?

3. What is the concept of democratizing the Innovation Process?

4. Is Open Innovation capable to bridge the Digital Divide and what is the Engineers Role?

I. What is the real Chance for Individualisation of Products and for an interactive value creation?

In the past, innovation has always been seen as the domain of Engineering. Traditionally, manufacturers identified customer needs via market research and transferred those needs into products and processes, using solution informations of international Research and Development. Recently there is empirical evidence that this is the paradigm of closed innovation. Opposite to the dominating pattern in many firms interactive Value Creation is in practice. They assume that customers do not only express new needs. Customers could also be able to expand a firm’s technological capabilities and competencies in terms of providing access to new solution information. Even: users can build upon other users’ contributions or collaborate with other users to develop a final product without the help of a manufacturer. If user interaction platforms also provide features for consumer-to-consumer interaction in online communities, powerful user networks around a core product can be established. This is the story of Linux, a famous software-product.

Chart 1 shows the bridge to User-Centered Innovation Paradigm.

What is the real chance for this paradigm change?

Those challenges can be described as follows.

First, seller markets are increasingly shifting to buyer markets. Formerly assymetric market information is becoming equally distributed between customers and manufacturers due to new ICT. In research, this is known as the move-to-the market hypothesis.

Second, we observe a trend of individualization among customers. They increasingly demand for customized products and services to satisfy their needs. More and more, standard products are not longer capable to serve those individual needs and demands.

Third, many industries face hyper-competition resulting in ever shortening product life cycles and ruinous price wars. Additionally, customers more and more demand for high quality products and services.

Thus, successful companies are those who are able to serve markets in terms of efficient value creating strategies for small market segments.

In doing so, new ICT is seen as the main factor to face these challenges.

New ICT is becoming the main enabler for the networks of decentralized mini plants because of the following reasons:

IT is an enabler for Customer Integration in the Process of Value-Creation. Especially in the process of innovation engineers have to learn how to interact with Market partners for example customers and engineers have to improve their competencies of communication with customers, with suppliers or other partners in the market. This is not simple as we will see later.

II. What means Decentralization and local production in Miniplants?

Traditional Production of industrial goods in the traditional manufacturer-centered paradigm was Mass-Production in large centralized plants

In the future decentralized, close to market production in mini plants and new value creation principles will give the rules. Decentralized mini-plants have to execute a complex challenge. Namely, production of individualized products must be accomplished without loosing the cost-advantages of mass production. How could this work out? On the one hand side, producing goods in low scales goes with loosing economies of scale and scope. On the other hand, this disadvantage can be compensated through alternative economies. First, production is shifted from large scale plants to decentralized mini plants. These mini plants are situated close to the customers, so costs for delivery are low. Second, customer proximity facilitates the transfer of customer needs and market research. Third, goods are produced on demand, resulting in low cost for storage and warehousing. Forth, flexible manufacturing systems are increasingly able to produce lot sizes of one without fully loosing economies of scale. Fifth, mini plants are embedded in a tight network in terms of effective knowledge transfer between single plants.

We call this interactive Value-Creation Model „Mass Customization“

Therefore we need new Value-Creation Principles which are shown in the Model of chart 4

To exploit the advantages of mass customization, production requires new value creation principles. The major principle could be described as customer integration. With mass customization, customers are not seen as anonymous buyers of large scale standard products. Instead, customers are becoming increasingly integrated in the value chain of a firm. To deliver customized products, customers need to articulate their individual needs. Those needs are then translated in product characteristics. Subsequently, the individual product bundle is produced in decentralized mini plants.

So what does the future vision of competing looks like? We believe, that mass customization could become the dominant strategy to satisfy heterogeneous customer needs and overcome the challenges of hyper-competition. Mass customization is the use of flexible systems to customize production output without loosing the advantages of mass production. With mass customization, customers do not need to select from predefined variants but they can add various product attributes and services to a customized bundle which best fits their individual needs. But in contrast to traditional single-unit production, those customized bundles sell for prices of a standard mass produced product. In other words, mass customization combines the best out of the two worlds mass production and customization.

Today mass customized goods are for example shoes, shirts and jeans.

Tomorrow the mass customized concept will be realized in other custom oriented goods like mobile phones, medical instruments, service robots, sport devices and even cars.

III. What is the Concept of Democratizing the Innovation Process?

The idea of open innovation can be summarized as follows. Successful innovations require two types of information. First, Need information, that is information about customer requirements in terms of quality, price, design and usability of a product. And second, solution information – that is information of how to transfer customer requirements into a product. In the mode of the traditional paradigm, firms assume that customers do not have solution information. Open innovation whereas uses the insights of the customer interactive paradigm. There is a significant group of customers – so called lead users – which possess sticky solution information for innovations. To exploit these economies of open innovation, firms need to employ powerful strategies to transfer this sticky information at low cost.

Local information in the head of customers are sticky information. To make tacit knowledge flow from customer to designer we need

- Communication Competences

- Local Presence

- Tools of Interaction with customers even with low educated people.

In this field the role of engineers is to bridge people in the process of innovation.

To profit from Open Innovation, companies need to access information of local users. However, this type of information usually is difficult to transfer. Thus, we call this information sticky. Metaphorical speaking, solution information glues at the head of people like at honeycombs.

Obviously, not every customer is able to generate own innovations and solutions to her needs. This competence is concentrated among a specific group of customers which we call lead users. Lead users must not be highly developed or IT-educated. Lead users are customers who generate own innovations and share those innovations with a manufacturer. But why? First lead users are dissatisfied with current market offerings. In other words, lead users face needs that foreshadow forecast general demand in a local marketplace. Their dissatisfaction motivates them to search for an own solution to their needs. Lead users expect to obtain a high benefit from a solution to their needs.

We will now have look at some practical examples of open innovation.

I guess everyone is familiar with the first one – Linux.

Linux is a computer operating system. It is one of the most prominent examples of free software and of open-source development: unlike proprietary operating systems such as Windows and Mac OS, all of its underlying source code is available to the public and anyone can freely use, modify, and redistribute it. IN other words, users are constantly improving Linux and all major innovations were developed my users of the program instead of a single corporation like e.g. Microsoft.

Initially, Linux was primarily developed and used by individual freaks. Since then, Linux has gained the support of major corporations such as IBM, Hewlett-Packard, and Novell for use in servers and is gaining great popularity in the desktop market.

A second example of open innovation is wikipedia.

Wikipedia is a multilingual Web-based free-content encyclopedia. It is written by volunteers with wiki software, which allows articles to be added or changed by nearly anyone. The project began on January 15, 2001 The English-language version of Wikipedia currently has more than 800,000 articles. Wikipedia has steadily risen in popularity. Wikipedia has a community of users who are proportionally few, but highly active. During January 2005, Wikipedia had about 13,000 users who made at least five edits that month; 9,000 of these active users worked on its three largest language editions. A more active group of about 3,000 users made more than 100 edits per month, over half of these users having worked in the three largest editions. According to Wikimedia, one-quarter of Wikipedia's traffic comes from users without accounts, who are less likely to be editors.

The examples like Linux and Wikipedia, demonstrated that open innovation is of special impact for digital goods like software or knowledge. However, open innovation is not limited to digital products.

Oscar is a project where the principles of open source have been transferred to a physical good – a car. The idea was to develop a car within an online community meeting the following specifications:

The OSCar should be a modular concept – different design versions should be easily manufactured in decentralized local plants

interchangeable (network).

The OSCar should be a “world car”– simple, cheap, reliable, easy to maintain and repair.

It should also refer to local needs and resources.

New, environmentally friendly engine types – e.g., fuel cell, hydrogen or electricity – should be taken into consideration.

By now, the first OSCAR has been built with the help of traditional car manufacturers (see picture). The project itself was a big success. Lots of car enthusiasts participated in this project because they wanted to create a car that did not conform to established traditions. In a recent speech to shareholders, a high-level manager at DaimlerChrysler made a standing offer to support the OSCar project. Without mentioning OSCar or its founder directly, this DaimlerChrysler executive pointed out that his company would “support an open source car project in any way possible”

I come to my conclusions referring to the four questions at the beginning of my presentation:

IV. Is Open Innovation capable to bridge a Digital Divide?

This is the question which we have to answer, but we can’t give a final result. Respectively, open innovation demands – even heavier than alternative modes of value creation – for the efficient and effective deployment of new ICT. Thus, the need of foreign direct investment in physical technology remains. However, open innovation reduces the uncertainty about local demand as local information solutions (lead users) can be identified beforehand. Also, free revealing of innovations can reduce the digital divide as even people in developing countries get free access to innovations and knowledge.