How to Manage Outside Innovation

Kevin J. Boudreau and Karim R. Lakhani, MIT Sloan Management Review

* Communities are useful when an innovation problem involves cumulative knowledge, continually building on past advances. Markets are effective when an innovation problem is best solved by broad experimentation.
* In general, communities are more oriented toward the intrinsic motivations of external innovators (the desire to be a part of some larger cause, for instance), whereas markets tend to reward extrinsic motivations (such as through financial compensation).

To appreciate the important role that outside innovators can play, look no further than Apple Inc.’s wildly successful iPhone. Thousands of external software developers have written complementary applications for the iPhone that have greatly enhanced its value, transforming the product into a blockbuster that has become the center of a thriving business ecosystem. Of course, the fundamental concept of “open innovation” 1 — relying on outsiders both as a source of ideas and as a means to commercialize them — is hardly new, but companies have struggled with precisely how to open up their product development to the external world. For starters, many executives have little idea how to motivate and manage outside innovation. Specifically, should external innovators be organized as a collaborative community or as a competitive market?

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