Creative Networks

Chapter 5

Creative
Networks

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Chapter 5: Creative Networks

The hammers must be swung in cadence, when more than

one is hammering the iron.
- Giordano Bruno

Beyond individual and organizational creativity, networks of

individuals and organizations are opening up new creative

opportunities. As we have seen in earlier chapters, the more

people involved, the greater the possibility that a truly

amazing idea will be unearthed (but also the greater the

management challenge.) Creative networks take this

management challenge to a whole new level.

We now consider influencing individuals and groups outside

the boundaries of our own organization. These external parties

are likely to have considerably different agendas to our own

and we have little or no formal control over them. However,

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many leading companies now think that the rewards in terms

of access to new ideas are worth the effort.

Open innovation vs. closed innovation

Professor Henry Chesbrough uses the term open innovation to

describe the process by which ideas are gathered from outside
the organization. In contrast, closed innovation is the
traditional focus on internal R&D which can be summarized
as the belief that successful innovation requires control.

Closed innovation assumes that if you hire the best people in

your industry you will be more innovative than your
competitors and bring those innovations to market more
quickly. This will increase sales and profits which will allow
you to reinvest in R&D. A virtuous circle is created.

Chesbrough argues that the key assumptions behind the closed

innovation model are increasingly in doubt. He identifies four
main factors.

1. The increasing mobility of highly experienced and

skilled workers means that is much harder for a company
to prevent knowledge from leaking out before they have
had a chance to commercialize it.

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2. The growth of private venture capital (VC) funding has

provided entrepreneurs with a source of capital to help
them develop innovations outside of the traditional
corporate research labs.

3. The growth in the number of people with college or

post-college level education means that even the smallest
start-up can have access to highly skilled individuals.

4. The shortening of time to market and product life-

cycles means that larger organizations are often at a
disadvantage compared to smaller, nimbler competitors.

The implication is that many organizations may be able to

improve their innovation if they adopt a more open model.
New ideas may come from outside the organization, and the
root to market may involve new channels outside the current
businesses of the firm.

Customer R&D

Think of a product which you use regularly and would

describe yourself as an expert with. Can you think of any ways
that this product could be improved? You can probably think

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of dozens of improvements and would gladly tell the

manufacturer if they asked you.

The most common external group companies turn to for

creative inspiration are the users of their products. Users
understand all of the products benefits and shortcomings and
are likely to have many ideas about how the product should
develop in the future.

For example, the American bicycle helmet manufacturer Bell

has collected hundreds of ideas from its customers and is
putting several of them into production. Electronic Arts, the
computer games manufacturer, even goes as far as providing
programming tools so customers can improve games and post
their modifications online

Larry Selden and Ian MacMillan, in their April 2006 Harvard

Business Review article, Manage Customer-Centric
InnovationSystematically.) recommend that companies
transfer some of the expenditure earmarked for traditional
R&D to what they term customer R&D. All too often the
ideas flowing out of R&D only excite the people working in
R&D and fail to excite the customers themselves. Perhaps the

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ideas are too complicated, include unnecessary features or are

only useful in very specific circumstances.

Consider for example a standard photo editing package

shipped with many PCs as a standard feature. It is likely to
include some incredible features that allow the home user to
enjoy the kinds of graphics-manipulation tools available only
to professionals just a few years ago.

Unfortunately, most people are not interested in applying a

gamma correction filter to their holiday snapshots. In fact, it is
likely that most customers will never actually make use of the
sophisticated software at all because they cant be bothered to
invest the time required to learn how to use it!

Selden and MacMillan have developed a process they call

Customer-Centric Innovation (CCI) which is designed to
ensure the innovation process is closely aligned with customer
needs. They argue that companies should establish a deep
relationship with core customers by identifying core customer
segments and developing mutually beneficial value
propositions. These core segments can then be expanded to
include halo segments which have similar needs.

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Users are likely to be innovating with your product whether

youve asked them to or not. A group of environmental
enthusiasts in California have re-engineered the Toyota Prius
so that its battery can be recharged by plugging it into the
mains. This innovation more than doubles fuel efficiency to
more than 100 miles per gallon.

The traditional mechanism for understanding customer needs

is via market research, sales reports and customer complaints.
These can all provide valuable information but they tend to
focus on the average user. Lead users are the early adopters
who are at the cutting edge of your technology. They are the
people who have thrown away the instruction booklet long
ago and may have modified and extended the product to
perform functions you have never even considered. They are
forced to do this because their needs are so far ahead of the
rest of the market. Often lead users are not even in the same
market as the vast majority of your users and have adapted the
product for a completely novel purpose.

Most lead users are prepared to share what they have learned
with the manufacturer for free. Eric von Hippel and colleagues
provide two explanations for this behavior in their research on
3M and other innovators. Firstly, if the lead users are in a

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different market then they may feel no competitive effects

from revealing their innovation to you. Secondly, many lead
users have innovated through necessity rather than for
competitive advantage and may welcome a supplier who is
willing to develop their ideas for them.

Von Hippel argues that innovations obtained from lead users

have a much higher success rate than innovations from other
sources and that the majority of innovation happens through
the lead user process. His team has worked with many large
companies to help them develop and implement a lead user
process.

Lead user process at 3M

3M is a company well known for its innovative flair (as

evidenced by the Post-It note example previously mentioned)
but in 1996 it was struggling to find a breakthrough for its
surgical drapes product line. Surgical drapes are thin adhesive
backed films used during surgery to prevent infection. 3M was
the market leader in the surgical drapes market, but had not
had a major breakthrough product for nearly a decade. It now
faced shrinking margins and limited growth opportunities.

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Traditional market research and R&D was failing to deliver

the desired breakthrough.

By following the lead user process developed by von Hippel

and his collaborators, 3M was able to discover several new
breakthrough innovations. First a cross-functional team was
assembled including R&D, marketing and manufacturing
expertise. The team then set about learning everything they
could about infection prevention and important trends in the
market. This led them to discover that doctors in developing
countries were underserved by the traditional market as
surgical drapes were too costlythey used cheap antibiotics
instead.

The team then sought out the lead users in the field of
infection control; some turned up in some surprising places.
For example, veterinary surgeons had to deal with hairy
patients who did not wash and had no medical insurance.
Hollywood makeup artists are experts at applying substances
to the skin that did not cause irritation and can be easily
removed. The lead users were invited to 3M for a workshop
with the aim of finding a revolutionary, low-cost approach to
infection control.

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The workshop generated concepts for six new product lines

and a radical new approach to infection control that started
before the patient had even arrived in the operating theater.
The likely long term benefits of this new strategy will be
significant both to 3M and to patients. 3M has now
successfully implemented the lead user method in several of
its divisions.

Creative networks

The same logic that suggests that product users can provide
valuable ideas can be applied to many other groups outside the
company. For example, suppliers and distributors hold a great
deal of valuable information about how your supply chain
performs, where any inefficiencies may lie and how lead times
may be reduced.

Retailers understand the buying decisions that customers are

making and the comparison between your product and
competitor products. Even groups completely unconnected to
your company or industry may be developing technology,
systems or strategies that you would find enormously
valuable. Recognizing this value, and seeking to capture it,
underlies the logic behind building creative networks.

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John Seely Brown, the former head of Xerox PARC, and John
Hagel, a business consultant, use the term creation nets to
describe the networks that open innovation demands
(Creation nets: Getting the most from open innovation,
McKinsey Quarterly, 2006 Volume 2.) These networks are
formed when many participants from diverse institutional
settings collaborate to create new knowledge, to learn from
one another, and to appropriate and build on one anothers
work.

Procter & Gambles connect and develop

To understand how a creative network functions in practice

lets look at recent example from Procter & Gamble. In 2000
the global consumer products giant was struggling to deliver
expected growth, R&D productivity had leveled off and the
percentage of new products meeting their financial objectives
had stagnated at 35%. When the company missed a quarterly
earnings target more than half of the companys market
capitalization was lost in a matter of weeks.

A.G. Lafley, the new CEO, challenged P&G to totally

redesign the approach the company took to innovation. Like
many mature, global firms P&G still embraced a traditional,

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internally-focused R&D model. New ideas were developed in-

house, usually across a period of several years and at
considerable cost. The rationale for this approach remained
clear enough. If you are the global leader, employing some of
the best and brightest across the world, why would you look
anywhere else?

The answer became clear when P&G managers compared the

success of homegrown products to the few products that had
outside development. External innovations had more chance
of being successful and were usually cheaper and faster to
market. The old rationale that in-house was always better was
no longer true.

Lafleys response was to set a target of 50% of P&Gs

innovations to come from outside the company. The old R&D
model was replaced with connect and develop (C&D) which
used P&Gs strength in understanding consumer needs to help
identify promising ideas from around the globe. P&Gs
expertise in manufacturing, marketing and purchasing could
then be applied to create better, and cheaper, products faster.

P&G has now developed networks that link entrepreneurs,

suppliers, private labs, universities and governments around

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the world. For example, the InnoCentive network allows P&G

to put a question to 75,000 contract scientists around the
world. About a third of the problems posted have been solved.

Pringles Prints provide a good example of connect and

develop (C&D) in action. In 2002 the idea of printing words
and images onto regular Pringles chips surfaced during a
brainstorming session.

Rather than ask the internal R&D function to develop a

solution from scratch, the team instead wrote a technology
brief that was circulated through the firms global networks.
The power of this network approach was quickly
demonstrated. A small bakery in Bologna, Italy was identified
as already possessing the technology to inkjet print onto cakes
that was then rapidly adapted for Pringles. This innovation has
helped North America Pringles achieve double-digit growth
over the past two years.

There are two key challenges that such networks must

overcome. Firstly, how can the participants trust one another,
especially when they may be sharing commercially sensitive
information? Secondly, how can the participants efforts be

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coordinated across a diverse range of agendas and tolerances

for risk?

Both of these challenges can be tackled, in part, by the

presence of a network organizer. The network organizer is
responsible for the formation of the network, acts as a
gatekeeper to determine who participates, and determines the
ground rules such as participation protocols and dispute
resolution.

A network organizer may be an individual, a small core team

or a corporation or other large institution. For example, P&G
acts as a network organizer for NineSigma which connects
science and technology companies. In contrast the
YourEncore network of retired scientists and engineers is
operated independently.

The long term benefits of creative networks help to ensure that

participants are motivated to act cooperatively and treat each
other fairly. For example, while there may be a short-term
financial incentive for P&G to (selfishly) expropriate a novel
technology developed through a network, the long term
benefits of remaining a trusted player in that network are far
more valuable.

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CASE STUDY: Wikipedia

A wiki is a website that allows visitors to edit its content.

Wikipedia, the online encyclopedia formed in 2001, is perhaps
the most famous wiki. It is operated by the non-profit
Wikimedia Foundation and boasts more than 3.8 million
articles in more than 130 languages at the time of writing.
Anyone can edit any of the articles on Wikipedia, making it
one of the largest collaborative networks in the world. The
expectation is that articles will improve over time through the
cooperative effort of thousands of users. This is exactly the
same logic that is employed in the development of open-
source software such as the Linux kernel.
Many people question the accuracy of Wikipedia articles
given they are written through a process of open collaboration.
In a recent survey fifty subject experts were each invited to
review a Wikipedia article related to their field of expertise.
76% agreed or strongly agreed that the article they reviewed
was accurate.

Process networks

The logic of creative networks can be applied to processes to

help companies build highly flexible and innovative supply
chains, manufacturing processes, and distribution networks.

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For example consider a traditional supply chain. The closed,

linear mindset would advocate tight control of a small number
of suppliers to assure quality and minimize the costs of
coordination. The cost of this control is inflexibility and the
inevitable build up inventory or stock outs as demand patterns
change unexpectedly.

Contrast this to the open, networked mindset in which a large

number of suppliers can be called upon at short notice and
supply chains that can be configured and reconfigured as
demand requires. The additional costs are due to the increased
complexity of managing a network rather than a linear chain
but the benefits such as reduced time to market can be
enormous.

The decision as to whether it is appropriate to adopt a more or

less open model will depend on the importance of quality
assurance, flexibility and speed to market. For example, a
pharmaceuticals company is best advised to retain a closed
model to ensure product safety and protect intellectual
property, whereas a fashion retailer may prefer the speed and
cost benefits of an open system.

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Li & Fung, Hong Kongs largest export trading company,

supplies some of the best known American and European
retailers with clothing and other consumer goods. It is also
one of the world leaders in dynamic supply chain management
and has created a network of thousands of suppliers that can
be called upon to produce whatever consumers may demand at
very short notice and minimal expense. (Details for this case
study were drawn from Joan Magrettas interview with Victor
Fung in Harvard Business Review, September-October 1998.)

If Li & Fung receives an order for a batch of 10,000 mens

shirts, the yarn may come from Korea and then be sent to
Taiwan to be woven and dyed. Meanwhile the buttons are
being manufactured in China by a Japanese company. The
shirts themselves may be assembled in Thailand, but because
the customer needs a very quick delivery the manufacturing is
distributed across five different factories. Five weeks after the
order was received, 10,000 shirts arrive and appear on the
shelves in Europe.

What we do is close to creating a customized value chain for

every customer order, Victor Fung explained to Magretta.
Our policy is not to own any portion of the value chain that

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deals with running factories. Wed lose all flexibility and wed
lose our ability to fine-tune and coordinate.

EXERCISE: Your creative network

Thinking about your business, do new ideas mainly come

from inside our outside the organization?
Draw up a list of 20 organizations or individuals external to
your company that would be a possible source of new ideas.
You may find the following headings useful:

Suppliers

Distributors

Customers

Competitors

Public sector

Professional groups

Individuals

Would your organization benefit from some form of creative

network?

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Summary

In this final chapter in the creativity section of the book we

looked at how firms can benefit from looking beyond their
own boundaries for ideas. The concept of the creative network
was introduced and we saw how P&G now uses international
networks of scientists to help it develop new product
technologies. We also considered how Li & Fung have
developed highly flexible process networks that allow them to
create efficient supply chains very quickly.

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References:

Chesborough, H. W. Open Innovation: The New Imperative

for Creating and Profiting from Technology. Boston: Harvard
Business School Press, 2003.

von Hippel, Eric. Democratizing Innovation. Cambridge,

MA.: MIT Press, 2005.

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