Communities of Creation: Managing Distributed Communities of Creation: Managing Distributed Innovation in the Network EconomyInnovation in the Network Economy

Mohan SawhneyKellogg Graduate School of Management

University of Colorado at BoulderMarch 2001

Slide 2

Assumptions underlying traditional innovation management

Innovation is governed through a hierarchical mechanism.

Firm organize innovation as a closed autonomous system.

Firms retain full control over innovation process.

Firms retain intellectual property rights over innovation.

Slide 3

Are being questioned in the network economy

Convergence of industries and blurring of boundaries– Increasing diversity of knowledge base

Focus on core competencies– Increasing need for partnering and collaboration

Emergent nature of innovation and markets– Increasing need for adaptability and speed

Deep connectivity with partners and customers– Increased ability to co-develop and co-create

Slide 4

Rethinking innovation governance

Autonomous knowledge production is inadequate.

Creativity and skills of partners need to be tapped.

Knowledge creation needs to transcend firm boundaries.

Innovation is becoming distributed across firms in the value network.

But managing distributed innovation requires new governance approaches.

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Innovation and knowledge creation: The sociological view

� Knowledge creation as a synergistic interplay between individual contributions and social interactions.

� Knowledge creation as spiraling interactions between explicit and tacit knowledge – the ba (shared space).

Information

Social IndividualKnowledge Knowledge

Relationships

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Characteristics of knowledge in the sociological view

� A social construction, embedded in a system of social relationships (Weick 1979; Kogut and Zanser 1992)

� Socially spread, and influenced by social settings (Shutz 1970; Hutchins 1983)

� Developed through participations in communities of practice (Wenger 1998)

� Continuously changing: from individual to social, from tacit to explicit (Nonaka and Takeuchi 1996)

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Implications of the sociological view for knowledge creation

Knowledge creation as an emergent, diffuse process, and not the output of a rigid planning process.

Knowledge creation as a shared outcome of individual actions, where every player contributes, but individual contributions cannot be uniquely identified.

Knowledge as not being isolated and owned by individuals, but being distributed and being owned by a community of individuals.

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h

The shifting locus of knowledge creation: From firms to communities

Firm

Firm Partner

Partners

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Community of creation: An alternative to hierarchy and market-based systems

HIERARCHY COMMUNITY MARKET

Complete control Edge of chaos Complete chaos

DEGREE OF OPENESS TO THE ENVIRONMENT

DEGREE OF STABILITY OF THE SYSTEM

Degree of openness of system

Degree of stability of system

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Governing communities of creation: Research questions

What level of control should the sponsor firm maintain?

What are the roles and responsibilities of the sponsor?

What are the criteria for selecting the members?

Can individual contributions be rewarded?

How should intellectual property rights be managed?

How should the community be allowed to evolve?

What incentives promote long-term member involvement?

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Contributing literatures

Transaction costtheory

(Governancemechanisms)

Complexity theory

(Balancing structurewith chaos)

Community organizationand management

(Collaboration and co-creation)

Intellectual propertyrights management

(Allocating economicrents from innovation)

Community ofcreation

(managing distributedinnovation)

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Governance mechanisms for innovation:Transaction cost analysis

Transaction Cost Analysis (TCA) proposes that a shift from markets to hierarchies will reduce transaction costs in situations characterized by uncertainty, bounded rationality and opportunism (Williamson 1985).

Limitations of traditional TCA:

– Focuses on benefits to the individual firm.– Ignores interdependence among partners.– Focuses on cost minimization, not value maximization.– Focuses on structural aspects of organizational exchanges, not

processual or behavioral aspects.

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Rethinking Transaction Cost Analysis

Shift in emphasis from cost minimization by individual firms to value maximization by networks of firms (Zajacand Olsen 1993).

Shift to more effective governance mechanisms, even though they may be less efficient.

Increasing returns from sharing knowledge may outweigh increased transaction costs.

The need for variety and creativity potential may dictate shift to markets, rather than hierarchies.

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Combining markets and hierarchies:The concept of agoric systems

An agoric system is a system for managing software that uses market mechanisms, and allows for software to be distributed across and to serve different owners pursuing different goals (Miller and Drexler 1988).

Decentralized planning is combined with central direction of resource allocation by coordinating firm.

Coordinating firm does not design rules that embody fixed decisions, but designs rules that enable flexible decision making.

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Shifting the locus of innovation:Insights from community management

Knowledge socialization is based on relationships of meaning building and sharing. Such relationships demand a context of co-participation. The community is the “cognitive minimum common denominator” for all participants that promotes the development of shared values, reciprocity and mutual trust (Taylor 1987).

– From knowledge exploitation to knowledge co-creation (Sawhney and Prandelli 1999).

– New relevance of periphery relative to the core (Micelli and Prandelli 1999).

– Need for “community organizer” to define the ground rules.– Need for screening criteria to ensure quality of participation.

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Balancing order and chaos:Insights from complexity theory

Firms that structure themselves as complex adaptive systems operate “at the edge of chaos” as organic systems open to their environment, creatively evolving and self-organizing to renew themselves while maintaining internal coherence (Kaufmann 1995; Youngblood 1997).

– Good competitor yet good evolver.– Robust versus focused strategies.– Standardizing what works, but seeding variation.

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The role of the community organizer:Tending the garden of innovation

The leader should promote the richest possible environment for self-organization to occur.

Leader’s primary tasks:

– Promote a clear identity through purpose, principles, strategy and culture, all of which cumulate into a “shared vision” (Youngblood 1997)

– Continually “perturb” or de-stabilize the system from its equilibrium state to promote experimentation (Vicari 1991, 1998).

– Create mechanisms for learning that promote trial and error, risk-taking, but also a tolerance for failures and mistakes.

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Allocation of economic rents:Managing intellectual property rights

Paradox of IP rights management in the network economy:– Digitization decouples ideas from the physical expression of

ideas, but IP law protects physical expressions (Barlow 1993). – Socialization perspective on knowledge creation creates conflict

between incentives for greater production of knowledge and faster distribution of knowledge (Thurow 1997).

Solutions:– Vesting IP rights with the community, not individuals.– “Encapsulation” of knowledge objects to protect IP rights of

individuals when knowledge is object-oriented.

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Application: Innovation management models in computer industry

Closed“Hierarchy”

model

Partially open“Community”

model

Open“Market” model

CaseExamples

Xerox PARC Sun’s JiniProject (SCSL)

IBM Alphaworks,Linux.

GovernanceMechanism

Hierarchy Community Market

Rigidity ofBoundaries

Closed system Emergentsystem

Open system

Degree ofStructure

Basicallystructured

Self-organizing Basicallyunstructured

Degree ofOrder

Order Creativetension

Disorder

Degree ofChange

Stasis Edge of chaos Chaos

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Sun’s Community Source Licensing:Innovating at the “edge of chaos”

Sun as developing organization (control)

Edge of chaos

Chaos

“The Sun Community Source License (SCSL) is designed to balance the needs of organizations needing to innovate rapidly in order to grow with the needs of organizations seeking to leverage a community’s expertise while maintaining proprietary advantages.”

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Managing a community of creation:Lessons for managers

Key questions Lessons for managers

What level of control should thesponsor company maintain?

- Needs to pull individual organizations into a circle of shared concerns,then allow them to self-organize.

- Needs to coordinate individual schedules and priorities, at the sametime allowing for emergent modifications.

- Needs to establish responsibilities to ensure alignment.How can property rights bemanaged?

- Intellectual property has to be maintained within the community.- Rights have to be directly proportional to responsibilities.

What incentives favor a directinvolvement in the long run?

- There needs to be a business model that encourages and rewardsindividual invention.

- To protect the quality of innovation, community needs to be “gated”.How can the community evolveand maintain stability?

- Preserving and renewing the balance between continuous innovationand internal cohesion, between openness and closedness.

- Tolerance for diversity and redundancy to favor innovation.- Sponsor needs to fund support for the entire community of licensees

as well as for further development.What level of support shouldthe sponsor firm provide? Canthe community remain virtual?

- To maintain the community overtime, physical support is essential.- Services offered by sponsor should be tiered, depending on intensity

of the individual members’ involvement.

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Case Study: Cisco SystemsGoals:

– Actively listen and respond to customer input – Reinforce position as leader in Internet capabilities

Solution:– An interactive community that allows customers, partners,

and prospects the opportunity to exchange information on networking topics with peers and with fellow Cisco experts.

– A vehicle for connection on a peer-to-peer level, visitors benefit by sharing experiences, best practices, lessons learned, etc., in real time.

Benefits– Allows Cisco to continuously capture feedback from customers

and partners, which can be used to anticipate and build next generation products and solutions

– Gain valuable information on networking trends and issues to aid in our marketing, engineering, sales and support efforts.

– Grow customer and partner loyalty as customers and the channel educate each other on Cisco products and solutions.

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Example: Cisco Systems

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Example: Cisco Systems

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Requirements for Community of Creation

• a common interest;

• a sense of belonging;

• an explicit economic purpose;

• a sponsor;

• a shared language;

• ground rules for participation;

• a mechanism to manage intellectual property rights;

• physical support of the sponsor;

• co-operation as a key success factor.

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Summary: Challenges in managing a community of creation

– Balancing order and disorder.– Balancing stasis and chaos.– Balancing incentives for knowledge production and

incentives for knowledge distribution.– Balancing individual rights and responsibilities.– Balancing common priorities and flexibility.– Balancing tolerance for diversity and redundancy.

Constantly feeding and renewing the creative tension that defines innovation “at the edge of chaos”.

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Communities of creation:Implications for theory

� From distribution of physical work to distribution of cognitive work.

� From transformation of products to transformation of ideas.

� From organizational intelligence to relational intelligence.

� From hierarchies that maximize control to adaptive organizations that maximize adaptability and creativity.

� Beyond dualities like “isolated-connected”, “concentrated-distributed”, “market-hierarchy”, make-buy”, “inside-outside”.