Introduction to Outside Innovation

The Outside Innovation Imperative

March 30, 2006

Customers are challenging your business models and demanding access to your intellectual property. This is what we refer to as the outside innovation imperative. You now have no choice but to redesign your business from the outside in. The good news is that you can profit from engaging with customers to drive your business innovation.

The outside innovation process involves engaging with lead users and lead customers in a variety of roles to create new products, processes, and business models. There are seven ways in which outside innovation differs from traditional innovation processes.


The “Customer Revolution” that I described in 2001[1] is now in full swing. Customers have taken control. Their rampant comparison shopping is eroding your margins. Their renegade behavior is challenging your business models and endangering your intellectual property. Their demanding expectations for customized products, wonderful experiences, and high service levels are draining your resources. Customers’ insistence on open access is exposing your industry’s policies and challenging your inflexible business processes.

The user-led outside innovation movement is inevitable. It’s scary. It’s exciting. And, it’s dangerous to your business if you’re not prepared.

What can you do to channel this customer energy into a positive direction--one that will power your business rather than sink it? Here’s the answer: engage your customers in more ways to help you redesign your business, your products, your processes, and your business models.

You’ve already begun to open the floodgates by giving your customers the ability to do business with you electronically. You’ve felt the excitement of working shoulder-to-shoulder with specific customers to help them solve problems or design new products. You may have already empowered customers to solve each others’ problems. Your executives are immersed in customer meetings. You’re sprinkling your organization with customer survey data and customer loyalty scores. But that’s drip irrigation. Now it’s time to turn the spigots on full--invite customers to play more roles in driving your business direction.

Harness Customer-Led Innovation

In this book, we’ll describe a “new” approach to the process of business innovation. In particular, we’ll describe innovation approaches that intentionally involve outside parties, most notably customers and potential customers, in the process of creating new value.

You’ll see how customers designed LEGO’s highest revenue-generating product, MINDSTORMS TM . You’ll discover how customers co-designed an open source telephone system that sells for one-tenth the cost of competitive offerings. You’ll learn how Staples redesigned the retail rebate process in response to customer demand. You’ll learn how GE Plastics empowers designers by providing them with direct access to its most proprietary knowledgebase. You’ll discover how Hallmark, Kraft, Unilever, and Charles Schwab have harnessed customers’ insights and creativity to drive their business decisions. You’ll see how tens of thousands of scientists and engineers are using National Instruments’ tools to design custom solutions while helping others do the same.

You’ll also discover how millions of consumers are collaborating to create and evolve next-generation multi-player games--games that would normally cost $100 million to develop are now being co-created by the gamers themselves. You’ll see how publishers and broadcasters are not only giving away their intellectual property, but encouraging customers to create derivative works. You’ll learn how companies around the world are enabling customers to create individually-customized products cost effectively. You’ll discover how top car designers from competing firms are co-creating an open car design and how competing scientists are collaborating to create breakthrough medical treatments--these are complex, difficult, and expensive projects that are best realized through multi-player collaboration. You’ll also discover how customers are reinventing the money lending business at Zopa, how they’ve become the salesforce at Karmaloop, and the product designers at Muji.

Will your company miss the next, and by far most sweeping, tide of outside innovation? This tide is big. And it’s going to get bigger. Unlike a tidal wave, which flattens everything in its path, the customer innovation surge is more like water pouring over a dam. It keeps coming. It generates tremendous energy. It powers new services and provides new growth opportunities. It opens new markets and spawns new products. It transforms industries. It changes business models. But if you aren’t ready, you won’t catch the outside innovation wave, and you may be waiting a long time to find another one. Don’t let that happen!

The Innovation Game Is Changing

I like John Seeley Brown’s definition of innovation best: “Innovation is invention implemented and taken to market.”[2] You create or invent a new product or a new way of doing things. You commercialize it. Customers value it. Your firm benefits through increased sales and/or usage, improved brand reputation, and better results delivered. In the English language, we use the noun “innovation” in two ways: The innovation process and products, or the results of innovation.

The Process of Outside Innovation

When business people say “we need to master repeatable innovation,” they’re referring to the innovation process. The process of innovation is the procedure that businesses use to create something new.

Outside innovation is an innovation process. You engage directly with lead users and passionate customers to harness and commercialize their ideas, and to co-design solutions that will better meet their needs and the needs of other prospects and customers. As you’ll soon see, many companies already do this today. What’s new is the exponential growth in the ratio of outside innovation to inside innovation in many industries. In the software industry, for example, outside innovation--in the form of open source development--now accounts for more than 50 percent of all R&D.

The Results of Outside Innovation

When business people say “we need a predictable stream of innovations that will keep us ahead of our competition,” they’re using the word innovation to describe the results of an innovation process: innovative products. But don’t limit your thinking to products per se.

There are many different kinds of innovations--new products and services, new business processes, new knowledgebases, new marketing and distribution approaches, and new business designs. Ideally, you should be engaging with lead users and customers to help you identify, commercialize, and co-create innovations in all of these realms.

How Does Outside Innovation Differ from “Traditional” Innovation?

There’s an underlying assumption that drives traditional innovation. The assumption is that “our experts are smarter than our customers.” While it is certainly true that your company probably has deep subject matter expertise in a certain domain--automobile design, product packaging, financial derivatives structuring, new drug discovery--it’s also true that your customers are subject matter experts in their own right. In particular, your customers know more about their context, their desired outcomes, their needs, and their constraints than you can ever hope to learn.

Traditional approaches to innovation assume that our subject matter experts invent and design innovative new products to meet needs customers may not have even realized they have. Then our marketing and advertising departments make prospective customers aware of those needs, wrap a brand experience around our innovative products, package and price those offerings (with some market research along the way), and bring them to market. That’s the old “inside out” approach to business and product innovation.

The outside in approach is to flip the innovation process around and assume that customers have outcomes they want to achieve, they have deep knowledge about their own circumstances and contexts, and they are not happy with the way they have to do things today. They’re looking for better ways to do the things they care about and/or need to get done. They will innovate--with or without your help--to create better ways to do things or to design products and services that meet their specific needs. If you want to harness the power of customers’ organic creativity, you need to support their creative processes, with ...


1) Seybold, Patricia. The Customer Revolution: How to Thrive When Customers Are in Control. New York: Crown Business, 2001

2) Foreword to Open Innovation by John Seely Brown, Open Innovation: The New Imperative for Creating and Profiting from Technology, Henry William Chesborough, Harvard Business School Publishing Corporation, 2003

3) Democratizing Innovation, Eric von Hippel, MIT Press, 2005

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