On producer-consumer interaction / Study notes about transaction costs in the producer environment and impact to innovation (feat. Eric von Hippel)

Reference

• Reference meeting: a05-820 — minisites — marcio — meeting — archive — transaction costs and platform costs fd38434a-d618-4e69-9cb8-1d1010611045 Tuesday, December 31⋅12:30 – 1:00pm Tuesday, December 31⋅1:00 – 1:30pm
• Parent project: Consumer-producer innovation
• Related study material: User Innovation, Free Innovation from Eric von Hippel
• Participants: Marcio S Galli
• Text language: en-us
• Tags: Tags: Tags: User Innovation, Producer-consumer interaction, Platforms, Network Effects, Innovation
• Document status: Copyright, draft; This is highly influenced by and/or may have parts from Eric von Hippel, check this text before any formal publishing

Existing transactions in the producer environment, and impact to innovation

• As companies develop solutions, they increase their effectiveness to provide incremental changes.
• Companies also seek innovation, thus establishing a process for innovation that breaks the effectiveness of the incremental process is challenging.
• Thus it becomes important, in order to understand how an innovation process/solution emerge, at a company, to identify factors or forces influencing product development.

Transaction costs in user innovation

Eric von Hippel, in Democratizing User Innovation, looks at transaction costs involved in user's decision to innovate. First it is important to position what is the user in Eric's study — a principal that has a need and wants to get a custom solution. The premisse, in looking at transaction costs, is based in the condition that users are interested in custom products in parallel with the fact that manufacturers tend to produce more common solutions. There is also the recognition that manufacturers could be well positioned to develop such products, assuming their knowledge, tools, expertise, etc.

The factors related to transaction costs are associated with the differences, in views, among users and manufacturers:

• Differences what is desirable
• Differences in quality requirements defining innovation
• Differences in legal requirements

These gap can be recognised when looking at the case of a user that hires an agency to come up with a needed solution. Agency costs arise due to elements that can be perceived as related to management or to the efforts in place to ensure the contract nature.

First the need for the agency to monitor and ensure the principal's interest. Secondly, the agency will also add costs to not become an agent that would otherwise commit against the user's interest. This second point is specifically interesting to look at from another angle:

Notice that software developers, mainly the ones that are familiar with open source development, tend to enjoy to offer custom solutions that can also release open source code on the side. When they negotiate such requirement, as part of a consulting work, they establish a certain degree of freedom, such as the means that gives them freedom to reuse any knowledge or software components that came out as a by-product or requirement for the said custom solution. This phenomenon (assuming it's a phenomenon) is not limited of a desire for producing performance gains, such as reusing content from the project, such as solution knowledge, in future projects. We need to recognise this hired agency, for example an individual, will be well positioned to live the enjoyment of producing innovation, as they perform the task, therefore they can engage in curating a situation to improve their chances to innovate, such as to release knowledge in the open space, to use open tools in the process, and more.

Another cost factor may also happen due to a potential outcome that does not fit the required interests. It is common, in the relationship between the principal and agency, a bond contract that recognises that a space for change as all players may not fully understand precisely what they want – and the agency sells potential iteration as part of their service.

Reality within companies

For existing business, that have their own solutions and means to come up with their innovation – think of the a company silos for engineering, design, sales, marketing, and more; the problem is not much different and it may in fact be increasingly complex as the company grows. The silos model creates gaps because these tend to become services within companies:

The design silo sells to the engineering or marketing. The engineering serves needs of marketing or customer, and more.

Similarly to the case between the principal and the agency, the teams will create certain contracts to serve their interests. And the condition becomes complex because executing teams have stakeholders of various kinds, within their silos and outside their silos. All that a silo produces may have outcomes to the customer silo but also to the internal stakeholders.

The alignment and management ciclos comes into play as an attempt to create internal social contracts in an attempt to establish performance improvements using traditional management such as project management or creating system of benefits for the groups or individuals.

Modern companies are improving the model, establishing elements that are common and are influencing factors to productivity, or the costs gap, but are not exactly positioned as stakeholders associated with a silo or another. These elements are positioned as common elements that may be recognised as cultural elements – exactly because they transcend. We tend to identify all that does not fit, and that is good, as under the strong culture umbrella.

In Lean Startup meets Design Thinking, Eric Ries points out at the need for a broader design process that resides outside company silos. He recognises that most companies think of design as a silo, or service, with other silos consuming when needed. He claims that it is needed to rethink that model.

Alex Schleifer, VP of Design at Airbnb, also recognises that design roles need to exist across the organization. Alex goes further to help us understand that we define roles based in role models too – and that we got used to known role models of engineering and management, for example. As more successful companies innovate with their successful role models, we will more recognise that new functions can be better established company wide – perhaps things that, when we see as successful today, we refer as strong culture.

In Brian Chesky's interview (Bliztscaling) he points out on the strong cultural traits that Airbnb displays – clearly traits associated with how designers see things. Brian points out that the company is always reinventing things and constantly learning.