Page 1

“90% of our customers just want to consume. Perhaps 10% want to make their own stuff online. 1% has the skills to make something which is good enough for others to want to buy it. Perhaps 1% is high, let us say 0.1 or even 0.01%, but with a customer base of 3.2 million that is still more than 3,000 people! At the moment we have 150 designers at LEGO� Paal Smith-Meyers, LEGO

THE LONG TAIL INNOVATION MODEL

David Dencker Cand.Merc.(fil) Master Thesis Advisor: Christopher Hienerth, IVS March 3rd 2008 Copenhagen Business School

1


The Long Tail Innovation Model How producer established online communities, toolkits and collaborative filtering can make niche products profitable.

Table of Contents 1 Introduction .................................................................................................... 3 1.1

1.1.1

Innovation Paradigms ............................................................................................6

1.1.2

Long Tail Economics ...............................................................................................8

1.1.3

Research Demarcation and Research Questions ....................................................9

1.2

2

Research Interest ..........................................................................................................6

Methodology ..............................................................................................................11

1.2.1

Research Strategy ................................................................................................11

1.2.2

Case Sampling ......................................................................................................12

1.2.3

Data Collection and Verification Methods ............................................................14

1.2.4

Data Reduction ....................................................................................................18

1.2.5

Data Presentation ................................................................................................19

Literature Review .......................................................................................... 21 2.1

Innovation...................................................................................................................23

2.1.1

Challenges in NPD ................................................................................................23

2.1.2

User Innovation ...................................................................................................24

2.1.3

Motivation for Innovators ....................................................................................28

2.2

Marketing ...................................................................................................................31

2.2.1

Market segmentation and micro segmentation ...................................................31

2.2.2

Mass customization and Collective Customer Commitment .................................33

2.2.3

Technological Enablers .........................................................................................36


3

4

Results ........................................................................................................... 39 3.1

Case Description .........................................................................................................39

3.2

Emerging Themes .......................................................................................................42

3.2.1

Drivers, Enablers & Barriers .................................................................................43

3.2.2

Innovation, Community & Publishing ...................................................................46

3.2.3

Marketing ............................................................................................................51

3.2.4

Cost, Risk & Challenges ........................................................................................54

3.2.5

Company Characteristics and Operations .............................................................56

The Long Tail Innovation Model ................................................................... 61 4.1

Conceptual Framework ...............................................................................................61

4.1.1

Long Tail Innovation Model Business Logic ...........................................................62

4.1.2

Long Tail Innovation Model NPD ..........................................................................69

4.2

Conclusion ..................................................................................................................79

4.2.1

Grounded Propositions ........................................................................................82

4.2.2

Limitations of research and suggestions for further research ...............................83

2


1 Introduction In 2006 LEGO launched ‘LEGO Factory’ a website which allows users to download a program enabling them to build virtual 3D LEGO models and upload them to ‘LEGO Gallery’ in order to display them for the online LEGO community. Subsequently, the user and other users can purchase the bricks and build the model in real life. When the user purchases his own model it is mass customization. When the model is made available online and purchased by other users, however, it is a new phenomenon which I coin Long Tail Innovation. The phenomenon has until now not been systematically described, but it comprises structural changes in new product development (NPD) cost, making niche products profitable and a source of substantial revenue, by employing user innovation and online communities. Today, companies making tangible consumer products are designed to serve mass markets. These companies are facing an increasingly fragmented demand which is rendering their NPD process and business models obsolete. The Long Tail Innovation Model systematizes the underlying business logic of the Long Tail Innovation phenomenon and helps companies to create substantial value by serving unmet market needs. The Long Tail Innovation Model has the potential to fundamentally change how industries - from construction to toys - do business. In 2004, the Chief Editor of Wired, Chris Anderson, argued that technology - primarily the Internet – makes an alternative business model for markets of digital products, such as music and movies, possible. Due to falling inventory and distribution costs, products with low sales volume can collectively make up a market share rivaling or exceeding the relatively few current bestsellers. The name ‘the long tail’ is derived from a power law demand curve. The long tail signifies the part of the curve with relatively low sales volume products (Anderson 2006). The business model seemed primarily relevant for products that could be stored and distributed digitally since the internet would drive down inventory and distribution costs. The virtual bookstore Amazon.com has also achieved long tail economics by receiving a substantial part of its revenue from niche books (Anderson 2006). User innovation in online communities, which allow users to find and purchase other users’ innovations, has the potential to realize long tail economics for tangible consumer products. Companies, such as toy manufacturer LEGO and apparel manufacturer Spreadshirt, are already employing Long Tail Innovation. As a business model, the Long Tail Innovation Model presents a systematic approach to the elements of Long Tail Innovation and describes the business logic behind the companies’ actual practice. (Brynjolfsson et al. 2006; Fuller et al. 2006; Pitta and Fowler 2005; Suomala and Jokioinen 2003; von Hippel 1998a; von Hippel 2001a; von Hippel 2001b; von Hippel and Katz 2002) 3


The Long Tail Innovation Model could warrant a consumer-to-consumer innovation model, in which the manufacturer is responsible for the physical manufacturing and distribution of the product, while consumers develop and market their own innovations. In this model, it is still the producer who experiences the profits of the long tail. This model could thus instigate a post mass production paradigm.

4


Structure This thesis is organized in four chapters, each with two subchapters. 1.1

1.2

2.1

2.2

3.1

3.2

4.1

4.2

Introduction consists of the two parts: Research Interest and Methodology. It aims to frame Long Tail Innovation, by defining the problem field and posing research questions. It then discusses the strengths and the limitations of the research strategy and the research methods employed.

Literature consists of two parts: Innovation and Marketing. It reviews the academic writing central to understanding the dynamics in play for the different elements of the phenomenon Long Tail Innovation.

Results consists of two parts: Case Description and Emerging Themes. It analyses the data obtained from the interviews in order to identify emerging patterns for the companies employing Long Tail Innovation.

Model consists of two parts: The Long Tail Innovation Model and Conclusion. Based on the literature and results sections it develops the Long Tail Innovation Model by unfolding the business logic, the NPD process and the propositions for Long Tail Innovation. Finally it discusses managerial implications and suggestions for further research.

Throughout the remainder of the thesis the progression is shown by an icon in the top right corner indicating the current chapter and subchapter. 5


1.1 Research Interest In this introductory subchapter, I first explain how the user-centric innovation paradigm differs from the manufacturer-centric innovation paradigm. Second, I describe the basic mechanisms behind long tail economics. Third, based on the understanding of the user-centric paradigm and the long tail economic mechanisms I demarcate this thesis’ problem field by defining the phenomenon of Long Tail Innovation and the Long Tail Innovation Model and discuss some of its properties in brief. In conclusion, this chapter poses a set of research questions guiding this thesis. There has been a substantial research in user driven innovation and community based innovation (e.g.von Hippel 2001a). Mass customization and ‘markets of one’ have also been placed under academic scrutiny (Simonson 2005). However, thus far academic research has failed to address the phenomenon of Long Tail Innovation. Long Tail Innovation has the potential to be a disruptive technology for the way companies innovate, manufacture and market products. Although several companies employ Long Tail Innovation, an academic understanding of how it works is lacking. This exploratory study will address this gap in the literature by employing a multiple case study research strategy in order to generate useful theory building and hypothesis (Yin 2002). Indepth interviews were conducted with experts and with key persons employed by selected companies which used Long Tail Innovation for tangible consumer products. The study aims to build theory from multiple cases in order to create the theoretical construct ‘The Long Tail Innovation Model’ and set up grounded testable theoretical propositions. This entails investigating components of Long Tail Innovation and exploring the factors influencing its practice. The selected companies for the case study sample were chosen across industries. They produce physical consumer goods, employ user driven innovation and host online communities contributing to innovation process. 1.1.1 Innovation Paradigms Massachusetts Institution of Technology (MIT) professor Eric von Hippel has led the research in user innovation since the 1970s. In his book Democratizing Innovation (von Hippel 2005) he describes the manufacturer-centric innovation paradigm versus the user-centric innovation paradigm. For the last few centuries, manufacturer-centric innovation development systems have dominated commercial product development. The central viewpoint in these systems is that the manufacturer innovates to meet consumers’ needs. The manufacturer-centric paradigm has relied on a closed innovation model using secrecy, patents and copyrights in order to prevent others from benefitting from their research and innovations. The user was perceived as a center of needs which the manufacturer would address with products. In the 6


user-centric innovation paradigm however, the users, both individuals and companies, are at the center of the innovation process. The advantages of this paradigm are that users can develop products that closely meet their needs; this way they do not have to rely on the manufacturer’s often imperfect agency. Furthermore the user can benefit from other users’ innovations which are freely shared. A good example of user-centric innovation is the open source movement where user communities develop software which in many circumstances is more successful than software developed by manufacturers. However the democratization of innovation not only applies to information products such as software but also to physical products. As a final remark it should be emphasized that user-centric innovation is only possible under certain conditions and is complementary to manufacturer-centric innovation rather than exclusive. Henceforth in this thesis Manufacturer-Centric Innovation and Traditional Innovation are used synonymously. An overview is given in Table 1 below Manufacturer-Centric Innovation

User-Centric Innovation

Innovation Modus

Closed innovation: patents and copyrights.

Open innovation: creative commons and free revealing.

Innovation structure

Top down design. Centralized control. Procedural.

Emergent design. Decentralized initiative. Modular.

Innovation Status

Innovation is property

Innovation is a public good

Means of Innovation

Internal R&D and market analysis. Assuming that preferences and demand can be anticipated.

Insight in own needs, communities of practice, availability of tools of innovation. Assuming demand is highly uncertain.

Innovation Target

Most feasibly segment often leading to lowest common denominator- targets.

Perfect fit for the user’s needs, customization, markets of one.

Innovation rewards

Zero-sum rewards (dominated by extrinsic rewards).

Positive sum rewards (dominated by intrinsic rewards).

Table 1, Innovation Paradigms

7


1.1.2 Long Tail Economics Since the entry of mass media, many markets for consumer products have been dominated by relatively few ‘best-sellers’. CD sales, movie rentals and book sales are all dominated by hits or new releases. The 80/20 rules also known as the Pareto Principle states that 20 percent of products often generate 80 percent of sales. The 80/20 sales distribution is true for many product categories, however new technologies and business models have the potential to change this (Anderson 2006). The Internet has changed this distribution for certain industries through driving down inventory and distribution costs and lowering search costs. Internet based business models have enabled a radical increase in the accumulated share of niche products. Observing how the Pareto Principle did not apply to Internet business, Chris Anderson coined the term ‘The Long Tail’ to describe how falling costs and improved search possibilities have changed sales distribution. The majority of consumer product categories exhibit a power law demand curve with high sales volume for the most popular products and lower sales volume for niche products. The lower sales volume for niche products constitutes the part of the curve known as ‘The Long Tail’ (Anderson 2006). Research shows that niche book titles, which are not even held by bricks-and-mortar bookstores, accounted for more than 40 percent of Amazon’s book sales revenue in year 2000. Furthermore research shows that for companies such as Netflix, Amazon, and Rhapsody, sales of products not held by competing bricks-and-mortar shops were between 25% and 50% of overall revenue. More importantly this number was rising every year (see Figure 1 below). At present Rhapsody sells less songs each month beyond its top 10,000 than it does from its top 10,000 (Anderson 2006; Brynjolfsson et al. 2006).

Figure 1, the Long Tail (Anderson 2006)

8


1.1.3 Research Demarcation and Research Questions Research Demarcation Based on the above insights from user innovation and the emergence of long tail economics this thesis proposes that companies such as toy manufacturer LEGO and apparel manufacturer Spreadshirt, share a business logic which is distinct from the prevailing business logic. This thesis coins the observed phenomenon ‘Long Tail Innovation’ and intends to extrapolate the underlying business logic into the Long Tail Innovation Model. The Long Tail Innovation Model is: -

A business model as opposed to an innovation model. The ultimate goal of the Long Tail Innovation Model is cash return by exploiting niche markets.

-

Focusing on physical products as opposed to knowledge products such as software.

-

Focusing on consumer goods as opposed to intermediate goods 1.

The Long Tail Innovation phenomenon encompasses a variety of different areas that have been investigated in academic literature such as New Product Development (NPD), user innovation, mass customization, market segmentation and collaborative filtering. However at present no literature has presented an integrated perspective on the Long Tail Innovation phenomenon. The present exploratory study will address this knowledge gap by: 1) Integrating existing knowledge relevant to the Long Tail Innovation phenomenon 2) Conducting expert interviews and employing a multiple case study research strategy in order to understand Long Tail Innovation practice 3) Building a comprehensive Long Tail Innovation Model and present grounded propositions that can guide future empirical research addressing the Long Tail Innovation phenomenon.

1

Consumer goods here refer to final products. In some circumstances products can both be intermediate goods and final goods however as this has little implication for the model, it will not be discussed further.

9


Research Questions The research questions that guide this study are: R1 How are the elements of Long Tail Innovation explained by existing literature? R2 What are the distinctive features of Long Tail Innovation from a company perspective? I. What are the drivers, enablers and barriers of Long Tail Innovation? II. How does innovation work in Long Tail Innovation? III. How does marketing work in Long Tail Innovation? IV. What are the costs and risks associated with Long Tail Innovation? V. What type of companies and operations are associated with Long Tail Innovation? R3 What is the Long Tail Innovation business logic and NPD process? I. How can the insights from R1 and R2 be integrated into a business model?

The above questions are broadly scoped to allow more flexibility in the research (Eisenhardt and Graebner 2007). R1 is answered in chapter 2, Literature. R2 is answered in Chapter 3, Results. R3 is answered in Chapter 4, The Long Tail Innovation Model. I conclude this introductory chapter by reemphasizing the potential impact of Long Tail Innovation. The Long Tail Innovation phenomenon represents an emerging business logic which enables a new form of NPD. Long Tail Innovation will not replace traditional innovation. However the democratizing potential may influence everything from architecture to apparels and presents major new opportunities and challenges to companies across industries.

10


1.2 Methodology This subchapter describes the methodology employed throughout this thesis. As mentioned in the Research Interest the goal of the present thesis is theory building. The outcome will be the theoretical construct ‘Long Tail Innovation business model for physical consumer goods’ including testable theoretical propositions. In this regard the methodology is meant to serve the purposs of providing efficient epistemological and analytical tools while still remaining sensitive to the case study. To restate this in a more accessible way, the methodology section will argue for choice of research strategy and research methods based on their consistency with the studied phenomenon and the intended outcome. First, I will argue the thesis’ theoretical position and the choice of research strategy, analyzing the implications for research design, case sample size and case representativeness. Second, case sample inclusion criteria and the chosen cases are described along with the data collection methods. Third, I discuss the methods used for data reduction. Fourth, I describe the data presentation. 1.2.1 Research Strategy This thesis endorses critical realism, a perspective which maintains that an objectively knowable, mind-independent reality exists, while concurrently accepting the roles of perception and cognition. The implication is that the theoretical propositions made by this thesis should be seen as a prelude to quantitative validations in subsequent studies (Eisenhardt 1989). Research interest in this area was prompted by the observation of phenomena such as that of LEGO and Spreadshirt – two companies conducting business in peculiar new ways that seemed to follow some of the same rules. This spurred an interest in creating a systematic explanation which in turn led to The Long Tail Innovation Model. The Long Tail Innovation Model was, as mentioned in the introduction, inspired by the new business models enabled by the changing cost structure of ecommerce and opening niche markets for companies such as Netflix and Amazon (Anderson 2006). Research in user driven innovation (von Hippel 2005) and NPD (Cormican and O'Sullivan 2004) qualifies the assertion that a new business model is dawning. However no present literature explains the phenomenon. In undertaking theory-building, this thesis thus fully acknowledges the extent to which it has been influenced by both existing theory in other fields and by operating companies. Claiming an entirely inductive or deductive approach would not make sense and the approach to building the Long Tail Long Tail Innovation Model should rather be described as abductive. Companies employing Long Tail Innovation have been phenomena motivating and inspiring. They illustrate the theoretical construct of the Long Tail Innovation Model. For this reason, a

11


case study research strategy has been adopted due to its strengths in theory building (Eisenhardt and Graebner 2007). The Long Tail Innovation Model is emerging through the mapping of relationship patterns within and across the case sample (Eisenhardt and Graebner 2007). Each of the companies from the case sample, LEGO, Spreadshirt and Big Blue Saw, are to be seen as individual analytic units serving as replication, contrast and extension of the Long Tail Innovation Model in a real world context (Yin 2002). Multiple-case studies rather than single-case study have been chosen on the grounds that it provides a stronger base for theory building (Yin 2002) as it typically yields more robust generalizable, and testable theory than single-case studies (Eisenhardt and Graebner 2007). This thesis aims to pose a theoretical framework, concepts and propositions which are parsimonious, testable and logically coherent. Furthermore it intends to do so by employing the analytical procedures: meaning condensation and pattern recognition, which are both documented in the results section and the appendixes. Finally the Long Tail Innovation Model will present new and framebreaking insights on the business logic behind Long Tail Innovation a phenomenon which may become one of the most important modes of production in the twenty-first century. Theory building and theoretical propositions The two chapters Literature and Results set the basis for theory building and theoretical propositions. The process has been highly iterative, continuingly comparing theory and data. The theory has guided the interview protocols but as new themes emerged from the data, relevant theory has been added. The definition of the Long Tail Innovation Model has been refined throughout the research, as have the research questions guiding this thesis. The literature and the data have been employed to build evidence for each of the Long Tail Innovation Model’s elements. Using different sources for triangulation has been central in establishing the Long Tail Innovation Model’s validity but also in identifying discrepancies (Eisenhardt 1989). “The rich story is difficult to write with multiple-case research. Overarching organizing frame is theory, each part of the theory is demonstrated by evidence by at least some of the cases.” (Eisenhardt and Graebner 2007)

1.2.2 Case Sampling This subchapter describes the selection criteria for the case samples and describes the cases in brief. It then addresses the issues of case sample size and representativeness based on the fact that the only a few cases have been strategically chosen. 12


Case Sample Inclusion Criteria The case study sample consist of multiple instrumental cases (Stake 2000) that each represent a company fulfilling following inclusion criteria: -

Produce tangible consumer goods Employ user driven innovation Use online communities contributing to innovation Actual or potential Long Tail Innovation Model company

The following companies were chosen: LEGO LEGO is a Danish company founded in 1932. LEGO products are sold all over the globe and it is one of the world's largest toy manufacturers and the largest in construction toys. It has been chosen as toy of the century and the LEGO brand is among the strongest in the world. Revenue in 2006 amounted to 8 billion DKK and the number of employees were 5000 (LEGO 2008). LEGO is venturing into Long Tail Innovation with its initiative LEGO Factory, through which revenue is still insignificant in comparison with the revenue generated by retail. LEGO was chosen as they could provide the perspective of a large, well known company initiating Long Tail Innovation with specific regard to long term strategy, brand issues, rights management and operational challenges. Spreadshirt Spreadshirt is a German company founded in 2002. Spreadshirt offers an online platform for private individuals and commercial organizations to design, buy and sell creative and personalized apparel. The revenue is about 20 million Euros and in 2007, 260 people worked for Spreadshirt. More than 300,000 internet users have become Spreadshirt shop partners (Spreadshirt 2008). Spreadshirt is a medium-sized company successfully employing Long Tail Innovation as its core business. Spreadshirt was chosen because they could contribute with specific knowledge about Long Tail Innovation marketing specific insights as well as insights pertaining to online communities and Long Tail Innovation. Big Blue Saw Big Blue Saw is an American company founded in 2004. Big Blue Saw brings together the Internet and modern computer controlled rapid manufacturing to offer custom made designs cut in 2 dimensions from metals and plastics. Big Blue Saw’s revenue and number of employees are not publically available, but Big Blue Saw is a small company (BigBlueSaw 2008). Big Blue Saw does not host its own community but relies on external communities to bring business to its platform. Big Blue Saw contributed with insights regarding necessary scale, liability and marketing from a small company perspective.

13


Case Sample Size and Representativeness The case samples have not been chosen randomly or stratified as other research strategies stipulate, but rather theoretically sampled in order to gain certain insights about the Long Tail Innovation Model that other organizations could not provide (Eisenhardt and Graebner 2007; Siggelkow 2007). Describing the particular phenomenon of Long Tail Innovation necessitates such a strategic sampling for the simple reason that very few companies employ Long Tail Innovation today. LEGO, Spreadshirt and Big Blue Saw are three very different companies in terms of size and products. However they all employ Long Tail Innovation and contribute with insights from different perspectives resulting in a more complete picture of the phenomenon. Discussing case sample size Ramachandran (1998) makes a strong point that even a small sample can provide powerful examples if the cases are extraordinary. Even though the case sample is limited in scope this thesis still aims for generalization. It is expected that the system of factors and relationships will be the same for companies employing Long Tail Innovation, thus making the Long Tail Innovation Model applicable to companies across industries. At present only very few companies employ Long Tail Innovation. However as the technological enablers for Long Tail Innovation evolve and spread, the future might see the Long Tail Innovation Model gaining popularity and in areas we cannot yet imagine. 1.2.3 Data Collection and Verification Methods This subchapter describes how data was collected and verified. It argues for the choice of interviewees and explains how the interviews were conducted, addresses single informant biases and triangulation of data. Some informal orientation interviews informed how the companies were organized and identified the key informants for the research, i.e. responsible for overall strategy and decision makers working with business models, NPD, user driven innovation and online communities. For each of the case studies this study looked at different sources of data in order to achieve triangulation of data (Cassell and Symon 2004; Eisenhardt 1989; Yin 2002). In order to avoid data overload (Cassell and Symon 2004; Stake 2000) the data sources were pre-managed. Four data sources are used in the research: 1. 2. 3. 4.

Expert interviews Case interviews Documentation in the form of company documents Practice

Interviews Two types of interviews were conducted during this study: expert Interviews and case Interviews. In advance of the interviews the interviewee was sent a short introduction to the 14


present research. The interviews were around 90 minutes in length and recorded. In preparation of the interview an interview guide was created. The interviews were semi structured open ended interviews taking the form of a dialogue. During the interview the interviewer would condense and interpret the meaning of what the interviewee described and ‘send’ the meaning back so the interviewee could disagree, agree or elaborate on his statements. In this way there was an ongoing interpretation as the intention was to conduct a self correcting interview (Kvale 1996). Expert interviews The primary intention in undertaking the expert interviews was to get a qualified reflection on elements of the Long Tail Innovation Model. The interview guide guiding the expert interviews focused on the expertise of the interviewee and allowed a high degree of digression. The expert interviews were conducted with: Dorthe Mathiesen, Dorthe Mathiesen is a project leader of the concrete robot initiative at the Danish Technological Institute. The interview focused on new robot technologies. This robot technologies are be able to make concrete elements based on 3D drawings. The process is fully automatic and at a (relatively) competitive price enabling Long Tail Innovation within architecture. The interview was selected because it showcased how technology can enable Long Tail Innovation for an industry such as construction. Furthermore the interview could provide valuable insight in issues pertinent to the construction industry. It is an industry where safety issues are paramount and which is significantly different from the field of apparels and toys represented by the cases LEGO and Spreadshirt. Interview conducted 31/8/2007. Louise Hvid Jensen Louise Hvid Jensen is center director of Center for Ideas & Growth at the Danish Technological Institute and a specialist in user driven innovation. The interview focused on user Innovation perspectives on Entrepreneurship and SMEs specializing in sourced manufacturing. The interview was selected because it could present the perspective of SME manufactures who have the potential to employ the Long Tail Innovation Model. It also explored the motivation and obstacles to entrepreneurs potentially using a Long Tail Innovation platform. Interview conducted 31/8/2007. Frank Piller Frank Piller is Chair Professor of management at the Technology & Innovation Management Group of RWTH Aachen University, and founding faculty member of the MIT Smart Customization Group mass customization. The interview focused on Long Tail Innovation from a mass customization perspective, particularly in the areas of payback and trust. Mass 15


customization and Long Tail Innovation are intrinsically connected and the interview was selected because Frank Piller is one of the leading scholars and consultants within mass customization and user manufacturing and thus could provide valuable insight into external and internal factors for pursuing Long Tail Innovation. Interview conducted 24/9/2007. Case interviews The main intent with the case interviews was to get an inside account of actual Long Tail Innovation practice in the case companies. A specific goal for the number of interviews conducted and the number of documents investigated was pre-set (Kvale 1996). In order to address single informant bias two interviews per case company were conducted with LEGO and Spreadshirt, however Big Blue Saw is a smaller company and it thus seemed appropriate to interview only the founder and President Simon Arthur. For this research it has been considered important to conduct interviews with key informants who are representative of a specific discipline within the company (e.g. innovation manager and company evangelists). For the case interviews the interview guide was more detailed than the interview guide for the expert interviews. Furthermore it was developed to incorporate new insights and areas of interest throughout the data collection period. All interviews were digitally recorded in order to facilitate analysis. The case interviews were conducted with: Paal Smith-Meyer, LEGO Paal Smith-Meyer is creative director Concept & Design at LEGO. The interview was about how LEGO is employing Long Tail Innovation in order to become a publisher of physical consumer products. Paal Smith-Meyers was a pivotal force in LEGO’s decision to involve users in the Mindstorm NXT product and furthermore is heading LEGO’s entry into the use of Long Tail Innovation. Interview conducted 7/9/2007. Helene Venge, LEGO Helene Venge is Head of Sales and Marketing for LEGO factory. She is responsible for the entire consumer experience and ensures that the consumer experience is financially profitable. Helene was interviewed because she could provide valuable insights into the operational challenges in setting up Long Tail Innovation. Interview conducted 9/11/2007. Adam Fletcher, Spreadshirt Adam Fletcher is evangelist and industry ambassador at Spreadshirt. Adam looks after Spreadshirt’s brand and reputation. Adam was interviewed because he has worked and works with the underlying business models of Threadless, another print on demand T-shirt company, and Spreadshirt, and would be able to share perspectives on the long term strategy of the company. Interview conducted 26/9/2007. 16


Andreas Milles, Spreadshirt Andreas is team leader for brand communication, responsible for brand and marketing activities and taking care of customers and shop-partners. Andreas could provide a perspective on the branding and marketing issues for a company employing Long Tail Innovation and discuss issues pertaining to the online community. Interview conducted 27/9/2007. Simon Arthur, Big Blue Saw Simon Arthur is the Founder and President for Big Blue Saw. Simon has the overall responsibility for both long term strategy and daily operations at Big Blue Saw and could provide insights into the challenges for a start-up company doing Long Tail Innovation. Interview conducted 26/9/2007. Documentation and Practice Documentation was obtained in order get a deeper understanding of the case-study companies. This included market analysis, strategy, evaluations surveys, articles, administrative documents, formal studies, animation, survey data, service records, budgets, reports, charts and innovation models. As the online aspect is central to the Long Tail Innovation model, the observed practice on the company web pages, e.g. the online toolkits, the online search functions, the online communities, and the online shops was also a part of the data collection. These observations have mainly functioned to establish a basic understanding of the interactions and qualify and complement the interviews. As the intent of the present study is to describe the business logic behind the Long Tail Innovation phenomenon, the user perspective has not been considered. Data verification The data collection and data reduction were iterative processes; emerging themes gave rise to iterations of the interview protocols. After transcription and meaning condensation the results were sent to the interviewees in order to get their verification. One clarifying follow-up interview was conducted with Paal Smith-Meyers in order to understand the potential impact of Long Tail Innovation from a business development perspective (Cassell and Symon 2004).

17


1.2.4 Data Reduction This subchapter describes how the empirical data was analyzed. It describes the process whereby the interviews were interpreted into the Long Tail Innovation themes and addresses single interpreter bias. The interviews have been analyzed through the following four stages: 1. 2. 3. 4.

Transcription Clarification Meaning condensation Pattern recognition

Transcription and Clarification All expert interviews were fully transcribed. One interview per company was fully transcribed whereas additional interviews were partly transcribed adding to the primary interview. This process was decided upon as each interview entertained so many unique perspectives and knowledge that could not loyally be represented in a content analysis where a statement merely gives rise to a tick in a box. The interviews that were conducted in Danish were translated into English during the transcription (Dorthe Mathiesen and Louise Hvid Jensen). The clarification eliminated superfluous materials such as digressions and repetition. Meaning condensation The meaning condensation was a process of six steps (Kvale 1996). 1) The interview was read through to get a sense of the larger context. 2) Natural meaning units expressed by the interviewees were isolated. 3) The topic that characterizes a natural meaning unit was identified. 4) The meaning units were related to the research questions. 5) The topics of the interview were combined into a descriptive statement (see Table 2 below). 6) The results were sent to the interviewee for verification and their comments were implemented. Natural Unit

Topic

Natural meaning unit of the The topic that dominates the natural meaning unit with an interviewee answers after extract of the quote. For example: “Motivation: if LEGO want its clarification. best designers to display their creations LEGO must offer extrinsic motivation.� Table 2, Meaning Condensation

18


Pattern recognition The pattern recognition presents a diagonal perspective on the interviews in order to gain insight in the central themes (Eisenhardt 1989). The pattern recognition had three stages. 1) The topics with extracts from the meaning condensation were arranged in a matrix and categorized in themes through an iterative process. 2) The themes were controlled for consistency across interviews in order to identify potential discrepancies or if consensus emerged. 3) The theme specific extracts were condensed into Long Tail Innovation insights. (See table 3 below). In this integrated view the expert interviews and the case interviews are intermingled. THEME 1 Topic A

-

Extract i Extract ii

Topic B

-

Extract iii Extract iiii

Table 3, Pattern recognition

Single interpreter bias This study has not been supplement to multiple interpreter control and thus suffers from a single interpreter bias. However this has partly been addressed by the ongoing confirmation from the interviewees both during the interviews and after the analysis as described in 0. Furthermore this study provides the raw data and makes the employed analytical methods explicit which in turn will enable the reader to retrace and check the results of the analysis all the way back to the data. 1.2.5 Data Presentation This subchapter describes how the data is presented throughout the thesis. Presentation of meaning condensation A short account of each expert interview’s descriptive statement is presented in the results section of the paper. The meaning condensation process and the descriptive statement in full can be found in appendix II. Each case is briefly described based on three sources 1. Interviews 2. Documentation 19


3. Practice Selected Elements from documentation and practice have been used to frame the case. Each case interview’s descriptive statement is presented in a short account in the results section of the paper. The meaning condensation process and the descriptive statement in full can be found in appendix II. Presentation of pattern recognition The pattern recognition has given rise to 5 themes which are presented in the results section. -

Drivers, Enablers & Barriers Innovation, Community & Publishing Marketing Cost, Risk & Challenges Company Characteristics & Operations

The foundation for this, the pattern recognition matrix can be found in appendix I. Furthermore it has been an imperative to actively use illustrations throughout this thesis. Tables and visual devices summarize theory and case evidence. Models are thus constructed to visually communicate central points about Long Tail Innovation (Eisenhardt and Graebner 2007).

20


2 Literature Review This chapter reviews literature relevant to the Long Tail Business model. Initially this chapter will explore studies arguing how important NPD is to business growth and how the NPD can be conceptualized as two interrelated processes: Innovation and Marketing. The remainder of the chapter is organized in these two main categories ‘Innovation’ and ‘Marketing’. The category ‘Innovation’ will review studies exploring: Challenges in NDP, user innovation and toolkits for innovation. The category ‘Marketing’ will review studies exploring: market segmentation, mass customization, and the technological enablers of Long Tail Innovation. New Product Development and organization of chapter During the last couple of decades innovation has become an increasingly important driver of growth. Shorter product lifecycles, increasing international competition, rapidly changing technologies and customer demand for diversification are all factors emphasising the necessity of innovation (Cormican and O'Sullivan 2004; de Brentani and Kleinschmidt 2004; Mikkola 2001). Central to innovation is NPD. Companies undertake NPD programs because they expect that new products will contribute to revenue and profits and because new products will increase the company’s present and future competitive strength and thus the stock value. NPD is critical to a company’s success (Cormican and O'Sullivan 2004). This is supported by research indicating that an estimated 50 percent of a firm’s sales today comes from new products introduced to the market within the previous five years (Griffin 1997; Patterson 2005b). “NPD is the overall process of strategy, organization, concept generation, product and marketing plan creation and evaluation, and commercialization of a new product.” (PDMA 2007)

In general the NPD process can be structured in two interrelated strategies: one is idea generation, product design, and detail engineering, the other is market research and marketing analysis (Cormican and O'Sullivan 2004; Halman et al. 2003; Krishnan and Ulrich 2001) The Long Tail Innovation Model entails a wide range of research areas (see Figure 2 below). Several of these areas overlap but more importantly, they complement each other in setting the theoretical foundation for the Long Tail Innovation Model’s conceptual framework. The Long Tail Innovation Model is essentially a business model expanding the product portfolio with niche products through changing the cost structure of the NPD process, thereby creating a larger market. The change of cost structure affects both of the two interrelated strategies of NPD mentioned above: 21


The literature review will be structured around these two interrelated categories (see Figure 2 below).

Figure 2, Innovation and Marketing

22


2.1 Innovation This subchapter reviews studies with relevant innovation findings for the Long Tail Innovation Model. First, recent trends and challenges in NPD will be explored. Second, several studies on user innovation are reviewed focusing on: lead user method, free revealing, community based innovation and toolkits for user innovation. Third, this subchapter will explore extrinsic and intrinsic motivation for innovation and look at a specific group of innovators: the hobbyists. 2.1.1 Challenges in NPD As innovation is perceived as increasingly important for overall success, the resources allocated to develop strategies of innovation have grown. In 1950 US$2.5 billion was invested in industrial research and development in the United States. In 1999 the number was US$185.9 billion. With this increase in investments, management and measurement of the NPD process has come into focus (Suomala and Jokioinen 2003). Recognizing timely innovation as a central competitive parameter, companies demand shorter development cycles. This stems from shorter product life cycles, increased global competition and the increased focus on the NDP process (Halman et al. 2003). Procter & Gamble, the world's biggest consumer-products firm, studied the life cycle of consumer goods in USA from 1992 to 2002 and found that it had fallen by half. There is general consensus that NPD is vital for businesses survival growth over time. Nonetheless it is a risky and expensive endeavour. Research shows that up to 80 percent of new products fail in the market (Griffin 1997; Suomala and Jokioinen 2003). The increased focus on cost and the ensuing increased risk aversion, the shorter NPD cycles and the high failure rate contribute to a trend of less radical innovation. Innovation occurs on different levels. Product innovation can range from small product modifications (incremental innovation) to new to the world products (radical innovation). Although research suggests that radical innovation is central to new product performance and success on the market, the financial methods typically employed to select NPD projects coupled with the increased risk aversion often leads to results biased in favour of incremental innovations (Cooper 2005). A survey from the Product Development and Management Association conducted in 1997 showed which practices were more commonly associated with successful NPD. The survey determined NPD practices and performance and whether NPD practice and performance differed across industry. The survey findings indicated that firms that do not reform and update their NPD practices suffer a significant competitive disadvantage. The majority of the respondents used a cross-functional stage-gate process for NPD (Griffin 1997). The stage gate 23


model attempts to describe portfolio management as a more or less linear process (e.g., Patterson 2005a) and relies heavily on financial methods to select or terminate NPD projects. Portfolio management for traditional innovation is a decision making process, the goal of which is to translate the business strategy into a product portfolio. The product portfolio is a set of NPD projects that: -

have not yet started and are subject to selection decisions; are in development and are subject to termination decisions; and have been launched on the market and are subject to continuation or deletion decisions (Kester et al. 2007)

This process is extremely complex and resource intensive. It often also results in the financial methods employed not being able to accurately forecast the market situation, resulting in product failures. Organizations relying solely on financial methods in NPD decision making also run the risk of systematically discarding truly innovative projects, because their associated risks are higher resulting in a low net present value (Lint and Pennings 2001) Findings for the Long Tail Innovation Model In sum, NDP is becoming increasingly risky and expensive for companies while radical innovation is becoming rarer. In order to mitigate risk companies choose ‘safe’ products palpable for the market majority thus aiming for the lowest common denominator. Challenges in NDP Increasing investments in NPD of overall budget Decreasing NPD cycle time Increasing NDP failure rate Decreasing radical innovation Increasing NPD cost per product Employing linear innovation models Table 4, Challenges in NDP

2.1.2 User Innovation In 1976 MIT professor Eric von Hippel studied the fields of ultraviolet spectrophotometry, nuclear magnetic resonance spectrometry, gas chromatography and transmission electron microscopy and came to the surprising conclusion that an average of 77% of major innovations within these fields were developed by the users, not by the manufacturers (von Hippel 1976). Continuing his research he discovered that most products and services are developed by users and then given to manufactures. This was true for both product modifications and new to the world products (Urban and Von Hippel 1988; von Hippel 1998b). Since products are often 24


developed to fit the needs of the lowest common denominator, consumers have no choice but to develop their own modifications of existing products, or develop entirely new products to meet their specific needs. The users are motivated by the lack of features or functionality of the product, which the market does not address. Often, users share their innovation with other users or give their innovations to manufacturers in the hope that they will produce the product, a process called free revealing. Based on these findings von Hippel pioneered user driven innovation and the Lead User (LU) method, systematizing how to apply user innovation to NPD. Lead User Method and Free Revealing Von Hippel defined lead users as users that (1) anticipate obtaining relatively high benefits from obtaining a solution to their needs and so may innovate and (2) are at the leading edge of important trends in a marketplace under study and so are currently experiencing needs that will later be experienced by many users in that marketplace (Franke et al. 2006). The Lead User method is based on the assumption that the highest innovative capacity is held by only a few users – the Lead Users. The Lead Users are identified and engaged in a multi stage approach with the goal of generating innovative new product concepts and to enhance the effectiveness of the joint NDP process. The lead user method has proven to be faster than the traditional way of identifying potential new products and far less costly (Herstatt and Von Hippel 1992; Luthje and Herstatt 2004). Further research has shown that lead user innovations have a better commercial potential (Herstatt and Von Hippel 1992; Urban and Von Hippel 1988). Research at the company 3M showed that products based on ideas generated with the lead user method had eight times higher sales forecasts the average traditionally conceived projects (Lilien et al. 2002). It was a challenge to explain why the lead users often chose to reveal their innovation for free. Von Hippel and von Krogh (von Hippel and von Krogh 2006) define free revealing as an action whereby the innovator gives up all property rights and gives everybody equal access to the innovation thereby making the innovation a public good 2. However this does not necessarily entail that the recipients acquire and utilize innovation at no cost to themselves or that the benefits of utilizing the innovation outweighs the costs. If the innovator does not profit by the revealed innovation it is by definition freely revealed (von Hippel and von Krogh 2006). Several studies have shown how free revealing makes sense for the individual as well as the society, applying various arguments and methods such as information spillovers and game theory

2

A public good is non-excludable. Consumption of the good by one individual does not reduce the amount of the good available for consumption by others and it is not possible to exclude individuals from the public's consumption

25


(Harhoff et al. 2003) and a private collective model of innovation (von Hippel and von Krogh 2003). Community Based Innovation Initially the majority of user driven innovation research was concentrated around industrial products and professional users (von Hippel 1976). However recently there has been an increased focus on user innovation within consumer products and community based innovation. Examples of innovation in communities of physical consumer products are mountain biking (Luthje et al. 2005), kite surfing (Franke et al. 2006) and rodeo kayaking (Hienerth 2006). The case of kite surfing is particularly interesting from the Long Tail Innovation Model perspective. Kite surfers with diverse backgrounds, including aerospace engineering, started sharing designs in online communities. The designs were conceived through computer aided design programs and it was then relatively straightforward for other users to utilize the design for local production. Furthermore these designs were often superior to the designs made by established companies. One company subsequently started relying solely on user generated designs (von Hippel 2005). Another researched phenomenon is the rise of online communities in the open source movement. As an opposition to the development of proprietary software which could not be legally modified the open source movement originated in the university environments but gained traction in the hacker (skilled programmer) environments. The result was a plethora of programs, some such as Apache software (Franke and von Hippel 2003; von Krogh and von Hippel 2006) and parts of Linux (Lee and Cole 2003)became more popular than their commercial counterparts. In these online communities the users not only innovated but also functioned as instructors for others where User-to-user assistance was widespread (Lakhani and von Hippel 2003). Common to the user communities of physical consumer products and open source software was that they were initially not hosted by companies but rather emerged on their own. However, computer game industry companies hosted online communities for computer games. When the company Valve adopted the user generated modification ‘Counter Strike’ of its popular game ‘Half life’ it unknowingly increased the success of Half Life tremendously. Counter Strike ended up becoming more popular than Half Life, but users still needed to purchase Half Life as a platform in order to play Counter Strike (Jeppesen 2004; Jeppesen 2005). Another example of online communities established by a company is the company Propellerhead Software employing user innovation in developing their computer controlled music instruments. (Jeppesen and Frederiksen 2006)

26


Toolkits for User Innovation Based on his research with lead users, von Hippel developed the concept of Toolkits for User Innovation. Toolkits for user innovation are “Integrated sets of product design, prototyping, and design-testing tools intended for use by end users.” (von Hippel 2005)

Toolkits are based on the idea that users possess ‘need knowledge’ while manufacturers possess ‘solution knowledge’. The users need knowledge is sticky so rather than incurring the costs of transferring the need knowledge from the user to the manufacturer, the manufacturer will provide a platform or a solution space, for the users innovation (von Hippel 2001b). The process described by von Hippel has five criteria: 1. 2. 3. 4. 5.

Learning by trial-and-error Appropriate solution space. User friendly toolkit Commonly used modules Result easily created by manufacturer

If the user goes through the complete trial-and-error cycles when designing the product, the user will see the consequences of the design choices he makes and be able to fine tune his preferences. Trial-and-error has been shown by research to be the prevalent way of problem solving (von Hippel 2001b). The solution space is demarcated by the flexibility of production. If the solution space is small, the chance of user innovations is small. The toolkits must be user friendly so the users cost of innovation is minimized, by empowering the user through the language and the skills he already possesses and thus eliminating the need to acquire solution specific knowledge. The toolkit should be based on commonly used modules or a platform of innovation. If standard modules are available to the user he can focus on the unique parts creating value. The resulting innovation must be easily converted into production without errors or translation – if the results must manually be translated some of the benefits of the toolkits are lost (von Hippel 2001b). Findings for the Long Tail Innovation Model Depending on industry up to 80 percent of major Innovations are made by users to meet their specific needs. Research has shown that the Lead Users approach is faster, less costly, less risky and has a higher commercial potential than traditional NPD projects. Users reveal their innovations for free, making them a public good because it makes economic sense for them. Users may innovate if high transaction and agency costs, combined with a small market potential, makes innovation commercially unattractive for the manufacturer. Innovation 27


communities have emerged on their own in areas such as sports gear and software, often outperforming the manufacturers because of superior need knowledge and skill-sets from advanced analogies (aerospace engineers working on kite surfing). Companies host online communities anticipating that community innovation will drive sales of the solution platform they provide for innovation, e.g. LEGO’s bricks. A toolkit for innovation has five criteria: the user must innovate by trial-and-error; the toolkit must provide the right solution space and be user friendly. The toolkit must consist of standard modules to a wide extent and the innovation must easily translate into a product. Merits of User Driven Innovation Less costly Faster NPD cycle Higher NPD success rate Radical Innovation Table 5, Merits of user driven innovation

2.1.3 Motivation for Innovators The extrinsic reason3 for user innovation occurs when a user’s needs are not being met by the market. In this scenario he faces the option of innovating himself or paying a manufacturer to act as his agent. However if only few users share needs, the transaction costs such as transferring sticky knowledge4 and the agency cost5 often make it commercially nonviable for the manufacturer to innovate on behalf of the user. Since the market is too small it is cheaper for the user to innovate for himself (von Hippel 2005). However if the number of users is greater than one but still too small to constitute a profitable market for the manufacturer a suboptimal situation occurs where users independently will innovate to meet the same needs. From a societal point of view this is a waste of resources. However this extrinsic view on motivation does not fully capture the essence of much user innovation. Several studies have shown how the intrinsic value of innovation is an important motivational factor as well.

3

Extrinsic reason refers to a rational change in behavior induced by incentives applied from the outside. ‘Difficult-to-transfer local knowledge’ von Hippel, E. (1998a), "Economics of product development by users: The impact of "sticky" local information," Management Science, 44 (5), 629-44. 5 Agency costs include: 1) cost of monitoring that the manufacturer follows the interest of the principal. 2) bonding cost for the manufacturer not to act against the interest of the principal. 3) cost of sub-optimal solution for principal --- (2005), Democratizing Innovation: MIT Press. 4

28


“Intrinsic motivation is defined as the doing of an activity for its inherent satisfactions rather than for some separable consequence. When intrinsically motivated a person is moved to act for the fun or challenge entailed rather than because of external prods, pressures, or rewards.“ (p.69, Ryan and Deci 2000)

von Hippel gives the example of crosswords as a clear example where the process and not the end product is the reward (von Hippel 2005). Lakhani and Wolf (2005) studied a sample of volunteer programmers in the open source movement and found that intrinsic motivation was a indeed a very important motivational factor for these individuals. Nearly half of them said that one of the top reasons for contributing to the project was intellectual stimulation (Lakhani and Wolf 2005; von Hippel 2005). Due to the intrinsic value of the creative process the user might still innovate in the cases where the expected benefit of the innovation is relatively low (von Hippel 2005). The hobbyists User driven innovation in consumer goods is often done by hobbyists as we saw in the cases of sports equipment and computer controlled music instruments (Franke and Shah 2003; Jeppesen and Frederiksen 2006). Hobbyist Lead Users are often equally or even better qualified than their professional counterparts. Primarily this is because of their superior need knowledge but frequently it is also due to their professional skill-sets. People who pursue amateur activities to professional standards, the so called professional-amateurs are active and participatory in pursuing their leisure. They deploy publicly accredited knowledge and skills and experience built up through a long lasting passion for their hobbies. To this group, intrinsic motivations are often more important than extrinsic motivations (Leadbeater and Miller 2004). A story from astronomy illustrates this: February 23 1987, light reached Earth from a star that had exploded on the edge of the Tarantula nebula 168,000 years earlier. It was the first supernova to be witnessed by the naked eye since 1604. In Chile amateur astronomer Ian Shelton photographed it with a 10” telescope. In USA and Australia two other amateur astronomers were independently observing the same part of the sky that night. Together these three amateurs played a central role in confirming an astrophysical theory. Without the thousands of dedicated professional-amateurs in astronomy many sightings will never be reported and theories cannot be confirmed. Astronomy has since transformed into a science driven by a vast open source professional-amateur movement working with a relatively smaller body of professional astronomers and astrophysicists. Within astronomy two innovations have made this cooperation possible: Cheap but powerful telescopes and communication over the internet. Recently professional-amateur astronomers have tracked the weather on Jupiter and craters on Mars as accurately as professionals (Anderson 2006). The professional-amateurs astronomers’ major advantage is their vast 29


number compared with the much smaller group of professionals. There are limits to what professional-amateurs can achieve. Amateurs do not produce new theories of astrophysics. Sometimes amateurs do not know how to make sense of the data they have acquired. The Sky & Telescope magazine wrote in 1988: “There will always remain a division of labor between professionals and amateurs. But it may be more difficult to tell the two groups apart in future.� (Lankford 1988)

Findings for the Long Tail Innovation Model Intrinsic motivation is an important aspect of the user innovation process. For Hobbyists or professional-amateurs the creative process itself rather than extrinsic rewards is the main source of motivation. Hobbyists or professional-amateurs posses superior need knowledge and often superior skills from either a lifelong dedication to the field or from employing skills from more advanced analogues fields, such as the aerospace engineer employing his skills on kite surfing (Franke et al. 2006). Motivation and Hobbyist Agency cost prohibitive for manufacturer Intrinsic motivation important Intrinsic and extrinsic motivation potentially in conflict If one out of a million can solve the problem, you just need a million people Hobbyists can contribute with superior skills Table 6, Motivation and hobbyists

30


2.2 Marketing This subchapter reviews studies with relevant Marketing findings for the Long Tail Innovation Model. First, literature on segmentation and micro-segmentation is reviewed. Second, strategies on reducing risk in NDP are discussed. Third, the technological enablers: online communities, collaborative filtering and toolkits of innovation are discussed. 2.2.1 Market segmentation and micro segmentation Tynan and Drayton said that: “An economically viable segment may be understood as being of sufficient size to enable a marketer to earn an adequate profit by catering to the specific needs of its members (p.302, Tynan and Drayton 1987).� In other words the long term income for the product

must be higher than the long term cost. Segmentation is based on the demand side of the market and represents a rational adjustment of products and marketing efforts in order to meet consumer needs (Beane and Ennis 1987; Tynan and Drayton 1987). Several segmentation parameters such as geographic, demographic, psychographic and behavioral are employed when undertaking a marketing study. A market segmentation study is normally aimed at 1) defining the market, 2) rationalizing policies for existing brands and products, 3) positioning ranges of brands and of product varieties, or 4) identifying gaps in the market which offer new product opportunities (Tynan and Drayton 1987). New technologies and techniques such as data-mining enabled an intimate knowledge of the individual consumer behavior. Marketers are thus challenged by proponents of individual marketing to shift from focusing on market segments to making individually customized offers, or markets of one (Simonson 2005).

Figure 3, Market Segmentation (Kara and Kaynak 1997)

31


Studies show that consumers are willing to pay a higher price if their preferences are better matched, so there is a strong incentive for companies to make more precise market segments. “15 studies from top tier journals on market segmentation found a 46% within segment variation suggesting that heterogeneity of need is substantial among users in different product categories. This translates into a willingness to pay for more for products having a better match with individual needs.” (von Hippel 2005)

However micro segmentation has proven more difficult than anticipated and the promise of individual-based approaches’ over traditional segmentation have been greatly exaggerated and have not produced the expected benefits. Tailoring of offers is costly and complicated if the process cannot be fully automated. Often one-to-one marketing has insufficient relevant customer information and also suffers from the fact that geographic, demographic, psychographic and behavioral parameters are not efficient in predicting future behavior when it comes to new products (Ansari and Mela 2003). However more fundamentally there is an emerging consensus among researchers of consumer decision making is that consumers often do not have a well-defined preference that can be disclosed. Rather they construct their preferences on the go. “The fundamental assumptions underlying the new approaches for satisfying individual customer preferences often may not hold – customers may not have will-defined preferences to be revealed, and they may fail to appreciate customized offers that fit their measured preferences.” (p.32, Simonson 2005)

The notion that consumers’ preferences are dynamic and constructed rather than revealed has important implications for micro-segmentation. Micro-segmentation relies on the assumption that if you have sufficient relevant individual information you can decode it and disclose the preferences and based on that make a customized offer that the consumer cannot refuse. Even if the preference-matching technologies are improved, the underlying limitations and instability of customers’ preferences are unlikely to change (Simonson 2005). However research has shown that active participation of the consumer in creating the offer increases perceived fit to the consumer’s preferences (Simonson 2005). These insights are now being applied in the field of mass customization.

32


Findings for the Long Tail Innovation Model One-to-one marketing has fallen short of expectations since it is costly and does not produce expected benefits. One reason, amongst others, is the flawed assumption that preferences are immanent, rather they are dynamic. “A segment should be the largest possible homogenous group worth going after with a tailored program.� (Kotler 1984)

Market segmentation Consumers are willing to pay higher price for better preference match Segmentation bad at predicting preferences for new to the world products Data-mining costly and difficult Micro-segmentation is costly Consumer preferences are constructed when faced with the decision Active participation in creative face enhance preference match Table 7, Market segmentation

2.2.2 Mass customization and Collective Customer Commitment Addressing above mentioned problem of mitigating NPD risk Ogava and Piller (2006) describe two strategies involving active customer involvement: Mass customization and collective customer commitment. Mass customization Mass customization is a business model which allows the customer to purchase a product which has been customized to meet his/her exact needs, for example the color of his/her car. From a company perspective, mass customization has been defined as the ability to provide customers with whatever they want, whenever they want it, wherever they want it and however they want it (Hart 1995). It has been heralded as a change of paradigms from the mass production paradigm to the mass customization paradigm and researchers posit that companies employing mass customization will gain a significant competitive advantage in the future (Kotha 1995). Four main structural changes drive mass customization: Heterogeneous demand, short product life cycles, mature markets and more conscious consumers (Bardakci and Whitelock 2003). Three main assumptions drive mass customisation. Demand fragmentation is coming to its end as even niches becomes too broad. Technology can serve needs efficiently, even on an individual level. Several technological preconditions had to be in place before mass customization could become reality. Primarily, it is flexible manufacturing and communication systems allowing a two way communication (Bardakci and Whitelock 2003). Three main impediments to mass customization are: 1. More expensive than mass produced products 33


2. Mass customized product cannot be delivered to the customer at time of purchase 3. The customer must spend time designing the desired product Industry leaders, including Toyota, Dow Jones, and Motorola, have tried to employ mass customization but many have failed. Toyota, for example, understated the increase in complexity related to its intention of timely delivering a custom made car (Pine et al. 1993). Lately several companies, such as Nike and Apple, have implemented mass customization successfully. However the innovation space remains small and the share of total revenue likewise. “Products suffer from notoriously high failure rates. Many new products fail, not because of technical shortcomings, but because they simply have no market. Not surprisingly, then, studies have found that timely and reliable knowledge about customer preferences and requirements is the single most important area of information necessary for product development. To obtain such data, many organizations have made heavy - but often unsuccessful - investments in traditional market research.” (Ogawa and Piller 2006)

Collective customer commitment Threadless, a T-shirt company relies on a community of professional graphics and hobbyist alike to generate the designs of its T-shirts. The T-shirt business is often very risky since it is difficult to predict which designs will be successful and which will fail. In order to mitigate that risk Threadless will only produce those designs that have garnered a sufficient number of preorders, thereby reducing the risk of failure to zero. Every week on the Threadless site the community rates designs on a scale from zero to five and can additionally express a desire to purchase the design (Ogawa and Piller 2006). This method of collective customer commitment has effectively eliminated Threadless’s NPD risk. This is done while still allowing for economies of scale and without the one-to-one communication of mass customization. “In essence, collective customer commitment enables firms to serve a market segment efficiently without first having to identify that segment, and it helps convert expenditures in market research directly into sales.” (Ogawa and Piller 2006)

34


Findings for the Long Tail Innovation Model Mass customization is characterized by how companies customize products keeping production cost and price close to those of mass-produced products (Kaplan and Haenlein 2006). Mass customization and Long Tail Innovation are closely related. The main difference is that in Long Tail Innovation the innovations are marketed to a niche market. One of the main impediments to mass customization is the time people need to spend designing a product. Collective Customer commitment is a market forecasting technique. Put together with flexible production it holds the promise of mitigating risk. Mass Customization

Collective Customer Commitment

Development of product architecture and Development of new product design of few customization options by manufacturer (expert) customers Customer co-design process

Evaluation and refinement of design by manufacturer and customer community

Placement of orders by individual customers

Presentation of selected design concepts and solicitation of commitment from potential customers

Custom (on demand) manufacturing

Mass production (but only if minimum lot size is presold)

Custom distribution

Mass distribution

Table 8, Strategies of NPD risk reduction (p.68, Ogawa and Piller 2006).

35


2.2.3 Technological Enablers Three technological enablers are necessary in order to employ Long Tail Innovation: Flexible production, innovation toolkits and online communities. Innovation toolkits have been described in the section dealing with user innovation. Flexible production Flexible production is small volume manufacturing that allows rapid change in amounts of products produced or rapid customization for each customer. It could also be in the customization of assembling or packaging modules. Central to flexible production is the ability to change or react with little penalty in time, effort, cost or performance. Furthermore if production is only on demand the risk of wrong forecasting is also mitigated (Mittendorf 2006). Mass Production

Flexible Production

Assembly line

Small Batch Production

Single purpose machinery

Multi-purpose machinery

Standardization of products

Customization of products

Large inventory of raw materials Small inventory of raw materials Single tasks for workers

Workers are multi-tasked

Lower skill labor

Higher skill labor

Table 9, Flexible production

Online communities and word of mouth advertisement An online community is a group of people that primarily interact via the internet. Online communities have also become a supplemental form of communication between people who know each other primarily through face-to-face interaction. Many tools are used for communication such as message boards, blogs, instant messaging, emails, posting etc. The type of online community of interest to Long Tail Innovation is communities of interest, where the online community is centered around an interest such as hobby trains, big game hunting, autism etc. Members of online communities often spend much time and effort in maintaining the community by offering support cost for free and developing it. The reasons are not purely altruistic but can be explained by socio-psychological mechanisms. Incentives for contributing to the community are suggested to be (Kollock 1999). 36


-

Anticipated Reciprocity Increased Recognition Sense of efficacy

In today's fragmented media landscape online communities offer an easy way of reaching a target group. However traditional advertising has proven ineffective on popular online communities such as MySpace and Facebook. The most effective way to reach community members is by generating positive word of mouth (Smith et al. 2007). Online communities harness the bidirectional communication capabilities of the Internet to engineer large-scale, word-of-mouth networks. Successful examples are eBay and Amazon. Their range from brand building, customer acquisition and retention, product development, to quality assurance (Dellarocas 2003). However a company must be careful in exercising its role in online communities. The strength about word of mouth is its authenticity. “To be effective, the sponsor should refrain from too active and overt role in an online community. If a sponsoring firm takes too active a role, it runs the risk of inhibiting discussions and the potential for valuable product information.� (Pitta and Fowler 2005, p.290)

Trust between community members and a company is built over time and legitimacy can be lost fast if the interaction is perceived to be solely to the firms advantage (Pitta and Fowler 2005). Collaborative Filtering – lowering search cost Collaborative filtering is the method of making automatic predictions about the interests of a user by collecting preference information from many users (Ansari and Mela 2003). When one purchases a book on Amazon a service suggests additional books listed as 'Customers who bought this book also bought'. This service employs fairly simple collaborative filtering to help direct marketing. Collaborative filtering is becoming more popular as online service providers realize the limitations of algorithms in disclosing consumer preferences. One example is the video website YouTube, which predominantly relies on user rating and tagging 6 for its organization of content. At present collaborative filtering is used isolatedly in various online services such as Amazon.com, Youtube.com and the online radio station Pandora.com.

6

A folksonomy is an Internet-based information retrieval methodology consisting of collaboratively generated, open-ended labels that categorize content such as Web pages, online photographs, and Web links. A folksonomy is most notably contrasted from a taxonomy in that the authors of the labeling system are often the main users (and sometimes originators) of the content to which the labels are applied. The labels are commonly known as tags and the labeling process is called tagging. (www.wikipedia.org)

37


Today’s technology allows categorization of users in preference groups based on their online behavior, but the success of such a system relies predominantly on user involvement and the users’ willingness to let their data be collected across services. Collaborative filtering uses data from users with similar preferences to recommend new items, and if employed in online communities it is a very powerful tool imitating the word-of-mouth advertisement. “On the demand side, tools such as search engines, recommender software and sampling tools are allowing customers to find products outside of their geographic area.” (Brynjolfsson et al. 2006)

Collaborative filtering can effectively lower the search cost for people sharing preferences. A reduction in search costs will lead to an increase in niche product sales and is one of the basic mechanisms in Long Tail economy (Brynjolfsson et al. 2007). Empirical evidence shows how Internet channels exhibits a significantly less concentrated sales distribution, when compared with traditional channels. Collaborative filtering and other search mechanisms are drivers behind an ongoing shift in the distribution of product sales. Findings for the Long Tail Innovation Model Flexible production, online communities and collaborative filtering enables Long Tail Innovation by allowing customized manufacturing, word-of-mouth advertisement and lowering the search cost so the sales distribution changes towards niche products. Enabler

Means

Cost Impact

Flexible Production

Customized manufacturing and packaging

Low inventory prices, low risk, manufacturing price close to mass production

Online communities

Word-of-mouth advertisement, directed advertisement

Low marketing cost

Collaborative filtering

Rating, tagging and folksonomy employed to categorize knowledge

Low search cost

Table 10, Technological enablers

38


3 Results This chapter describes how Long Tail Innovation works in practice. It is based on documentation, practice and the interviews conducted with the case companies and the experts. First, is a case study describing the three case companies’ practices and the themes the interviews enlightened in particular. This section is based on the meaning condensations, which can be found in appendix II. Second, is a diagonal perspective disclosing the common themes for companies employing Long Tail Innovation. This section is based on pattern recognition, which can be found in appendix I.

3.1 Case Description LEGO LEGO’s Long Tail Innovation practice is LEGO Factory. On the LEGO Factory website the visitor can build with LEGO bricks in a virtual environment. First the visitors download the program, LEGO Digital Designer – and build their models with virtual LEGO bricks. Later the visitor can order the parts from LEGO Shop at home and display the model on the web page LEGO Gallery as a suggestion for other visitors. If the model is displayed on the LEGO Gallery the rights are transferred to LEGO and other people in the community can buy the model, or download and modify it (LEGO 2008).

Picture 1, LEGO Designer (LEGO 2008)

At present 90 percent of LEGO’s business is retail. Long Tail Innovation is a future direct to consumer business area, and it is a part of LEGO’s plans for development. LEGO factory started as a low budget pilot project. The idea is that when LEGO factory has proved that its concept 39


has worked successfully, it will be given additional funds and might develop into something like MySpace. Rather than being just a manufacturer, LEGO will lend its brand to the creations made by the community and thus become a publisher of physical content. The LEGO brick in itself is the LEGO brand and will always be a part of the creations. Eventually LEGO’s Long Tail Innovation model can become an incubator for companies that want to build businesses on the LEGO platform. The LEGO case study provides insights with regard to long term strategy, the innovation process and operations. Spreadshirt Spreadshirt’s Long Tail Innovation practice is the shop partner initiative. This is put into effect when a private individual or a commercial organization uploads his design to Spreadshirt. Through an online toolkit the uploaded design can be placed on a variety of apparel such as TShirts. The toolkit generates a piece of HTML code which the designer can then embed on his own home page. The code displays his designs and an interface where people can purchase the apparel. All back-end functions such as manufacturing, payment and after sales support are handled by Spreadshirt. The designer can choose to take a commission on top of the price Spreadshirt charges (a white T-shirt with multicolor print is around $15). Every time a purchase is made Spreadshirt transfers the commission to the designer’s account (Spreadshirt 2008).

Picture 2, Spreadshirt Shop Partner (Retrofootball 2008).

Spreadshirt has two sides of the business: direct to consumer and shop partners. At the moment the revenue split is 40/60 in the shop partner’s favor. Spreadshirt has more than 40


300,000 shop partners worldwide and rather than advertising for its products it educates innovators in how to market their own products. The Spreadshirt case study provides insights regarding branding, marketing, rights management and how to build a revenue sharing model. Big Blue Saw Big Blue Saw’s Long Tail Innovation practice is how it reaches out to communities with its mass customization offerings. On Big Blue Saw’s homepage innovators can use an online toolkit to make their own designs. Big Blue Saw offers a variety of materials and cutting methods but only cuts designs in two dimensions. Often people make customized parts for home build products. People do not share their designs on Big Blue Saw’s homepage but rather in their own communities and Big Blue Saw is proactive in looking for communities such as robot builders and presenting its offerings (BigBlueSaw 2008).

Picture 3, Big Blue Saw (BigBlueSaw 2008)

The Big Blue Saw case study provides insights in how a smaller company can enter a traditional industry such as machine shops and employ Long Tail Innovation without hosting the communities itself.

41


3.2 Emerging Themes This subchapter describes Long Tail Innovation practice and is based on the qualitative interviews conducted. The pattern recognition found in appendix 1 presents a diagonal analysis of the interviews in order to gain thematic insights into . The five themes came about through an iterative process between the data findings and the research questions. The five themes are: -

Drivers, Enablers & Barriers Innovation, Community & Publishing Marketing Cost, Risk & Challenges Company Characteristics & Operations

On the following pages the five Long Tail Innovation themes are presented. Their impact on the Long Tail Innovation Model and the theoretical propositions will be discussed in the next chapter. Today we only see fantastic architecture for high profile projects such as museums and operas. We want to bring down the cost and make unique architecture like Zaha Hadid's extension to the Ordrupgaard, available to Mr. and Ms. Denmark (Dorthe Mathiesen, Teknologisk Institut).

Picture 4, Extension to the Ordrupgaard Museum near Copenhagen

42


3.2.1 Drivers, Enablers & Barriers The first theme: Drivers, Enablers & Barriers, concentrates on the external factors’ which potentially influence Long Tail Innovation and the general preconditions for Long Tail Innovation. Drivers of Long Tail Innovation “Consumer needs are proliferating. There is no mainstream any more. Niche is the new mainstream. We do not watch the same TV show, we watch 350 different ones. Nothing is prominent for a long time – perhaps everybody watches Pirates of the Caribbean, but only for a short while. It is a different mass market than before.” (Helene Venge, LEGO)

The trend towards personalization and customization is a reflection of a global trend of increasingly fragmented markets. People are moving away from the big brands, conspicuous consumption is still an important means through which a unique identity and belongingness are displayed and performed. This has significant implications for manufactures who are set up for mass production and is affecting such diverse industries, from apparels to construction. Simultaneously there has been a sharp increase of end-users engaging in a creative process themselves from making inventions to building robots or designing clothes, without necessarily having the skills that were previously necessary to undertake such endeavors. At present many ideas die because of the cost and complexity for the individual to bring them to the market. It is a cycle where the customized offerings create an awareness creating a yet larger demand leading to more offerings. At the same time traditional manufactures in the West are increasingly facing low cost competition from the emerging economies and a consolidation threat. Stepping up the value chain by offering customization or employing Long Tail Innovation are strategies addressing those threats. Some argue that if the traditional manufactures in the West do not take action they will disappear. The enablers are allowing a separation of the design and manufacturing process “The macro level preconditions mass customization are: flexible manufacturing systems, easy to operate and cheap design software and a repository of existing designs so you do not always have to start from scratch. I would say these are the three basic technology enablers which have to be combined through the internet. This is not to say you can do everything in most cases it is more craft business.” (Frank Piller)

Mass customization relies on the above mentioned three preconditions. However Long Tail Innovation differs because the innovations are sold to others. This includes a marketing/search mechanism. Simultaneously the repository of existing designs becomes less important as the innovation space enlarges. Basically there are three preconditions for Long Tail Innovation. 43


-

Flexible manufacturing / assembling. Easy to operate and cheap design software. Access to the internet and search mechanisms

It is the increasing accessibility and availability of the above that has enabled Long Tail Innovation. Flexible manufacturing enables companies to avoid inefficient forecasting and inventory cost. Readily available design tools make a decentralized design process separated from the manufacturing process possible. The Internet ties it together and makes it possible to navigate through a huge variety of designs. Automation of the customized manufacturing process makes the process cheaper by decreasing the labor intensive part. In some regards the automation not only makes the process cheaper but also increases quality. Modularity in production is central to automation. Modularity allows for a more flexible construction system. Technologies from other industries such as polymer printing, independent production cells, sensor and robot technology and cognitive learning as well as new types of materials allows new applications for Long Tail Innovation. Lack of awareness and competencies is a barrier “It is only 1-2% of the 14-15.000 companies we work with every year that know what user innovation is. The rest do not have a clue.” (Louise Hvid Jensen, Teknologisk Institut)

Smaller manufacturing companies could potentially benefit from for employing Long Tail Innovation, but suffer from a lack of awareness and competencies. Only 1-2 percent of the Danish companies working with Teknologisk Institut know about the possibilities of user innovation. Furthermore they do not have the competencies necessary for undertaking Long Tail Innovation such as knowledge about alternative business models, specific management skills, ICT skills, logistical setup and design skills. They are also not exposed to this potential because of a lack of awareness of existing academic literature on this topic. “The plastic spray molding companies often have few customers. Handling a huge customer base takes a lot of professionalism which they might not posses. It is a challenge because it takes a whole different logistical system, rather than Bob who comes every Friday to pick up the truck. It is a completely different setup.” (Louise Hvid Jensen, Teknologisk Institut)

Company culture is also hindering Long Tail Innovation. Companies have problems realizing both the needs and the creative potential of users. Innovation that takes place outside the company is seen as less useful or competent. Short term problem solving which often halts strategic changes is also an impediment to harnessing these changing trends. This is very much a generational barrier and will change as a younger generation of employees bring competencies and mindsets that are compatible with Long Tail Innovation into the companies. 44


At the same time the market and potential innovators also lack knowledge of the possibilities available to them. This was reflected in all the interviews and is one of the largest barriers for Long Tail Innovation. High complexity and lack of business model as barriers Long Tail Innovation changes the NPD process; it changes the distribution, the revenue stream, marketing, manufacturing, logistics and operations. As a business model has thus far not been designed, there are no best practice examples to learn from. This is a concern which this thesis seeks to address. The investments needed in order to handle the complexity and setup a Long Tail Innovation framework are significant. To achieve benefits close to those of mass production, the total volume of products offered must be extremely large. The idea and the technology for LEGO Factory has been available since 2001, but because of the lack of a business model, it was not implemented until much later. Employing Long Tail Innovation entails a very high degree of complexity and a business model thus even in instances where the drivers and enablers are in place, it does not guarantee successful implementation.

45


3.2.2 Innovation, Community & Publishing The second theme: Innovation, Community & Publishing, concentrates on the innovation and NPD process of Long Tail Innovation and how different agents are involved in that process. Creating the infrastructure for Innovation Employing Long Tail Innovation is about creating an infrastructure for innovation where innovation can take place within a predefined solution space and the manufacturer can then realize this innovations through his manufacturing capacity. Creating a suitable innovation platform and/or innovation language enables customers to innovate for themselves, which results in mass customization, but more importantly, when customers innovate for others, Long Tail Innovation occurs. A company can in this way, meet niche demands. By employing user innovation the company can tap into the creative potential of a myriad of people and effectively multiply their innovation resources, without associated costs or risks. LEGO wants to make LEGO the language of invention, the medium people use for innovation per se. The Long Tail Innovation model is about facilitating other people’s innovations, and becoming a publisher of physical content by providing people with the appropriate infrastructure. Long Tail Innovation is not an innovation strategy but a business model which relies on traditional innovation in order to create the innovation space for others to use. This infrastructure i.e. the toolkits, can also become the product. Big Blue Saw intends to venture into the business of providing the infrastructure for innovation for other machine shops in the future. In some cases, such as the concrete robot at Teknologisk Institut the end consumers are not necessarily the innovators. Rather the architects and the designers are the users of the infrastructure. One of the primary differences between Long Tail Innovation and mass customization is that the innovation is not necessarily only undertaken for oneself. For mass customization the innovation space has to very stable and thus constrained. There is a trade-off between innovation space and accessibility. The time people are willing to spend customizing a product is product-specific. One of the core problems of mass customization is calibrating the innovation space because different people are willing to spend different amounts of time customizing a product. However, Long Tail Innovation can allow a larger innovation space, demand more time and skill from people because the consumption body does not only constitute one-to-one but one-to-some. This implies that through placing higher demands on customers to innovate, it may drive some away, but the ones who stay will have the possibility to create something valuable for others to buy.

46


“The best balance between innovation space and accessibility depends on the product. You cannot make a general assumption. A real challenge is that for one product there might be a majority of consumers who are not willing to spend much time customizing the product while more involved consumers are willing to invest much more time perfecting it”. (Frank Piller)

Communities “90% of our customers just want to consume. Perhaps 10% want to make their own stuff online. 1% has the skills to make something which is good enough for others to want to buy it. Perhaps 1% is high, let us say 0.1 or even 0.01%, but with a customer base of 3.2 million that is still 3200 people! At the moment we have 150 designers at LEGO.” (Paal Smith-Meyers, LEGO)

When talking about the community it is important to make a distinction between 1. The community around an innovation platform 2. A community of interest The community around an innovation platform could be the Spreadshirt community or the LEGO factory community. They are communities hosted by the manufacturer and centered on the solution platform the manufacturer provides. These communities usually possess a high degree of solution knowledge. The community of interest could be a sports community that likes old soccer players from the UK or a community that likes hobby trains. They might employ the manufactures platform to pursue their interest but the community is not hosted by the manufacturer and is centered around the interest. Both LEGO and Spreadshirt have a strong communities centered around their platforms and it is important for them to manage those relationships. Proactively creating that sense of community is important even as the company grows. Skillful people make designs available for others and galleries of designs are hosted by the manufacturer. The community becomes a showroom for other people’s designs. However LEGO, Spreadshirt and Big Blue Saw are also reaching out to communities of interest. LEGO can for example be used as a therapeutic tool for autistic children. Big Blue Saw does not even host its own community and gallery but relies on communities of interest, such as hobby robot makers to drive sales. Spreadshirt is taking this strategy to its limit and has enabled its web-shop to be embedded in other websites. That way a community about for example big game hunting can host community-designed Spreadshirt T-shirts with lions and elephants along with the other things such as hunting gear on the community webpage. The innovators that set up their own shop 47


are called shop partners and can charge a commission on top of the manufacturing price thus making a profit if other people purchase their design. Spreadshirt also has an application for Facebook – a social network – where people in a very simple manner can embed the Spreadshirt shop in a community of interest. LEGO is currently pursuing similar plans. “We are also thinking about a widget for Facebook. Do you make people come to you or do you go out to people? That is a fundamental question. It should probably be both.” (Helene Venge, LEGO)

Motivation There were two different attitudes towards what motivates people which came out from the interviews conducted. Spreadshirt says that around one third of shop partners do not take a commission but do it rather for a sense of achievement and self expression. It is not about the money but more about the recognition the designers get from the community. Dorthe Mathiesen from Teknologisk Institut agrees and says that what drives architects is the possibility of making something completely new, and not necessarily the financial rewards. LEGO is planning to set up a progressive system with monetary incentives. LEGO argues that even though theory says people will innovate for fun, in practice people want monetary rewards as well. LEGO has asked some of the best designers in the LEGO community why they do not show their designs in the LEGO gallery. It was found out that this was because they often had their own web pages – communities of interest - and will get peer recognition through them. Extrinsic motivation for the innovators is necessary as customers innovating would like a share of the rewards LEGO is reaping from their designs. However setting up a revenue sharing model is not that straight forward. “The main driver is achievement and self expression. Before I started at Spreadshirt I also had my own Spreadshirt shop and then one day somebody from Munich bought a shirt, and I was all energized, thinking ‘who do I know from Munich’, and when I went there I kept thinking about how it would be to meet the guy who bought my T-shirt. It is almost one third of the shop-partners who is not interested in taking a commission.” (Andreas Milles, Spreadshirt)

Editing Long Tail Innovation Another issue in the Long Tail Innovation NPD process is the editing. Besides apparent copyright issues, how is it possible to avoid content you do not want associated with your brand? From a long term perspective if Long Tail Innovation becomes mainstream, how do you ensure that the brand consistency and perceived quality does not suffer from a democratized innovation process? At present LEGO factory is not being screened as moderating is one of the largest expenses. However avoiding racist or pornographic content is particularly important for a company such 48


as LEGO which does not want its children-friendly image to be blemished. Automation, flagging and collaborative reporting might be a solution to drive down costs of screening content. The same issues come up when ensuring levels of quality. In Long Tail Innovation other people purchase designs made by strangers but endorsed by the manufacturer, especially if the manufacturer lends its brand out to the innovators. A full review process of all the designs being uploaded is not feasible. Using up internal capacity of the company in the editing process incurs extra cost. “It is not good if we promote that other people buy your model because then we have endorsed that model and we are responsible that the buyer gets a good experience. If the model falls apart the buyer gets disappointed. Not only with you, but also with LEGO.” (Paal Smith-Meyers, LEGO)

Mechanisms for ensuring legality, brand fit and quality can be done three ways: -

Automatic editing mechanisms Community driven editing Manufacturer editing

LEGO is making a program that can calculate if the model is stable called the ‘Shake table’, because it is difficult to judge if a virtual model is well built. Similarly some copyright issues can be screened automatically by a computer program. Tutorials for aspiring designers are some of the tools through which quality of design can be assured. The platform community can help make all the designs better, through parameter specific rating and comments. When employing a feedback loop where users can support each other it is important to install mechanisms for people to be honest and serious about reviewing. The user community can also be used for screening designs and flagging what is inappropriate. However before something is endorsed by the manufacturer an expert is necessary to make the final judgement. After the community has expressed sufficient interest in a particular design through rating or collective customer commitment the manufacturer can edit the model and endorse it. For the most successful Long Tail Innovators a dedicated sales team can be set up because they are the key drivers of growth. The manufacturer will thus become a publisher of physical content like a record company. This constellation will blur the lines between working for the manufacturer and being successful in the Long Tail as an independent innovator. “The interesting thing from a business perspective is that if we can make this happen it is like becoming a record company. We can manage 20 artists they are the head of the tail, but what

49


if we can promote another 200. Those 200 are the most popular from the end of the tail - the mass customization. Why would they like to be part of us? Because we have people that can help them become even better. So in the end we will blur this line about what it is to work for LEGO on the inside and on the outside. These people will work for LEGO on a voluntary incentive basis LEGO.� (Paal Smith-Meyers, LEGO)

50


3.2.3 Marketing The third theme: Marketing, concentrates on how the innovation is brought to the market. How the product is sold and marketed, how innovators and customers are retained and how the brand is managed. Employing Long Tail Innovation entails opening up and democratizing the innovation process, while tapping into a market consisting of niches. This is at conflict with marketing’s core values such as brand consistency, target groups, segmentation models etc. However, employing Long Tail Innovation does not make marketing obsolete, it just changes it. Letting the innovators do the marketing The core of Long Tail Innovation marketing logic is that the innovators should do the marketing, not the manufacturer. The manufacturer should facilitate this marketing effort by his best means. This is because innovators will market to their own niche far better than the manufacturer will ever be able to because it is a sphere they know intimately. Furthermore it is impossible for the manufacturer to realize all the potential applications of the platform, only the customers can thorough an intrinsic understanding of their needs. So rather than advertising for any of the numerous of products the manufacturer must advertise for the service. The main target group are the communities and the designers and even though customer retention remains important, innovator retention is just as central. “The best way to generate new shop partners is by word of mouth from the old shop partners. They become ambassadors of Spreadshirt. In producing those ambassadors and those people who are really satisfied you draw more people into the service than traditional marketing could ever do.” (Adam Fletcher, Spreadshirt)

Spreadshirt and Big Blue Saw are proactive in reaching out to the communities presenting them their offerings. This is done for example by being active on community message boards or blogs. Traditional advertising and even online advertisements such as Google Adwords do not work as well. Word of mouth and direct contact to the communities is by far the most effective means of disseminating the brand. Using community agents to market niche products is the only viable way as mass marketing is too expensive, too slow and cannot address the target group precisely enough. “We have a shop partner who runs a popular UK store. It sells designs of old football players on t-shirts. The market consists of 10-12 small communities who are interested in the history of football and the shop partner knows this market intimately. So he is active on the message board and places banner ads and people visits his site from these small communities. The

51


conversion rate is very high because he knows his niche and he knows it better than we will ever do.” (Adam Fletcher, Spreadshirt)

Facilitating Marketing By embedding features such as ‘Blog this’ the manufacturer can remove barriers to sharing findings within a community, thereby employing viral marketing and effectively multiplying showrooms. By assisting innovators in learning how to market their products and how to make the technically best products the manufacturer is educating a sales force. This is also a sales force that has superior knowledge of their market and the products they are selling. A sales force which is working for themselves and driven by passion. A sales force which is free of charge. “We have a 'blog this function' if you find a t-shirt you think is interesting for your community you can hit 'Blog this'. It will give you the codes to embed in your personal blog, so you are able to take something which you found on the marketplace and move it on to your personal platform where you can write about it.” (Adam Fletcher, Spreadshirt)

Brand In order for a mass customization product to be successful it must gain consumer trust. Being connected to an existing product or brand is a strong enabler. Neither LEGO nor Spreadshirt intend to become invisible manufactures, but intend to guarantee the quality of the final product. LEGO has a clear advantage as the LEGO brick acts as a brand vehicle. However this also exaggerates the need for the product to meet a certain quality standard before LEGO can endorse it. The most interesting aspect of this phenomenon is how the community can act as a brand and generate trust in the brand. In communities of interest the distance between seller and buyer is smaller. It is well known that a recommendation from a friend is far more effective than any advertisement. Trust in the community, respect for individual community members and personal trust will be very powerful mechanisms for marketing Long Tail Innovation products. Navigation Another central element of the marketing effort is navigation, or how potential customers will find the products that fit their needs. Having a sales force that knows their markets intimately is important but so are the mechanisms that will lead the customer to the best and most relevant products for a customer. Direct marketing in communities of interest will lower the search cost. The other aspect is to make the products available to people looking for it, but not knowing the community. Amazon and YouTube excel in employing collaborative filtering. 2.0 mechanisms such as rating, commenting and tagging favourites can bring the best designs to the top in the general marketplace. Tags and categories can help people find what they are looking for. 52


Market responsiveness Long Tail Innovation will enable manufactures to be very receptive to market trends. NPD cycles become shorter, and the time taken to bring a product to the market might be a month rather than a year. As these cycles become shorter the distinctions between mass market / niche market may become obsolete as manufactures operate with micro demand fluctuations on a continuous basis. Of the companies doing mass customization only few use the information they get to learn how the market is moving, but Long Tail Innovation enables a dynamic system where trends are immediately looped back to the designers in the way, for instance, which Spreadshirt employs, when it reviews the most popular design on a weekly basis. Long Tail Innovation will also enable people to start a trend. Other people can then pick up on their ideas and develop them further into a more sustained movement. The problem is that no historical data exist for LTI so setting up models for predicting demand is difficult. “We help them a lot picking out the cool stuff that has been selling really well. We reveal the top sellers so the designers can see what is working in the market place and tailor their designs to what is popular.� (Adam Fletcher, Spreadshirt)

One of the strongest advantages of Long Tail Innovation is how it can enhance the portfolio management process. Companies are spending vast amounts of resources on forecasting market trends, using ethnographic methods to translate user needs, focus groups, and consumer experts. Companies are doing complicated calculations in net present value equations or relying on gut feeling and experience in order to make the right product portfolio decisions. Yet, there is still a high failure rate in NPD. Due to flexible production and market responsiveness Long Tail Innovation vastly outperforms traditional innovation.

53


3.2.4 Cost, Risk & Challenges The fourth theme: Cost, Risk & Challenges, concentrates on how the cost and risk structure of Long Tail Innovation differs from traditional innovation and what challenges are specific to employing Long Tail Innovation NPD cost Compared to traditional innovation the NPD cost structure of Long Tail Innovation is very different. A product which has been created within the Long Tail Innovation platform needs a shorter time to reach the market. Simultaneously, the success rate is higher as the subjectivity in the portfolio management process has been taken out of the equation. Niches can be very small as variable costs are not susceptible to economies of scale. The product portfolio is limitless as there is no inventory cost. “At Spreadshirt we do not lose any money through failed inventory. We don’t lose a penny because the product is only made when it is produced. So I guess for the first time it is feasible that we can run a business with an inventory of 4 million different partner designs. And the web is the perfect platform.” (Adam Fletcher, Spreadshirt)

At the same time marketing is done by the innovators. Even the support cost of running the innovation platform can be outsourced to the community as it will outperform support because of greater knowledge. The strategy is to facilitate support rather than the company undertaking it themselves. The risk per product is also minimal - If nothing is sold, nothing is lost so the engagement is risk free for both the innovator and the manufacturer. “Basically everybody can come open their own Spreadshirt shop. We have around 300.000 shops worldwide, and from there they upload their own designs which are printed on demand. There is absolutely no risk. If you never sell you never incur a cost.” (Adam Fletcher, Spreadshirt)

Fixed cost However the fixed cost of having a Long Tail Innovation setup, including flexible production, innovation toolkit, online community, and editing must be distributed across the product cost. This setup cannot be significantly more expensive than mass production in order to make Long Tail Innovation viable. Variation in innovation space incurs a fixed cost. The more freedom the innovators have, the larger the volume needs to be in order to reach economies of scale. Every time the innovation space is broadened it incurs cost. An extra brick for LEGO factory, an extra type of apparel for Spreadshirt or a new material for Big Blue Saw ads to the inventory cost, the programming cost and the logistical cost of the total production. 54


For Spreadshirt the largest cost is production. However the development of a platform is also a very large cost, and so is support and marketing of the service. The manufacturer takes care of service and after-sales support, making it as easy for the innovators as possible but also costly. The lower cost enables a lower price point which for example can make unique architecture available for the broader private market. The cost of manual work limits innovation. Unique architecture is today prohibitively expensive for the masses due to the handicraft element. Challenges - Liability One of the biggest issues concerns liability. In general, the simpler the product, such as a LEGO brick, a T-shirt or a piece of aluminum cut in two dimensions the less the liability. But for example within the construction industry there are clear restrictions on what part of the construction innovators can change using concrete robot technology. The construction advisor is responsible for the construction’s stability, so individual innovators cannot design the carrying constructions themselves. Regulatory issues thus limit the innovation space in the construction industry. Putting the brand on a product incurs liability for its safety and in that regard the product is no different to a mass produced one. It depends, however, on the product and the brand. LEGO and Big Blue Saw for example are different brands selling different products and consumer expectations are thus very different. Making a more complex product might incur liability; but this could be solved by a middleman. Challenges - Rights management Long Tail Innovation necessitates rights management. This consists of two aspects. How does the manufacturer avoid the innovator violating someone’s rights, and how does the manufacturer avoid the innovators’ rights being violated? Trademark infringement and copyright issues are very complicated and it can be difficult for the innovators to navigate this legal field – as it stands Spreadshirt is partly liable if a shop partner uses protected material. It is incredibly probelmatic to conform to all the different copyright laws in various EU nations; some of which are more prohibitive than others. Due to these complexities, Spreadshirt designs are reviewed before being put on the marketplace, which is very costly for the legal team. The other issue has to do with protecting the innovators’ rights. When the customer uploads his innovation to the manufacturer’s website what are his intellectual property rights? For example, if another innovator changes one brick on a LEGO model, is it now a new LEGO model or should the old model be attributed? In the present system, the innovator hands over his rights to LEGO the moment he uploads his model onto the LEGO gallery – according to LEGO 55


this is the only practical solution they see as presently feasible. This issue is closely connected with the revenue sharing model. 3.2.5 Company Characteristics and Operations The fifth theme: Company Characteristics and Operations, demarcates the two closely related fields mass customization and Long Tail Innovation. It describes the characteristics of companies which could potentially venture into Long Tail Innovation and describes the operational characteristics and challenges related to employing Long Tail Innovation. Long Tail Innovation and mass customization “Long Tail Innovation will only be a new business model if a stranger buys the creations. I see very little evidence of this. I could not get evidence from Spreadshirt or Cafepress that this is happening very often.� (Frank Piller).

A company must be able to handle mass customization well before it can undertake Long Tail Innovation. The logistical setup and the innovation toolkits are similar, however, there are also several basic differences. -

Only if a stranger to the innovator buys the product it constitutes a new business model. At the moment there is no clear evidence that this is happening, so while mass customization has been proven as a business model, Long Tail Innovation has not.

-

Mass customization does not create a consumption body because it is only one-to-one. Long Tail Innovation can create a consumption body as it is one-to-some, which aggregated, can amount to a large market.

-

About 80 percent of mass customization is about brand building to sell more mass produced products rather than increasing supply chain efficiency and market forecasting. There is a discrepancy between why/what companies say they do, and what they do. For consumer goods, mass customization is utilized primarily to increase existing sales of mass produced products.

-

In Long Tail Innovation a poor construction affects the buyers as opposed to mass customization where it only affects the customizer himself. For example if LEGO endorses a model LEGO also incurs a higher degree of responsibility for the quality.

-

Long Tail Innovation can offer a larger innovation space since the innovation toolkit does not need to meet the accessibility demands of the masses but only the innovators. Both in terms of time and skills.

Spreadshirt has two sides of its business: the mass customization and the Long Tail Innovation. 56


“We need to be able to do mass customization really well before we embark on something like consumer publishing. It is further down the line.” (Helene Venge, LEGO)

Type of companies At the moment Long Tail Innovation is predominantly connected to digital printing, and it has yet to be proven to work for other products. The more complex the product becomes the higher is the necessary skill level of the innovator and the higher is the need for editing by the manufacturer. However Long Tail Innovation is theoretically possible for all types of products. At the moment it is only possible for simple products such as T-shirts but it is too early to say whether LTI will be possible with more complex products such as cars. “At the moment Long Tail Innovation only works for simple products but eventually I don’t see why it couldn’t work for a power plant!“ (Frank Piller).

As the Teknologisk Institut’s concrete printer showcases, Long Tail Innovation for houses is within reach and the future will bring technologies such as 3D polymer printing that will enable Long Tail Innovation for a wide variety of other product types. It is only the very large and the small knowledge intensive companies who are informed about user innovation. Typically traditional industries lack this kind of knowledge. Thus, the companies that will eventually employ Long Tail Innovation will be founded and led by people from a knowledge-based rather than a manufacturing background. The challenge of Long Tail Innovation is not in manufacturing but in providing services and supply chains. Companies with strong service and supply chain competencies such as Amazon and Wal-Mart are more likely competitors to LEGO factory than MEGA blocks for example. “LEGO is very different from the t-shirt business. The bricks are equivalent of the fabric or the threads going into the t-shirt. What LEGO factory is about is not print on jeans. It is different buttons, different pockets, different cuts everything different. That is why we say we operate on an atomic level.” (Helene Venge, LEGO)

Operations Long Tail Innovation operations entail an integration of -

A sophisticated flexible manufacturing system. An online accessible innovation toolkit and a gallery that allows for viral marketing. A state of the art supply chain. A rights management and revenue sharing system

This is a challenge for most companies. At present, Spreadshirt is the only manufacturer who can claim to have implemented this successfully. 57


“The management in a company doing Long Tail Innovation must change because it is not only about doing flexible manufacturing and having an online innovation toolkit. It is an entirely different business model. Implementing this on the fulfillment side nowadays is not so difficult. A lot of the standard offerings and the manufacturing is mastered quite well, but to really understand how to implement it in order to benefit from it and to reach a satisfactory level is very difficult to achieve.” (Frank Piller).

Operating a production with many parts makes automation a challenge, at the moment every single order at LEGO factory is packaged manually. Simultaneously LEGO does not have the same supply chain capabilities as Amazon; these must be fostered in order to be good at Long Tail Innovation. “LEGO factory deals with single bricks. In LEGO the box is the SKU, the brick does not have a SKU number, it has a brick ID but it does not travel around in the inventory management systems the same way as SKUs. Operating with brick ID is something entirely different than the rest of LEGO, which has been a huge challenge – nobody is going to create an entirely new SAP system just for us (LEGO factory) – it does not make financial sense.” (Helene Venge, LEGO)

The catch 22 is that investment in the necessary setup is high cost. In order to make a large investment the expected revenue must be high, but so far no data exists to support the Long Tail Innovation Model and assess rewards. “My problem is the volume. If I had a lot of people who ordered parts from let’s say 5mm thick aluminum I could run all of those parts at once and it would reduce cost a lot. At the moment I have orders in plastic, steel and other materials. If the volume got high enough and I could group the jobs for a lot of different customers together then in that case the cost would come down very significantly. For doing customized things it could definitely be feasible.” (Simon Arthur, Big Blue Saw)

Organizational structure Long Tail Innovation also has an impact on organizational structure. At present many companies have reorganized their structures to cross functional teams in order to focus on the customer. How to govern and exploit user innovation is an issue which companies struggle with today. Companies want to control – the difficulty is letting go. The openness which is necessary for Long Tail Innovation must be reflected in the organizational structure of the company and in the physical structures. LEGO factory has touch points with all parts of the LEGO organization and must educate them on their requirements, which are different to LEGO’s traditional offerings. Starting as a LTI business within an existing business is a challenge as the organizational setup is already set up and not necessarily geared towards Long Tail Innovation. “It is a big challenge to operate as a new business within an existing business. LEGO has one business model that works really well for LEGO. LEGO factory has an entirely different business model with different requirements, which we have to make work with the existing setup. If we

58


were a stand-alone business that had come up with this idea we could build up our entire backend and operations from ground up to serve only that purpose.” (Helene Venge, LEGO)

Strategy There is a viable business model behind mass customization. But often small companies that start up using mass customization later segway into mass production when they grow in size in order to ramp up the consumption body. Venturing into Long Tail Innovation enables manufactures to tap into niches and produce smaller volumes that would not be viable with traditional innovation but which still increase revenue drastically over mass customization as there are only a limited amount of people who have the interest and skills to design their own products. At present 90 percent of LEGO’s business is retail. Long Tail Innovation is seen as a future direct-to-consumer business area. Long Tail Innovation has a strategic fit within LEGO’s plans for new business development. “LEGO is considering moving from being a company that makes plastic bricks to a company that more or less sells interaction.” (Frank Piller).

What then are the competitive parameters of the companies? Spreadshirt argues that being just as trustworthy as a normal shop with regard to quality and delivery and providing multilingual services etc. will set them apart from competitors and copy-cats. But the main competitive parameter is the community. When designers and innovators have learned how to use the system and build up a portfolio the switching cost becomes prohibitively high for them to move to a competitor. Time frame Companies such as Spreadshirt and Cafepress still need to deliver a proof of concept. It is difficult to say if Long Tail Innovation will become a mass phenomenon like YouTube. Future business models and change of consumption habits are extremely difficult to predict. In the next ten years Long Tail Innovation will not be a mass market phenomenon compared to mass production – consumption habits will still focus on traditional consumption. The question is how large a share Long Tail Innovation can take. For the next decade customers buying Long Tail Innovation products will be cutting edge in understanding the conditions for Long Tail Innovation. But when the phenomenon becomes more mass market, then Long Tail Innovation products need to be of the same quality as the mass produced products so as to maintain the main brand image. Within a decade concrete robot technology will start to be employed in the construction industry. Rapid production technology might allow for LTI in more product categories than 59


digital printing. LEGO factory, which has started as a low budget project may develop into a phenomenn like MySpace. Manufacturing will proliferate and production facilities will be local. “At the moment Long Tail Innovation is connected with digital content. If you take Cafepress, Lulu, and Spreadshirt, which I think are companies employing Long Tail Innovation business models, they are all connected to digital printing. So it is technology driven. If the rapid manufacturing technology develops over the next ten years Long Tail Innovation might expand to different product categories.� (Frank Piller).

60


4 The Long Tail Innovation Model The Long Tail Innovation Model is the synthesis of the findings from the literature review and the themes from the result section. LEGO, Spreadshirt and Big Blue Saw were strategically sampled as they could provide insights into the phenomenon of Long Tail Innovation. However, the Long Tail Innovation Model is meant to be generalizable across companies and industries. This chapter is structured in two parts: The Conceptual Framework and the conclusion. The Conceptual Framework builds the Long Tail Innovation Model from the manufacturers perspective by integrating the elements from the literature review and the findings from the results section in order to demonstrate the Long Tail Innovation Models business logic and the Long Tail Innovation Model NPD process. The Conclusion returns to the research questions and demonstrates how they have been answered throughout the thesis. Furthermore it states the theoretical proposition pertaining to the Long Tail Innovation Model and discusses the limitations of this study. It concludes by suggesting areas for further research.

4.1 Conceptual Framework Long Tail Innovation Model – A Business Model As stated in the methodology the Long Tail Innovation Model is intended to be parsimonious7, testable and logically coherent. The Long Tail Innovation Model is: -

A business model as opposed to an innovation model. The ultimate goal of the Long Tail Innovation Model is financial return by exploiting niche markets. Focusing on physical and tangible products as opposed to knowledge products such as software. Focusing on consumer (final) goods as opposed to intermediate goods

The Long Tail Innovation Model consists of two interrelated frameworks: 1. Long Tail Innovation Model business logic

7

By parsimonious it is meant that it should be the simplest model that can account for the phenomenon Long Tail Innovation. As we have seen the majority of companies use mass customization primarily for marketing purposes rather than for the officially stated purpose of generating direct revenue. There is no doubt that employing Long Tail Innovation has other strategic benefits than generating revenue through exploiting niche markets. However in the name of parsimony these apocrypha are not entertained by the Long Tail Innovation Model.

61


2. Long Tail Innovation Model NPD The Long Tail Innovation Model business logic first describes how the Long Tail Innovation Model makes niche markets viable. Second, it describes how the Model makes niche markets a substantial source of revenue, rivaling the size of the mainstream market. Long Tail Innovation Model NPD process describes the three phases in the process: The innovation phase, the editing phase and the marketing phase. In these phases the three actors; the innovator, the community and the manufacturer have different functions and the subchapter describes how the manufacturer must facilitate rather than govern these functions. 4.1.1 Long Tail Innovation Model Business Logic The Long Tail Innovation Model is the answer to a structural conflict between supply and demand of physical consumer goods. As we learned from both the literature review and the result section there is an increasing demand for niche products. ‘Niche is the new mainstream’ as Helene Venge from LEGO commented so aptly when conveying the changing nature of consumer markets. Concurrently, the literature review showed that challenges within NPD force companies to go after (what they believe to be) the lowest common denominator in the market, in order to produce blockbuster products. The companies’ efforts are largely statistically unsuccessful. The result is that demand is not being met effectively and new products suffer notoriously high failure rates. The Long Tail Innovation Model offers a sustainable business model which is necessary in order to reunite demand and supply. It does so by changing the NPD cost structure in terms of innovation and marketing so niche products become: -

Commercially viable A source of substantial revenue.

Demand for niche products The results section described how the trend towards personalization and customization is a reflection of a global trend of fragmentation. Customers are moving away from big brands towards niche products. Research on market segmentation, referred to in the literature review, showed a large segment variation suggesting that consumer needs are not being fulfilled by the current offerings, and that consumers are willing to pay more for products that more closely match their preferences. Challenges for traditional innovation and marketing The challenges in NDP outlined in the literature review included higher costs, decreasing cycle times and higher failure rate. The consequence is a higher risk aversion, which leads companies 62


to go for the safe products, rather than tapping into the underserved niche market. This has the outcome of: -

Increasing investments in NPD of overall budget Increasing NPD cost per product Decreasing NPD cycle time Increasing NDP failure rate Decreasing innovation potential

The high failure rate of new products is not due to technical shortcomings but rather because the products have no market. Companies are increasingly investing in traditional market research but often in vain, as traditional market research does not provide the sought-after results. Furthermore it is evident that micro segmentation also falls short of expectations since it is costly and does not produce expected benefits. -

Data-mining is costly and difficult Micro-segmentation is expensive Consumer preferences are constructed when faced with the decision Active participation in the creative phase enhances preference match

4.1.1.1 Making Niche Products Viable For the Long Tail Innovation Model to overcome the structural conflict between demand and supply and create a sustainable business model for niche products, certain enablers need to be in place: 1. Flexible manufacturing 2. Online consumer communities undertaking innovation and marketing 3. Access to the internet and search mechanisms Flexible manufacturing The Long Tail Innovation Model fundamentally changes the NPD process. Flexible manufacturing allows small volume manufacturing or customization with little penalty in cost over mass production. On-demand manufacturing mitigates the risk of wrong forecasting. -

Manufacturing cost close to that of mass production Mitigating risk

Online communities undertaking Innovation and marketing User innovation in online communities lowers the cost of development as the innovation is done freely by innovators. The failure rate decreases and the NPD cycle time is reduced. 63


Furthermore as the consumers know their needs better than the companies it increases the innovation potential. -

Lower cost of development Speeding up NPD cycle Reducing failure rate

Internet and search mechanisms The internet and search mechanisms allow for directed marketing which is more effective than traditional marketing and largely done by the innovators word of mouth or automated through collaborative filtering. -

Lower cost of marketing Higher efficiency of marketing

These advantages closely address the challenges of traditional NPD as described above. Long Tail Innovation Model Cost advantages The Long Tail Innovation Model makes niche products viable by employing flexible production and user innovation in online communities to change the structural cost of NPD. Table 6 below portrays the Long Tail Innovation Model cost advantages over traditional innovation and their relative impact on the cost per product. In the section Long Tail Innovation Model NPD the cost advantages will be further elaborated upon.

64


Table 11, Long Tail Innovation Cost Breakdown

The larger the NPD cost, the larger the sales volume must be in order to reach the break-even point (BEP) where the cost of NPD equals the income derived from the product. For traditional innovation this means that the NPD specific costs, such as development, marketing and risk necessitate a high sales volume in order to be viable. However since the NPD cost structure of Long Tail Innovation Model is different, there is no minimum sales volume for the individual product for it to be viable. However, as we saw in the result section, the setup costs for the Long Tail Innovation Model, such as the innovation toolkits, flexible production and marketing for the service itself, necessitate large investments. Concurrently the volume of the modules (e.g. bricks, T-Shirts, aluminum plates) used for the Long Tail Innovation Model must also be high in order to achieve economies of scale.

65


In a sales distribution curve three stages can be identified (see Figure 4 below). 1. Traditional Innovation: Mass market 2. Long Tail Innovation: Niche market 3. Mass Customization: One-to-one Traditional innovation’s product portfolio ranges from the best selling product to the product with a break-even sales volume (BEP). Mass customization employs flexible production and limited innovation space in order to turn a profit on every single customized product sold – the sales volume is by definition one. Long Tail Innovation is the part of the product portfolio which lies in between traditional innovation and mass customization. It has a lower sales volume than the break-even point for traditional innovation and is thus not viable for traditional innovation. However it has a higher sales volume than mass customization which by definition is a one-toone business model. It is important to emphasize that in practice the borders between traditional innovation, Long Tail Innovation and mass customization are blurred. If, for example, a consumer’s friend buys a copy of a customized LEGO model does it constitute Long Tail Innovation? Nonetheless traditional innovation, Long Tail Innovation and mass customization constitute three fundamentally different business logics.

Figure 4, Long Tail Innovation Model

66


4.1.1.2 Making Niche Products a Substantial Source of Revenue The reason why mass customization is primarily employed for marketing purposes rather than for generating revenue is the core problem of mass customization: It cannot constitute a substantial consumption body. This is due to mass customization’s intrinsic impediments. People need to spend time customizing their product and the innovation space needs to be limited so that it is accessible to everyone. Fragmentation of demand does not mean that everybody wants to make their own products, but it does mean that people are looking for the perfect match for their preferences. Long Tail Innovation can create a larger consumption body as it is not one-to-one but one-tosome, which aggregated can amount to a huge market. The literature review and the results section showed how aficionados, professional amateurs and hobbyists spend unlimited amounts of time perfecting their products, disregarding the fact that the market might only consist of a hundred people. They will employ their skills and knowledge to make products better than the manufacturer would have made, and they will use their superior market understanding to concentrate their marketing efforts on precisely the people constituting the niche market. These communities of interest will innovate for markets which are too small for companies to break-even in. Communities of interest will embark on Long Tail Innovation because their NPD cost structure differs from that of the manufacturer. They do not have any agency cost and they are partly rewarded by intrinsic motivation (these point will be elaborated on in the section Long Tail Innovation Model NPD). -

Manufacturers agency cost Innovator’s intrinsic motivation

The structural change in inventory costs, distribution costs and search costs resulted in long tail economics becoming viable for digital music and books. The structural change in NPD costs resulted in long tail economics making commercial sense for niche products. This is the foundation of the Long Tail Innovation Model.

67


Figure 5 depicts a sales distribution for product portfolio a-z. From insights pertaining to long tail economics we know that the aggregated market size of Long Tail Innovation, e-t, can rival in size or even exceed the market size attributed to traditional innovation, a-d. For the reasons outlined above the market size of mass customization, u-z, will be inferior in size. Long Tail Innovation can thus constitute a substantial source of revenue for the company.

Figure 5, Long Tail Innovation Market Size

68


4.1.2 Long Tail Innovation Model NPD The Long Tail Innovation Model NPD process describes the product’s journey from idea to market. As we saw in the literature review the traditional innovation NPD process is typically a linear process governed by the stage gate model. It is handled within the company and the portfolio management is predominantly based on financial models. The Long Tail Innovation Model NPD differs by being a recursive process with three phases within a network of three actors contributing to the different phases and being part of the portfolio management process: NPD Phases

1. Innovation

2. Editing

3. Marketing

NPD Actors

1. Innovator

2. Manufacturer

3. Community

Table 12, NPD Phases and Actors

In figure 6 the Long Tail Innovation NPD network and the three actors are shown. The actors’ functions are briefly outlined in the figure and will be elaborated throughout the three different phases, which guide the structure of this subchapter.

Figure 6, Long Tail Innovation NPD network

69


Firstly, this section focuses on the Long Tail Innovation NPD innovation phase with regard to Long Tail Innovators and toolkits of innovation. Second, it will explore the editing phase with regard to portfolio management and editing mechanisms. Third, it will focus on the marketing phase with regard to brands, advertisement and navigation. Finally, this subchapter will discuss operational aspects of the Long Tail Innovation Model NPD process. 4.1.2.1 The NPD Innovation Phase The innovation phase is the part of the NPD process where the consumer innovates within the given innovation space and submits it to the community. It is this fuzzy front end which is difficult for companies to handle. However is it is not necessary to make an expensive translation of user needs or market analysis in order to come up with ideas, rather the Long Tail Innovation Model is open to all innovators and the barriers of entry are low. If the manufacturer hosts an innovation toolkit the only barrier is time. The Long Tail Innovator One of the cornerstones of the Long Tail Innovation Model is the innovator. The Long Tail Innovator is the source of innovation and the contact to the community and the niche market. The lead users are defined as users that anticipate a high benefit from a solution and ahead of market trends. The Long Tail Innovator is slightly different due to the fact that a Long Tail Innovator: -

Anticipates high benefit from the innovation, including intrinsic motivation, which will induce them to innovate Satisfies an unmet niche market demand which is not viable with traditional innovation methods

The primary difference is that the innovation will perhaps never become viable through traditional innovation and only by employing Long Tail Innovation in the innovation, editing and marketing part of NPD does it become viable for the company to manufacture the product. The challenge for companies is how to identify and motivate the Long Tail Innovators. The literature review and the results section showed that motivational dynamics for innovators are still highly disputed. LEGO claimed that extrinsic motivation was essential for the best innovators to reveal their creations, while Spreadshirt believed that intrinsic motivation was more important. Literature on open source software argues that offering extrinsic motivation may diminish existing intrinsic motivation (Lakhani and Wolf 2005), however this is disputed by current research. Furthermore, the identification of Long Tail Innovators has not been carried out systematically by any of the case companies. The current practice is to reach out to known

70


communities and innovators. Identifying and motivating Long Tail Innovators remain central challenges for companies, but is outside the scope of this thesis and warrants further research. The Long Tail Innovators are the most important assets in the Long Tail Innovation Model and should be attracted, retained and developed with initiatives similar to regular employees of the company. Toolkits and innovation space The toolkit should be provided by the manufacturer or based on a widely available open standard. Von Hippel’s five criteria for the toolkit (trial-and-error, appropriate innovation space, user friendliness, modular and easy translation) are useful guiding principles. LEGO, Big Blue Saw and Spreadshirt all showcased how the trial-and-error process was embedded in the toolkit. It is imperative for the manufacturer to embed mechanisms which automatically facilitate the innovation process in the toolkit in order cut down editing costs. Spreadshirt showed how aspects beyond the physical composition of the innovation, such as copyright issues, can preliminarily be screened by a toolkit. The process is fully automated and the flexible cost to the manufacturer is zero. However developing the toolkit is a large fixed investment, which must be recouped through the proceeds of Long Tail Innovation. The larger the innovation space that the toolkits offer, the more precisely needs can be met and the larger the potential revenue. Long Tail Innovation allows for a larger innovation space than mass customization because the bar is not set by the lowest common denominator, but rather relies on the skill level and motivation of the Long Tail Innovators. The size of the innovation space is positively correlated to two variables: Innovator investment in terms of skills and motivation, and manufacturer investment in terms of means of production (e.g. adding a new type of material). The higher the skills and motivation of the innovator, the more layers of complexity the toolkit can have (while remaining user friendly). The higher the utilization of production capacity, the larger the feasible manufacturer investment. (See figure 7)

Figure 7, Innovation Space

71


Gallery The final part of the innovation process is submitting the innovation so it can be displayed and purchased by the interest community. It is possible for communities to use several manufacturers to pursue their common interest. And it is possible for manufacturers to make their platform available to serve several communities’ interests. In this regard Long Tail Innovation becomes a decentralized innovation network consisting of several innovators, communities and manufacturers.

Figure 8, Long Tail Innovation Network

Figure 7 presents four innovators in two communities respectively centered around autism and hobby trains who have used two manufactures, LEGO and Spreadshirt in order to make four different innovations based on their need knowledge and the manufactures’ solution knowledge. The innovations can be displayed in two places. The first place is in an online environment hosted by the manufacturer. LEGO Gallery and Spreadshirt Marketplace are examples of that. In figure 7, LEGO gallery could display both the ‘LEGO hobby train’ and the ‘LEGO kit for autistic children’. The alternative is that the manufacturer facilitates display of the innovation in an external online environment. Spreadshirt’s Shop partner initiative is an example of this. In 72


figure 7, a webpage for parents of autistic children could display both the ‘support autism Tshirt’ and the ‘LEGO kit for autistic children’. If the manufacturer hosts the gallery the community will have the product in common, e.g. LEGO Gallery centers around LEGO blocks. If the gallery is displayed in an external online environment the community will have an interest in common, such as hobby trains. The differences between these two types of communities will be elaborated in the next section: the editing phase. 4.1.2.2 Editing Phase The three editing mechanisms The editing process intends to make the innovation more marketable. It consists of three mechanisms: -

Automated editing by the toolkit Peer review by the community Professional editing by the manufacturer

Automation and peer review are free of cost for the manufacturer, while professional editing takes up internal resources. It is in the manufacturers’ interest to make sure that as much of the editing process as possible is handled either automatically or by the community. Automated Editing The previous section discussed how the toolkit can assist innovation. Mechanisms such as tutorials and guidelines can educate the innovator in areas of copy right issues and construction/design. Automated functionalities in the toolkits can warn of poor construction quality (e.g. LEGO shake table), possible copyrights infringements, make realistic 3D renderings of the final product, etc. The manufacturer must strike the balance between a toolkit which facilitates innovation and one that constrains it.

73


Peer Review The manufacturer can facilitate community editing by embedding features such as a comment box and criteria specific rating functions in the gallery. Furthermore, the manufacturer can set up incentives for people to assist in the editing process. E.g. if you peer review 10 designs you get a higher ranking in the community. As the innovation is put on display and peer reviewed there are two types of editing the community can assist with. This is related to the two types of communities mentioned in the previous section about the innovation phase. In Figure 8 the ‘LEGO kit for autistic children’ from Figure 7 has been singled out.

Figure 9, Community editing

This is an important distinction to make. The platform community will typically be hosted by the manufacturer and can contribute with platform knowledge editing, such as build quality, how to use the toolkit, how to get a greater exposure using the manufacturer’s tools, and everything which is related to the solution platform. However an equally important editing process is carried out by the community of interest, which can edit and comment with regard to the needs of the members in the community, thus making the innovation a better match for the niche market. The manufacturer must facilitate the peer review in both communities. The Marketing phase section will discuss more in detail what mechanisms the manufacturer can 74


install in order to allow Long Tail Innovators to easily bring their innovations to external online environments and receive need knowledge editing they can implement through the manufacturer’s solution platform. Manufacturer editing When the manufacturer undertakes editing it necessitates investing resources in an innovation, which is contrary to the business logic of Long Tail Innovation Model. However, the manufacturer must also ensure the quality of the products it endorses in order to retain its brand strength and reputation. In traditional portfolios, management performs selection, termination and deletion decisions in order to prioritize its resources in such a way as to generate the highest long term profit revenue. In the Long Tail Innovation Model, portfolio management consists of a threshold model where direct market feedback guides the portfolio decisions. This has two primary advantages. -

It eliminates the dependency on both subjective, experience based decision making and financial methods based on estimates, which are both notoriously fallible. It automates the portfolio management process thus lowering the cost.

The Long Tail Innovation Model is based on the premise of a self-innovating, self-selecting and self-marketing system. It is impossible to make portfolio decisions without market knowledge and it is unfeasible to acquire market knowledge for a myriad of niche markets. The threshold model has no selection, termination or deletion decisions but relies on collective customer commitment, which enables companies to prioritize only those innovations that are selected by the market itself. Figure 10 is an example of a threshold model based on sales volume. Based on the sales volume the manufacturer can decide to invest internal resources in editing the innovation and in endorsing it. If it reaches an even higher threshold the manufacturer can decide to invest more internal resources in optimizing the Figure 10, Portfolio Management innovation and promoting it to a larger audience 75


or retailers. The task for the manufacturer is to devise a system which operates on the most relevant parameters (e.g. sales volume, ranking, hits) and provides incentives to the innovators to improve and market their innovations in order to reach the next threshold. Selecting the right parameters is a huge challenge and is associated with the distinction between communities of interest and platform communities. Ultimately the manufacturer wants the community of interest, which constitutes the niche market, to have the largest impact on when an innovation should reach the next threshold. Rights management Another challenge for the Long Tail Innovation Model is the question of rights management. The three case companies handle the issue differently. Big Blue Saw argues that when they manufacture a part it is similar to a print shop printing a document, thus entailing no rights to the design. Spreadshirt has a similar system, however they are in the process of lobbying for the t-shirt to be accepted as a form of written media rather than a product, as freedom of speech laws would allow for far more designs than under current copyright law. LEGO has a different answer to the problem. When a user uploads his design on LEGO gallery he signs terms and conditions surrendering all rights of his model to LEGO. Devising a system which both offers incentives and protects the innovator, while not being too restrictive and while complying with copyright legislation, is a difficult task. Services such as YouTube which also publish user content have faced some of the same problems and their efforts have yielded many solutions relevant to these manufacturers. 4.1.2.3 Marketing Phase The marketing phase is just as central to the Long Tail Innovation Model as the innovation phase and the editing phase. Only by engaging the Long Tail Innovators and interest communities can niche markets can be targeted in an effective way. The manufacturer’s marketing efforts are threefold. They must market the Long Tail Innovation service to innovators, they must assist the innovators in reaching their niche markets and they must assist the niche markets in finding the innovations. Attracting and retaining the innovators As described before, the most important asset for the Long Tail Innovation Model is the innovators. It has been posited that the most effective way of connecting to innovators is by word of mouth, which entails having a strong community and excellent service which will ensure existing innovators are ambassadors for the company. Building a strong platform community will also alleviate support cost, as the community becomes self supporting. Traditional marketing mechanisms should be used to build up the brand of the platform, rather than the individual products. One element in attracting innovators would be to set up a 76


revenue sharing model which will offer extrinsic motivation to the innovators. Another strategy would be to create structures that enforce intrinsic motivation and socio-psychological mechanisms which anticipate reciprocity, increased recognition and sense of efficacy. For example the most active reviewers in the community could be formally recognized by LEGO by, for example, giving them titles such as ‘LEGO knight’. Additionally, it is important to make it easy to join and difficult to leave for a competitor. Ease of joining can be achieved by making a simple transparent system, where the manufacturer handles as much as possible of the process which is not dependent on the innovator’s need and market knowledge, such as sales payment, after sales, logistics, etc. Making it difficult to leave can be done by raising the switching cost and competing on quality of service. Helping innovators in reaching their niche markets The core of Long Tail Innovation marketing is that the innovators should market their own innovation as they have superior market knowledge. The manufacturer’s job is to facilitate the innovators’ efforts. This can be done by providing tools to proliferate the innovations such as ‘blog this’ functions, viral marketing tools, virtual shops that can seamlessly be embedded in external online environments and allow for feedback, so innovators can introduce their innovation to communities of interest and get more specific feedback. The manufacturer can allow innovators to build extensions to the toolkit itself by making an open application programming interface. Furthermore the manufacturer can educate the innovators in the basics of marketing through tutorials, promote best cases and create a forum where innovators can advise each other in how to market products in the best way. The Long Tail Innovation Model allows a fast response to trends. This is also facilitated by the manufacturer by feeding relevant knowledge back to the innovators about the most popular models, materials, designs etc. Enabling the niche markets to find the innovations The manufacturer should also install mechanisms which allow the niche market to find the right innovations. This is essentially about lowering search costs. This is done by organizing knowledge. One aspect is how the innovator can categorize his innovation so it is easier for others to find it (LEGO - hobby train – locomotive - black). The other aspect is how the communities can organize the innovation. Here the central tool is collaborative filtering where the communities can tag innovations, rate innovations and ‘favorite’ innovations and view similar innovations. By employing collaborate filtering the best innovations (judged by the community) will stand out and thus get a greater exposure, and possibly even evolve from niche to mainstream. Just as for the editing process the manufacturer should allow for segregated collaborative filtering so a member of a community of interest can chose to see only 77


the ratings from the people he shares interests with rather than the whole platform community. Facilitating Innovation The common theme of the innovation phase, the editing phase and the marketing phase is that the manufacturer must facilitate the Long Tail Innovation Model NPD process rather than control it. By creating the right dynamics in the toolkit, the online communities, the threshold model, the search mechanisms, the collaborative filtering mechanisms, the revenue sharing model and so forth, the manufacturer can make the NPD self-innovating, self-editing and selfmarketing to a large extent, thus decreasing the need for investments. A company employing the Long Tail Innovation Model must also be able to undertake mass customization well because the setups are very similar and because a part of the business will be mass customized products (the products with no niche market). That entails flexible manufacturing systems, innovation toolkits, and excellent supply chain capabilities. However besides that, it also necessitates a revenue sharing system, a solid rights managements system, specific marketing mechanisms and search mechanisms. The organizational structure must reflect the openness, both in internal SAP systems and in management systems and the organization must understand that the innovators must be attracted, retained and developed just as regular employees are, even though they are not paid.

78


4.2 Conclusion Today companies are designed to serve mass markets and operate under the flawed assumption that demand is intrinsically foreseeable and consumer preferences can be disclosed. Traditional business models and NPD processes are becoming obsolete as demand is becoming increasingly fragmented. This has resulted in chaotic and costly portfolios and companies that frantically innovate to serve unanticipated market needs. The Long Tail Innovation Model is a business logic which changes the cost structure of NPD enabling niche products to become profitable and a source of substantial revenue by employing user innovation and online communities. The research questions that guided this thesis were: R1 How are the elements of Long Tail Innovation explained by existing literature? R2 What are the distinctive features of Long Tail Innovation from a company perspective? R3 What is the Long Tail Innovation business logic and NPD process? These three questions have been answered consecutively throughout the thesis in an iterative process, where findings have given rise to alterations in the research questions. How are the elements of Long Tail Innovation explained by existing literature? The NPD process can be described as two interrelated strategies: Innovation and marketing. The elements pertaining to innovation which are relevant to Long Tail Innovation are: -

Challenges in NPD User Innovation Motivation for Innovators

NDP is becoming more risky and costly for companies while radical innovation is becoming rarer. In order to mitigate risk, companies choose products aimed at a segment’s lowest common denominator, which results in a poor fit between consumer preferences and products. However research has shown that user innovation is faster, less costly, less risky and has a higher commercial potential that traditional NPD projects. If the innovation is commercially unattractive to the manufacturer the users must innovate themselves. Hobbyists or professional-amateurs posses superior need knowledge (and skills) from lifelong dedication to the field. Intrinsic motivation is an important factor to this group. 79


The marketing elements pertaining to innovation which are relevant to Long Tail Innovation are: -

Market segmentation and micro segmentation Mass customization and Collective Customer Commitment Technological Enablers

With the fragmentation of demand, market segmentation has become increasingly difficult to handle. One-to-one marketing has fallen short of expectations since it is costly and does not produce the expected benefits. One way to mitigate risk, address niche market needs while overcoming the impediments of micro segmentation, is through mass customization and ensuring collective customer commitment. Long Tail Innovation differs from mass customization in that it targets niche markets, rather than being a one-to-one business model. Flexible production, online communities and collaborative filtering enable Long Tail Innovation by allowing customized manufacturing, word-of-mouth advertisement and lowering the search cost so the sales distribution changes towards niche products. What are the distinctive features of Long Tail Innovation? The meaning condensation and the pattern recognition gave rise to five themes that described the distinctive features of Long Tail Innovation as compared to traditional innovation: -

Drivers, Enablers & Barriers Innovation, Community & Publishing Marketing Cost, Risk & Challenges Company Characteristics and Operation

Long Tail Innovation is being driven by proliferating consumer needs enabled by three preconditions: flexible manufacturing, easy to operate and cheap design software, and access to the internet and search mechanisms. However, companies’ lack of awareness and competency, as well as the high complexity of the phenomenon and the lack of a business mode,l are barriers to Long Tail Innovation. Long Tail Innovation is about creating an innovation infrastructure for innovators. The innovators are driven by extrinsic and intrinsic motivation; however it is difficult to determine which is more important. Communities of interest constitute the niche markets and have need knowledge, while the platform communities have solution knowledge. Both can assist the manufacturer in editing the innovations. Long Tail Innovation changes marketing by letting the innovators become their own marketers. Long Tail Innovation entails a structural change of NPD cost. However in some aspects it also incurs an increased fixed cost. 80


Long Tail Innovation differs from mass customization by constituting a potentially substantial source of revenue and having a larger innovation space. Only knowledge intensive companies will be able to employ Long Tail Innovation as the operations entail an integration of 1) sophisticated flexible manufacturing systems. 2) Online accessible innovation toolkits and galleries. 3) State of the art supply chains. 4) Rights management and revenue sharing systems. However, Long Tail Innovation still needs to deliver proof of concept and it is difficult to say if Long Tail Innovation will become a mass phenomenon like YouTube. This will be determined possibly within the next decade. What is the Long Tail Innovation business logic and NPD process? The Long Tail Innovation Model is a business model focusing on tangible consumer products. It changes the cost structure of NPD, enabling niche products to become profitable and a source of substantial revenue by employing user innovation and online communities. The Long Tail Innovation Model consists of two interrelated frameworks: -

Long Tail Innovation Model business logic Long Tail Innovation Model NPD

Long Tail Innovation has several cost advantages over traditional innovation which makes niche markets viable through changing the structural cost of NPD. Flexible manufacturing mitigates risk, innovators and online communities lower the cost of development and the Internet and search mechanisms lower the cost of marketing. In a sales distribution curve there are three stages: Traditional Innovation for the mass market, Long Tail Innovation for niche markets and mass Customization for one-to-one. The structural change of NPD costs results in long tail economics where the cumulative niche markets becomes a substantial source of revenue for the company, rivaling the size of the mass market. The Long Tail Innovation Model NPD process is a recursive process with three phases within a network of three actors contributing to the different phases and being part of the portfolio management process. The three phases are the innovation phase, the editing phase and the marketing phase. The three actors are the innovator, the community and the manufacturer. In all three phases the manufacturer must facilitate the Long Tail Innovation Model NPD process rather than control it. This is done by installing mechanisms that 1) Provide incentives for the innovators and assist them in innovating and marketing their innovations. 2) Provide incentives and assist the community in editing and organizing the innovations. 3) Automate the portfolio management process. Eventually the manufacturer can make the NPD self-innovating, selfediting and self-marketing to a large extend, thus decreasing the need for investments. 81


4.2.1 Grounded Propositions These propositions are based on the insights derived from the literature review and the case studies. They relate to three different areas: Markets and Communities, Type of products and Type of companies. Market and Communities - For all material consumer products the 80/20 distribution will begin to fail and the sales distribution will become more flat – meaning niche markets will become more important. - Having an innovative and dedicated platform community will become a competitive parameter and an element in company valuation within the next decade. - Communities of interest will become brands. Type of products - The Long Tail Innovation model will become more important in product categories characterized by compressed lifecycles and rapidly evolving consumer demand. - The innovation type will initially be design oriented, later it will be oriented towards functionality. - The Long Tail Innovation Model will become relevant to most industries except for heavily regulated industries such as pharmaceuticals. Type of companies - Mass Customization will never become a substantial source of income for companies and most companies that successfully undertake mass customization now will therefore venture into Long Tail Innovation. - In the Long Tail Innovation Model, first mover advantages are substantial as the toolkit will become the de facto standard of innovation. Owning the innovation architecture for physical consumer products will become an important competitive parameter. - A new type of company will emerge to handle the brokering process between the innovating consumer and the traditional manufacturer. It is likely that companies who are strong in supply chain management such as Amazon and eBay will be in a good position to do this. - The rights management lessons learned from online user generated content can be applied with modifications to the Long Tail Innovation Model. - The organizational structure of the company will be flat in order to accommodate the business strategy - it is highly unlikely that a very hierarchical company will undertake Long Tail Innovation.

82


4.2.2 Limitations of research and suggestions for further research The limitations of this thesis are intrinsically connected to the chosen research strategy and have been partly addressed in the methodology section. However it should be reiterated that this research is based on three strategically sampled case studies, which represent the exceptions rather than the rule. The Long Tail Innovation Model has systematized the business logic of Long Tail Innovation and presented a list of grounded propositions. These elements must be qualified and investigated in further research, both in order to garner new insights and to successfully operationalize the Long Tail Innovation Model. Central research areas that need to be addressed are: -

How is the Long Tail Innovator identified What are the motivational dynamics for the innovator and the community What are the relevant parameters of the portfolio management threshold model What is the community perspective on Long Tail Innovation

I suggest that within the next decade the Long Tail Innovation Model will have had significantly larger impact than mass customization. Long Tail Innovation will have reached the mass market for certain product categories and thus truly instigated a post mass production paradigm.

83


Anderson, Chris (2006), The long tail : How Endless Choice is Creating Unlimited Demand. London Random House Business. Ansari, A. and C. F. Mela (2003), "E-customization," Journal of Marketing Research, 40 (2), 131-45. Bardakci, Ahmet and Jeryl Whitelock (2003), "Mass-customization in marketing: the consumer perspective," Journal of Consumer Marketing, 20 (5). Beane, T. P. and D. M. Ennis (1987), "Market Segmentation - A Review," European Journal of Marketing, 21 (5), 20-42. BigBlueSaw (2008), "Homepage: www.bigbluesaw.com," Vol. 2008. Brynjolfsson, E., Y. Hu, and M. D. Smith (2006), "From niches to riches: Anatomy of the long tail," Mit Sloan Management Review, 47 (4), 67-+. Brynjolfsson, Erik, Yu Jeffrey Hu, and Duncan Simester (2007), Goodbye Pareto Principle, Hello Long Tail: the Effect of Search Costs on the Concentration of Product Sales: SSRN. Cassell, C. and G. Symon (2004), Essential guide to qualitative methods in organizational research (1st ed.). London: SAGE. Cooper, Robert G (2005), "Your NPD portfolio may be harmful to your business’s health," PDMA Visions, 29 (2). Cormican, K. and D. O'Sullivan (2004), "Auditing best practice for effective product innovation management," Technovation, 24 (10), 819-29. de Brentani, U. and E. J. Kleinschmidt (2004), "Corporate culture and commitment: Impact on performance of international new product development programs," Journal of Product Innovation Management, 21 (5), 309-33. Dellarocas, C. (2003), "The digitization of word of mouth: Promise and challenges of online feedback mechanisms," Management Science, 49 (10), 1407-24. Eisenhardt, K. M. (1989), "Building Theories From Case-Study Research," Academy of Management Review, 14 (4), 532-50. Eisenhardt, K. M. and M. E. Graebner (2007), "Theory building from cases: Opportunities and challenges," Academy of Management Journal, 50 (1), 25-32. Franke, N. and S. Shah (2003), "How communities support innovative activities: an exploration of assistance and sharing among end-users," Research Policy, 32 (1), 157-78. Franke, N. and E. von Hippel (2003), "Satisfying heterogeneous user needs via innovation toolkits: the case of Apache security software," Research Policy, 32 (7), 1199-215.

84


Franke, N., E. von Hippel, and M. Schreier (2006), "Finding commercially attractive user innovations: A test of lead-user theory," Journal of Product Innovation Management, 23 (4), 301-15. Fuller, Johann, Michael Bartl, Holger Ernst, and Hans Muhlbacher (2006), "Community based innovation: How to integrate members of virtual communities into new product development," Electronic Commerce Research, 6 (1), 57-73. Griffin, A. (1997), "PDMA research on new product development practices: Updating trends and benchmarking best practices," Journal of Product Innovation Management, 14 (6), 429-58. Halman, J. I. M., A. P. Hofer, and W. van Vuuren (2003), "Platform-driven development of product families: Linking theory with practice," Journal of Product Innovation Management, 20 (2), 149-62. Harhoff, D., J. Henkel, and E. von Hippel (2003), "Profiting from voluntary information spillovers: how users benefit by freely revealing their innovations," Research Policy, 32 (10), 1753-69. Hart, C. W. L. (1995), "Mass Customization - conceptual underpinnings, opportunities and limits," International Journal of Service Industry Management, 6 (2), 36-&. Herstatt, C. and E. Von Hippel (1992), "From Experience - Developing New Product Concepts Via the Lead User Method - a Case-Study in a Low-Tech Field," Journal of Product Innovation Management, 9 (3), 213-21. Hienerth, C. (2006), "The commercialization of user innovations: the development of the rodeo kayak industry," R & D Management, 36 (3), 273-94. Jeppesen, L. B. (2004), "Organizing Consumer Innovation," Copenhagen Business School. ---- (2005), "User toolkits for innovation: Consumers support each other," Journal of Product Innovation Management, 22 (4), 347-62. Jeppesen, L. B. and L. Frederiksen (2006), "Why do users contribute to firm-hosted user communities? The case of computer-controlled music instruments," Organization Science, 17 (1), 45-63. Kaplan, A. M. and M. Haenlein (2006), "Toward a parsimonious definition of traditional and electronic mass customization," Journal of Product Innovation Management, 23 (2), 168-82. Kara, Ali and Erdener Kaynak (1997), "Markets of a single Customer: exploiting conceptual developments in market segmentation," European Journal of Marketing, 31 (11/12), 873-95. Kester, Linda, Petra Badke-Schaub, Erik Jan Hultink, and Kristina Lauche (2007), "Problems and Pitfalls in Portfolio Management: A planning, Learning or Integrative approach?," TU Delft. Kollock, Peter (1999), "The Economies of Online Cooperation: Gifts and Public Goods in Cyberspace," in Communities in Cyberspace. London: Routledge.

85


Kotha, S. (1995), "Mass Customization - Implementing the emerging paradigm for competitive advantage," Strategic Management Journal, 16, 21-42. Kotler, P. (1984), Marketing Management: Analysis, Planning and Control (5 ed.). Englewood Cliffs, New Jersey: Prentice-Hall. Krishnan, V. and K. T. Ulrich (2001), "Product development decisions: A review of the literature," Management Science, 47 (1), 1-21. Kvale, Steinar (1996), Interviews : an introduction to qualitative research interviewing. California: Sage. Lakhani, K. R. and E. von Hippel (2003), "How open source software works: "free" user-to-user assistance," Research Policy, 32 (6), 923-43. Lakhani, K. R. and B. Wolf (2005), "Why Hackers Do What They Do: Understanding Motivation and Effort in Free/Open Source Software Projects," in Perspectives on Free and Open Source Software, B. J. Feller and S. Hissam Fitzgerald and K. R. Lakhani, Eds.: MIT Press. Lankford, J (1988), "A Galaxy of Amateur Astronomers," in Sky & Telescope Vol. 76. Leadbeater, C and P Miller (2004), The Pro-Am Revolution. How enthusiasts are changing our economy and society.: London: Demos. Lee, G. K. and R. E. Cole (2003), "From a firm-based to a community-based model of knowledge creation: The case of the Linux kernel development," Organization Science, 14 (6), 633-49. LEGO (2008), "Homepage: www.lego.com," Vol. 2008. Lilien, G. L., P. D. Morrison, K. Searls, M. Sonnack, and E. von Hippel (2002), "Performance assessment of the lead user idea-generation process for new product development," Management Science, 48 (8), 1042-59. Lint, O. and E. Pennings (2001), "An option approach to the new product development process: a case study at Philips Electronics," R & D Management, 31 (2), 163-72. Luthje, C. and C. Herstatt (2004), "The Lead User method: an outline of empirical findings and issues for future research," R & D Management, 34 (5), 553-68. Luthje, C., C. Herstatt, and E. von Hippel (2005), "User-innovators and "local" information: The case of mountain biking," Research Policy, 34 (6), 951-65. Mikkola, J. H. (2001), "Portfolio management of R&D projects: implications for innovation management," Technovation, 21 (7), 423-35.

86


Mittendorf, B. (2006), "Incentives and the role of flexible production in facilitating information exchange," Journal of Engineering and Technology Management, 23 (1-2), 100-13. Ogawa, S. and F. T. Piller (2006), "Reducing the risks of new product development," Mit Sloan Management Review, 47 (2), 65-+. Patterson, M. L. (2005a), "New product portfolio planning and management," in The PDMA handbook of new product development, K. B. Kahn, Ed. 2nd ed. Hoboken, New Jersey: John Wiley & Sons. Patterson, Marvin L (2005b), New Product Portfolio Planning and Management (second ed.). Hoboken, New Jersey John Wiley & Sons Inc. PDMA (2007), "PDMA Glossary," Vol. 2007. Pine, B. J., B. Victor, and A. C. Boynton (1993), "Making Mass Customization Work," Harvard Business Review, 71 (5), 108-19. Pitta, Dennis A. and Daniella Fowler (2005), "Online Consumer Communities and their value to new product developers," Journal of Product & Brand Management, 14 (5), 283-91. Ramachandran, V.S. (1998), Phantoms in the brain. New York: Harper Collins. Retrofootball (2008), "Homepage: http://www.retrofootballtshirts.co.uk/." Ryan, R. M. and E. L. Deci (2000), "Self-determination theory and the facilitation of intrinsic motivation, social development, and well-being," American Psychologist, 55 (1), 68-78. Siggelkow, N. (2007), "Persuasion with case studies," Academy of Management Journal, 50 (1), 20-24. Simonson, I. (2005), "Determinants of customers' responses to customized offers: Conceptual framework and research propositions," Journal of Marketing, 69 (1), 32-45. Smith, T., J. R. Coyle, E. Lightfoot, and A. Scott (2007), "Reconsidering models of influence: The relationship between consumer social networks and word-of-mouth effectiveness," Journal of Advertising Research, 47 (4), 387-97. Spreadshirt (2008), "Homepage: www.spreadshirt.com," Vol. 2008. Stake, R., E. (2000), "Case studies," in Handbook of qualitative research, N. Denzin, K. and Y. Lincoln, S., Eds. 2nd ed. London: Sage Publications Inc. Suomala, Petri and Ilkka Jokioinen (2003), "The patterns of success in product development: a case study," European Journal of Innovation Management, 6 (4).

87


Tynan, A. Caroline and Jennifer Drayton (1987), "Market Segmentation," Journal of Marketing Management, 2 (3), 301-35. Urban, G. L. and E. Von Hippel (1988), "Lead User Analyses for the Development of New IndustrialProducts," Management Science, 34 (5), 569-82. von Hippel, E. (2005), Democratizing Innovation: MIT Press. ---- (1976), "Dominant Role of Users in Scientific Instrument Innovation Process," Research Policy, 5 (3), 212-39. ---- (1998a), "Economics of product development by users: The impact of "sticky" local information," Management Science, 44 (5), 629-44. ---- (2001a), "Innovation by user communities: Learning from open-source software," MIT Sloan Management Review, 42 (4), 82-86. ---- (2001b), "Perspective: User toolkits for innovation," Journal of Product Innovation Management, 18 (4), 247-57. ---- (1998b), The sources of innovation: Oxford University Press. von Hippel, E. and R. Katz (2002), "Shifting innovation to users via toolkits," Management Science, 48 (7), 821-33. von Hippel, E. and G. von Krogh (2006), "Free revealing and the private-collective model for innovation incentives," R & D Management, 36 (3), 295-306. ---- (2003), "Open source software and the "private-collective" innovation model: Issues for organization science," Organization Science, 14 (2), 209-23. von Krogh, G. and E. von Hippel (2006), "The promise of research on open source software," Management Science, 52 (7), 975-83. Yin, Robert K. (2002), Case Study Research. Design and Methods (Third ed.): Sage Publications.

88

Profile for david.dencker

The Long Tail Innovation Model  

A business model describing how structural changes in NPD cost enable long tail economics for physical consumer goods.

The Long Tail Innovation Model  

A business model describing how structural changes in NPD cost enable long tail economics for physical consumer goods.

Advertisement