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How to Manage Outside Innovation

Companies are aware of the potential benefits of "open innovation"--relying on outsiders both as a
source of ideas and as a means to commercialize them--but they have struggled with precisely how to
open up their product development to the external world. For starters, many executives have little idea
how to motivate and manage outside innovation. Specifically, should external innovators be organized
as a collaborative community or as a competitive market?
Collaborative communities are perhaps best known through Linux and other open-source software
efforts that are governed loosely by social norms and "soft" rules to encourage open access to information, transparency, joint development and the sharing of intellectual property. Competitive markets are strikingly different. Rather than collaborating, external innovators in a market will develop multiple competing varieties of complementary goods, components or services. Customers then choose from among the different offerings, and this often results in fierce competition--and little cooperation--among the innovators.
Because the dynamics of communities and markets are so dramatically different, companies need to consider carefully which approach makes the best sense for their objectives. From their research, the authors have identified three critical issues that managers should take into account when making that decision: 1) the type of innovation that will be shifted to external innovators, 2) the motivations of those individuals, and 3) the nature of the platform business model. An in-depth analysis of those issues reveals that the choice between communities and markets is not as obvious--nor as clear-cut--as it might first appear.
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