Creating Breakthrough Products and Services with the Lead User Method Professor Eric von Hippel MIT Sloan School of Management [email_address]

Essential Definitions The “functional” source of innovation depends upon the functional relationship between innovator and innovation: An INNOVATION is anything new that is actually used (“enters the marketplace”) – whether major or minor. An innovation is a USER innovation when the developer expects to benefit by USING it; An innovation is a MANUFACTURER innovation when the developer expects to benefit by SELLING it.

The “functional” source of innovation depends upon the functional relationship between innovator and innovation:

An INNOVATION is anything new that is actually used (“enters the marketplace”) – whether major or minor.

An innovation is a USER innovation when the developer expects to benefit by USING it;

An innovation is a MANUFACTURER innovation when the developer expects to benefit by SELLING it.

How we discovered that users develop many major new products 63 44 4 Total 63 14 1 Transmission Electron Microscopy - 5 1 Ultraviolet Spectrophotometry - 14 1 Nuclear Magnetic Resonance Spectrometry - 11 1 Gas Chromatography Minor Improvement Major Improvement First Device Innovations Affecting

First device used in field developed and built by: 22 72 77% Total 17 44 72% Transmission Electron Microscopy 0 6 100% Ultraviolet Spectrophotometry 3 12 80% Nuclear Magnetic Resonance Spectrometry 2 10 83% Gas Chromatography Mfg. User % User Innovations Affecting

Gammaflow: A Completely Automated Radiommunoassy System Source: Science Vol 194 October 1976

A Completely Automated Radiommunoassy System

The World Wide Web – A Lead User Innovation “Berners-Lee did not set out to invent a contemporary cultural phenomenon; rather, he says, “it was something I needed in my work.” He wanted to simply to solve a problem that was hindering his efforts as a consulting software engineer at CERN. Berners-Lee’s innovation was to apply hypertext to the growing reality of networked computers. He expanded the idea he had developed at CERN and made it available on the Internet in the summer of 1991. Technology Review , July 1996, p.34

“Berners-Lee did not set out to invent a contemporary cultural phenomenon; rather, he says, “it was something I needed in my work.” He wanted to simply to solve a problem that was hindering his efforts as a consulting software engineer at CERN.

Berners-Lee’s innovation was to apply hypertext to the growing reality of networked computers. He expanded the idea he had developed at CERN and made it available on the Internet in the summer of 1991.

Technology Review , July 1996, p.34

Examples of Important Consumer Product Innovations Electronic Mail Desk Top Publishing Computer Application Software White-out Liquid Office Chocolate Milk Graham Cracker Crust Food Sports Bra Apparel Mountain Bike Mountain Climbing-Piton Sports Equipment Protein-base Shampoo Feminine Hygiene Personal Care Gatorade Health Products Example Category

History of “AOL Instant Messenger” Instant Messaging is a User Innovation By 1987 MIT Lab for Computer Science had thousands of “Athena” workstations online and difficulties diffusing system admin info rapidly. Developed “Zephyr” instant message system. MIT students begin to use for general instant messaging. Other universities adopted Zephyr-like programs First Commercial Product 9 years later 1996 Israeli firm Mirabilis put out comml product ICQ 1998 Mirabilis acquired by AOL Source: October 2002 Technology Review

Instant Messaging is a User Innovation

By 1987 MIT Lab for Computer Science had thousands of “Athena” workstations online and difficulties diffusing system admin info rapidly. Developed “Zephyr” instant message system.

MIT students begin to use for general instant messaging.

Other universities adopted Zephyr-like programs

First Commercial Product 9 years later

1996 Israeli firm Mirabilis put out comml product ICQ

1998 Mirabilis acquired by AOL

Ongoing evolution of Wi-Fi User Activities to Date Users discover possibilities and begin free sharing of wireless networks Users Modify Wi-Fi antennas to greatly increase range Widespread implementation occurs – travelers find “hot spots” as they travel, can get Internet access, send e-mail from the highway etc. Traditional Supplier Responses? No one will want it – no network security We think this might be service stealing… should stop. Source: October 2002 Technology Review

User Activities to Date

Users discover possibilities and begin free sharing of wireless networks

Users Modify Wi-Fi antennas to greatly increase range

Widespread implementation occurs – travelers find “hot spots” as they travel, can get Internet access, send e-mail from the highway etc.

Traditional Supplier Responses?

No one will want it – no network security

We think this might be service stealing… should stop.

Users aren’t always the innovators 48 - 15% - 27% 58% Sports Equipment 12 - - 83% 13% 4% Connector Attaching Equip 8 2 - - 75% 25% Wire Stripping Equip 14 - 7% 36% 14% 43% Thermoplastic-Using 12 - 8% 33% 17% 42% Industrial Gas-Using 16 4 - - 92% 8% Plastics Additives 5 - - - 90% 10% Engineering Plastics 11 - - - 94% 6% Tractor Shovel Related 10 - - - 10% 90% Pultrusion Process 49 6 12% - 21% 67% Semicon & PC Crd Process 111 17 - - 23% 77% Scientific Instruments Total (N) NA Other Suplr Manufr User Innovations Samples:

Factors influencing the sources of innovation Relative ability to profit from an innovation Firm with highest innovation-related profit expectations most likely to innovate. “ Sticky information” transfer costs Firm with stickiest local information needed for innovation most likely to innovate. Agency costs Always creates tendency towards user innovation “I will do it myself because I want something exactly right for me – You are only willing to make something almost-right for many.” Coordination costs Always creates tendency towards user innovation “By the time you can physically get here to do what I need, I might be bankrupt – so I have to do it myself (Example, solving semiconductor production problems – loss rates as high as $10,000 per minute!)

Relative ability to profit from an innovation

Firm with highest innovation-related profit expectations most likely to innovate.

“ Sticky information” transfer costs

Firm with stickiest local information needed for innovation most likely to innovate.

Agency costs

Always creates tendency towards user innovation “I will do it myself because I want something exactly right for me – You are only willing to make something almost-right for many.”

Coordination costs

Always creates tendency towards user innovation “By the time you can physically get here to do what I need, I might be bankrupt – so I have to do it myself (Example, solving semiconductor production problems – loss rates as high as $10,000 per minute!)

User and Manufacturer Innovations Differ Users tend to develop Functionally Novel innovations: The first sports-nutrition bar The first scientific instrument of a new type Manufacturers tend to develop Dimension of Merit Improvements: A better-tasting sports-nutrition bar Improvements to an existing type of scientific instrument

Users tend to develop Functionally Novel innovations:

The first sports-nutrition bar

The first scientific instrument of a new type

Manufacturers tend to develop Dimension of Merit Improvements:

A better-tasting sports-nutrition bar

Improvements to an existing type of scientific instrument

Users innovate when it pays… for them Only “Lead User” innovations form the basis for new products and services of value to manufacturers. “ Lead Users” are users that: Have needs that foreshadow general demand in the marketplace; Expect to obtain high benefit from a solution to their needs. (Such users are more likely to innovate – “Necessity is the mother of invention!”)

Only “Lead User” innovations form the basis for new products and services of value to manufacturers.

“ Lead Users” are users that:

Have needs that foreshadow general demand in the marketplace;

Expect to obtain high benefit from a solution to their needs. (Such users are more likely to innovate – “Necessity is the mother of invention!”)

Time Only lead user prototypes available Commercial versions of product available # of users perceiving need Lead users are now facing “emerging needs”

Product area selected for pilot test of lead user methods: Computer-Aided-Design systems Used to lay out printed circuit boards (PCB-CAD)

In PC-CAD Lead Users were innovating - Routine Users were not 99 33 Number in Sample 1% Yes 82% Yes Did you build own PCB CAD System Active In Solving Own Problem? It’s OK No “ Are you satisfied with your present PCB CAD system? High Need For Improved System? 4.1 15 6.8 11 What are your: Avg. Number of layers? Avg. Line width (mils)? (1988 data) At Front of “High Density” Trend? Routine Users LEAD Users Type of Questions We Asked Expected Lead User Attribute

What are your:

Avg. Number of layers?

Avg. Line width (mils)? (1988 data)

Performance Assessment of Lead User Research at 3M Research Team: Prof. Gary Lilien, Penn State University; Prof. Pam Morrison, University of New South Wales; Dr. Kate Searls, ASI Associates, Mary Sonnack, Division Scientist, 3M; Prof. Eric von Hippel, MIT For the complete article and other Lead User Videos and articles: Go to leaduser.com on the Web

Research Team: Prof. Gary Lilien, Penn State University; Prof. Pam Morrison, University of New South Wales; Dr. Kate Searls, ASI Associates, Mary Sonnack, Division Scientist, 3M;

Prof. Eric von Hippel, MIT

For the complete article and other Lead User Videos and articles: Go to leaduser.com on the Web

Overall study outcomes The 3M Assessment study showed: 8 X Higher Sales in Year 5 $146 vs. $18 Million per concept “ The highest rate of new product line generation in 50 years for the 5 Divisions tested.”

Assessment Results: Lead User vs. Non-Lead User Funded Ideas Note: Items measured on 10 pt. Scale, 10=high, 1=low 0.80 0.92 0.61 6.7 6.7 8.0 7.1 7.8 8.8 Fit with Business Intellectual property protection Fit with mfr. Capabilities Fit with distribution channels 0.08 9.24 7.3 8.4 9.6 9.8 Strategic Value Strategic importance Fit with Strategic plan 0.01 0.00 33% 18m 68% $146m Projected Profitability % market share in year 5 Estimated sales in year 5 0.01 0.09 6.8 5.3 9.6 8.3 “ Newness” of Idea Novelty compared to competition Newness of needs addressed Sig. NON-LU Ideas (n=42) LU Ideas (n=5)

Fit with Business

Intellectual property protection

Fit with mfr. Capabilities

Fit with distribution channels

Strategic Value

Strategic importance

Fit with Strategic plan

Projected Profitability

% market share in year 5

Estimated sales in year 5

“ Newness” of Idea

Novelty compared to competition

Newness of needs addressed

Essential Definitions “ Breakthrough:” Determines Future Business Growth and Margins Major Product line >20% of Division Sales Incremental improvement: Valuable to existing business Extension to existing line 5 0 LU Method At 3M 1 41 Traditional 3M Method Breakthrough Incremental

“ Breakthrough:”

Determines Future Business Growth and Margins

Major Product line >20% of Division Sales

Incremental improvement:

Valuable to existing business

Extension to existing line

Lead User concept generation projects cost more than traditional ones $100,000 (plus coaching) 154 Lead User concept development stage At 3M $30,000 60 Traditional 3M concept development stage Total Cost Person Days

ACTIVITY: Think about possible Lead Users in your markets Specify what you might learn from each type of LU Step 4 Brainstorm possible lead users outside target market Which types of users in other fields & applications are facing a similar need but in a more demanding form? Step 4 Brainstorm possible lead users within that target market Which types of individuals or firms have needs at the leading edge of the trends? Which ones have a high incentive & the resources to solve their leading edge needs? Step 2 Select a specific market & specific major trend to think about Step 1

Brainstorm possible lead users outside target market

Which types of users in other fields & applications are facing a similar need but in a more demanding form?

Brainstorm possible lead users within that target market

Which types of individuals or firms have needs at the leading edge of the trends?

Which ones have a high incentive & the resources to solve their leading edge needs?

Example of searching for lead users outside your target market Look for users facing higher needs than anyone in target market: People who need even high resolution than anyone doing medical imaging Image enhancement (“pattern recognition”) specialists Examples: Experts in semiconductor chip imaging Experts who process photographs from space probes Medical X-Ray Instead of a board of leading radiologists…

Look for users facing higher needs than anyone in target market:

People who need even high resolution than anyone doing medical imaging

Image enhancement (“pattern recognition”) specialists

Examples:

Experts in semiconductor chip imaging

Experts who process photographs from space probes

Organizing to use LU Method