1 © Carliss Y. Baldwin and Kim B. Clark, 2004 Who is the User? The Employment of User-Designers by User-Firms Carliss Y. Baldwin Harvard Business School.

1 © Carliss Y. Baldwin and Kim B. Clark, 2004

Who is the User? The Employment of User-Designers by User-Firms

Carliss Y. BaldwinHarvard Business School

MIT Innovation LabBoston, MAApril 15, 2004

2 © Carliss Y. Baldwin and Kim B. Clark, 2004

Some history Josiah Wedgwood William Perkin vs. August Hofmann

– “the academic-industrial knowledge network”– Germany “beat” Britain in dyes

Andreas Bechtolscheim (e.g.) – user-designer-founder

James Gosling (e.g.)– User-designer-employee (albeit highly

optioned)

3 © Carliss Y. Baldwin and Kim B. Clark, 2004

My question for today

Does the “power” of user innovation rest on founder-owners or employees?

Start sketching …

4 © Carliss Y. Baldwin and Kim B. Clark, 2004

Three parts to problem-solvingPerceive functional gap— Users comparative advantage

5 © Carliss Y. Baldwin and Kim B. Clark, 2004

Three parts to problem-solvingPerceive functional gap— Users comparative advantage

Close the gap— Designers with domain knowledge

6 © Carliss Y. Baldwin and Kim B. Clark, 2004

Three parts to problem-solvingPerceive functional gap— Users comparative advantage

Close the gap— Designers with domain knowledge

Allocate resources— Entrepreneurs or

financiers with economic knowledge

7 © Carliss Y. Baldwin and Kim B. Clark, 2004

Shorthand Notation

User

Designer Owner or Agent

8 © Carliss Y. Baldwin and Kim B. Clark, 2004

Wedgwood Configuration: 3 in 1

User

Designer Owner, NOT Agent

THIS CONFIG-URATION DOES NOT SCALE!

9 © Carliss Y. Baldwin and Kim B. Clark, 2004

Configuration 1 (Classic)

User

Designer (might be a User, too!)

Owner NOT Agent

User-owner buys a solution designed by someone else

10 © Carliss Y. Baldwin and Kim B. Clark, 2004

Configuration 2 (Von Hippel?)

User

Designer Owner NOT Agent

Owner HIRES User-Designers to solve specialized problems

11 © Carliss Y. Baldwin and Kim B. Clark, 2004

The Configurations are NOT mutually exclusive

Owner-founder problem-solving can be supplemented by BOTH Classic and Von Hippel problem-solving

In “modern” corporations, we lose the owner-founder altogether– Owner-founder replaced by passive shareholders

– Get “layers of agents”— the Board of Directors, Senior Management Team, and Specialists

Not if, but where, when and why

12 © Carliss Y. Baldwin and Kim B. Clark, 2004

Von Hippel Problem-Solving: Benefits

Relative to Wedgwood, User-Designer-Employee (UDE) accelerates work on problems– Solutions don’t have to be very good if the discount

rate is positive and the “Owner’s delay” is long

– E.g., suppose owner needs to get a PhD!

Relative to Classic, UDE can achieve more precise targeting of functional gaps vs. “mass-produced” solutions (Bessen)

13 © Carliss Y. Baldwin and Kim B. Clark, 2004

Von Hippel Problem-Solving: Costs User-Designer-Employee (UDE) IS an agent Therefore:

– Choice of which problems to solve may not be identical to the owner’s (problem-ranking conflicts)

– Choice of solutions may not mimic the owner’s (problem-solving conflicts)

We have all experienced these agency problems!

– After a while, the owner (or the owners other agents) may even not understand what the UDE is doing (need equivalent Ph.D)

14 © Carliss Y. Baldwin and Kim B. Clark, 2004

Digressions

Examples of UDEs– Internal MIS groups– Process engineers– Accountants– HR professionals

The “Rashomon” enterprise– Same place, different perceptions

» IBM in the early 1990s; DEC until demise

15 © Carliss Y. Baldwin and Kim B. Clark, 2004

Our research

Seeks to explore the nature of this deep agency problem

We are in a theory-building stage All results preliminary and model-

dependent

16 © Carliss Y. Baldwin and Kim B. Clark, 2004

Base Case:Designers=UDEs They come out of “school” capable of

solving problems (in some domain). Their knowledge is non-transferrable. They can rank designs = solutions to

problems. They care about money, effort and the

quality of designs.– u(w, x1, …, xM, e)

17 © Carliss Y. Baldwin and Kim B. Clark, 2004

Base Case:UDEs are employed by User-firms

Designers come out Designers User-firmsof school and get jobs:

IBM

BMY

"Tech"

GE

AMZN

GM

LU

KnowledgeDivide

Greater Economy

18 © Carliss Y. Baldwin and Kim B. Clark, 2004

Some preliminary results/conjectures

UDEs are in a symbiotic relationship with “Professional Schools” – like MIT and HBS

Once they are entrenched in a domain of knowledge, the Schools may have NO interest in improving “their” graduates’ ability to estimate the economic value of solving a specific problem

Intuition: Less precise problem ranking = More employment = More demand for schooling

19 © Carliss Y. Baldwin and Kim B. Clark, 2004

More preliminary results/conjectures

UDEs will want to create the following “institutions”– Library—ex post revelation of designs

– Signup sheets—ex ante declaration of design intentions

– See “Architecture of Cooperation” on economics of these institutions

These institutions are Good News for the UDEs’ employers– Support/Subsidize!

20 © Carliss Y. Baldwin and Kim B. Clark, 2004

The “Tom Sawyer” Model

Tom Sawyer’s fence Knowers vs. Competitors in the UDEs’ domain

– Knowers want the solution with least effort

– Competitors want to WIN (fame, glory and warm glow)

Tweaking the Library+Signup Sheets institution to disclose “winners” greatly changes the Competitors’ incentives to play

A very Machiavellian strategy!

21 © Carliss Y. Baldwin and Kim B. Clark, 2004

Bottom Line It makes good economic sense to create user-

designer-employees (UDEs)– Most important: Doesn’t preclude other problem-solving

approaches

But “behind the walls” created by the UDE’s specialized knowledge, strange games can go on– Schools’ game: fuzz up the economics of problem-solving

– Library’s game: share solutions, reduce redundant effort

– Tom Sawyer’s game: Knowers entice Competitors to solve their problems and share the solutions for fame and glory

22 © Carliss Y. Baldwin and Kim B. Clark, 2004

Thank you!