1. 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 MIT Innovation Lab Boston, MA April 15, 2004

2. 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. 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. 4 © Carliss Y. Baldwin and Kim B. Clark, 2004 Three parts to problem-solving Perceive functional gap— Users comparative advantage

5. 5 © Carliss Y. Baldwin and Kim B. Clark, 2004 Three parts to problem-solving Perceive functional gap— Users comparative advantage Close the gap— Designers with domain knowledge

6. 6 © Carliss Y. Baldwin and Kim B. Clark, 2004 Three parts to problem-solving Perceive functional gap— Users comparative advantage Close the gap— Designers with domain knowledge Allocate resources— Entrepreneurs or financiers with economic knowledge

7. 7 © Carliss Y. Baldwin and Kim B. Clark, 2004 Shorthand Notation User DesignerOwner or Agent

8. 8 © Carliss Y. Baldwin and Kim B. Clark, 2004 Wedgwood Configuration: 3 in 1 User DesignerOwner, NOT Agent THIS CONFIG- URATION DOES NOT SCALE!

9. 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. 10 © Carliss Y. Baldwin and Kim B. Clark, 2004 Configuration 2 (Von Hippel?) User DesignerOwner NOT Agent Owner HIRES User-Designers to solve specialized problems

11. 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. 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. 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. 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. 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. 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, x 1, …, x M, e)

17. 17 © Carliss Y. Baldwin and Kim B. Clark, 2004 Base Case: UDEs are employed by User-firms

18. 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. 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. 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. 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. 22 © Carliss Y. Baldwin and Kim B. Clark, 2004 Thank you!