Commercializing user innovations by vertical diversification: The user–manufacturer innovator

doi:10.1016/j.respol.2015.09.007

Research Policy

Volume 45, Issue 1, February 2016, Pages 244-259

https://doi.org/10.1016/j.respol.2015.09.007 Get rights and content

Highlights

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User–manufacturer diversification is a new pathway to commercialization of user innovations.
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It realizes synergies between user and manufacturer functions regarding need knowledge, solution knowledge, marketing, and financials.
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Benefits depend on conditions related to innovation, marketing, organization, and financials.
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As a downside, selling the firm's own user innovations risks loss of competitive advantage.
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User–manufacturer diversification affects the firm's boundaries.

Abstract

This paper explores a pathway to commercializing user innovations hitherto not studied, namely, the vertical diversification of a user firm into an upstream industry supplying capital goods, and subsequent coexistence of user and manufacturing units. Such coexistence creates synergies regarding innovation, marketing, and financials. It enables the manufacturing unit to benefit from user innovations in its new product development, while the user unit profits from improved tools. Yet, selling the firm's own user innovations risks loss of the competitive advantage originating from use of these innovations. We employ case evidence from firms in the fields of foundation engineering, tunnel construction, tea-packaging, and geological surveying to derive a set of five propositions regarding the conditions under which user–manufacturer diversification is attractive and viable in the long run. These conditions relate to innovation, marketing, the organization, and financial aspects. Our study offers three contributions. We show how user entrepreneurship can originate from established corporations rather than from individual user innovators; we carve out factors that favor the move toward and the success of user–manufacturer diversification; and we link user innovation and corporate strategy by showing how user innovation can affect the boundaries of organizations.

Introduction

When users innovate, they intend to benefit by using their innovations (von Hippel, 1988). However, user innovations can also be valuable to other parties, and in many cases have been shown to have good commercial potential (e.g. Franke and von Hippel, 2003, von Hippel, 2005). Two ways of tapping this potential have been described. The user innovator can either pass its innovation to a manufacturer to integrate it into the latter's new product development (von Hippel et al., 1999), or can commercialize the innovation by becoming a manufacturer herself (Baldwin et al., 2006, Haefliger et al., 2010, Shah and Tripsas, 2007). In the first scenario, the user innovator maintains the functional role of a user; in the second, the user's role switches to that of a manufacturer. However, in both cases, the interaction between manufacturer and user innovator is limited, either because the user innovator remains external to the manufacturer or because the user has abandoned her functional role as a user (von Hippel, 1988).

A long-term and close relationship between the parties is conceivable if a user innovator turned manufacturer retains both roles over the long run, remaining active in the original business as a user, and also selling her user innovations on the market. We refer to this phenomenon as user–manufacturer diversification. The obvious benefits of this configuration are that it enables the user–manufacturer to commercialize a continuous stream of user innovations while simultaneously allowing the in-house user to benefit directly from improved commercial products. On the other hand, selling one's user innovations on the market—and to competitors in particular—risks loss of the competitive advantage that the user unit derives from the innovations. As a result, tensions can arise between the user and manufacturing units that negate the potential synergistic gains.

In this study, we explore two interrelated questions about user–manufacturer diversification: First, what are the characteristics, advantages, and drawbacks of user–manufacturer diversification, also in contrast to other pathways of commercializing user innovations? Second, which factors favor or impede the move toward and success of user–manufacturer diversification?

We address these questions using a multiple case study approach to analyze the history, organization, and innovation management of four firms that diversified from their original business using specific equipment (the user business) into a related business manufacturing this equipment (the manufacturing business). Our focal firms are active in the fields of foundation engineering, tunnel construction, tea-packaging, and geological surveying.

Our empirical evidence shows that successful user–manufacturer diversification is possible. Based on detailed case analysis we propose that an organization's tendency to perform such a diversification, and the sustainability thereof, are determined by four groups of factors. In relation to innovation, the favorable factors are a continuous stream of innovations resulting from leading-edge activity by the user unit; in relation to marketing, a good reputation of the focal firm in its original market helps the new manufacturing unit. At an organizational level, conflicts between the user and manufacturing unit might impede the diversification and its success; in relation to finance, diversification helps to cover the investment required for user innovation and, if market cycles are asynchronous, hedges against slumps in demand for the user business. We derive five propositions regarding how these factors favor the move toward and the success of user–manufacturer diversification.

Our study contributes to the literature on user innovation in three ways. First, we show how user entrepreneurship can originate from established firms rather than from individual user innovators (as described by Baldwin et al., 2006, Haefliger et al., 2010, Shah and Tripsas, 2007). We propose a new path to user innovation commercialization, describe this phenomenon in depth, and delineate it from other paths to commercializing user innovations. Second, we reveal the factors that favor both the move toward and the success of user–manufacturer diversification. Third, we establish a new link between user innovation and corporate strategy. We show that user innovation can affect the boundaries of the firm and should thus be considered a central strategic issue (Santos and Eisenhardt, 2005, Tushman et al., 2012).

The remainder of the article is organized as follows. Section 2 reviews the relevant literature; Section 3 describes the research method, data sources, and the cases investigated. Drawing on these cases, we develop our propositions in Section 4. Section 5 compares user–manufacturer diversification to alternative pathways to commercialization of user innovation and relates our phenomenon to existing theory. Section 6 concludes and suggests implications for research and management.

Section snippets

Literature review: commercialization of user innovations

We first review the literature on how user innovations become commercial products. Known pathways are new product introduction by an existing firm in its core market and the creation of a new firm by the user innovator. Next, we review the literature pertaining to the new pathway we carve out, i.e., diversification into an upstream market based on a firm's own user innovations.

Research method

In this paper we explore the phenomenon of user–manufacturer diversification. Beyond presenting a description of this phenomenon our aim is to inductively develop new theory in this regard. To achieve these objectives we use an inductive research approach, making use of the richness of qualitative data which is needed for theorizing (Edmondson and McManus, 2007). We follow a case study approach, which provides two main advantages. First, immersion in the richness of detailed case data and use

Findings

In presenting our findings, we first provide an overview of the phenomenon of user–manufacturer diversification, focusing on the sequence of steps that we observed in the cases we studied. The following subsections then delve deeper in four specific aspects of the phenomenon, and derive propositions regarding the factors that influence user–manufacturer diversification. Our propositions relate to both the move toward and the successful sustainment of user–manufacturer diversification, since

Comparing pathways of commercialization of user innovations

In order to further characterize user–manufacturer diversification as a phenomenon we compare it with the two other known pathways to user innovation commercialization (Agarwal and Shah, 2014, Baldwin et al., 2006, Haefliger et al., 2010, Hienerth, 2006, Shah and Tripsas, 2007) along six dimensions, as shown in Table 6.

The comparison reveals that user–manufacturer diversification shares some characteristics with both of the known pathways, yet differs in others. Similarities between

Contributions

Our research makes three contributions to the literature. First, we contribute to the body of literature that explores how user innovations are commercialized by users (Baldwin et al., 2006, Haefliger et al., 2010, Shah and Tripsas, 2007). We demonstrate that, under certain conditions, user–manufacturer diversification and subsequent coexistence of both functions within one firm is feasible. Such diversification constitutes a new pathway to commercializing user innovations.

Second, we carve out

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View full text

Commercializing user innovations by vertical diversification: The user–manufacturer innovator

Highlights

Abstract

Introduction

Section snippets

Literature review: commercialization of user innovations

Research method

Findings

Comparing pathways of commercialization of user innovations

Contributions

Präsentation zur Hauptversammlung

Handbuch des Spezialtiefbaus – Geräte und Verfahren

Der Spezialtiefbau – Aktueller Stand der Geräte- und Verfahrenstechnik

Bautechnik Spezial

Börsenprospekt der Bauer AG. Schrobenhausen

Rückblick auf 40 Jahre Bohrpfahltechnik – Gibt es noch Impulse für die Zukunft?

Tiefbau