Why innovation thrives on the network effect


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In a 2005 essay written by Phillip Evans and Bob Wolf of the Boston Consulting Group titled Collaboration Rules, the authors highlight (among other things) the power that the network effect has on innovation. The premise of the essay is that when companies operate with open-source traits – similar to the workings of the Linux community – their responsiveness to challenges goes up which fuels better innovative solutions. The transaction costs associated with their collaboration is small due to the unique way they collaborate as efficiently, frictionlessly and creatively as the self-styled Linux “hackers.” They are able to respond to market signals quicker, tap into small segments, and experiment with unlikely combinations of technologies.

One such example is how Toyota took the lead in hybrid vehicles with the development of the Prius over the big three American automobile manufacturers. Here’s what the authors had to say.

“Detroit considered hybrid vehicles to be an uninteresting intermediate product: U.S. auto executives preferred so-far-unfulfilled research on fuel cell technology. Meanwhile Toyota was building the Prius…Toyota’s low transaction costs and penchant for small-scale collaborations helped it keep open 80 discrete options for the hybrid engine until just six months before delivering a final design. Conventional automakers would have needed to freeze those design variables at least two years earlier.”

Here’s the most powerful statement of all:

“It is in the interstices of the human network – rather than in the minds of a few wunderkinder – that most real innovations are born. And so it is the transaction costs that constrain innovation by constraining opportunities to share different and conflicting ideas, skills, and prejudices.”

According to Toyota president Fujio Cho, “Detroit people are far more talented than people at Toyota. But we take averagely talented people and make them work as spectacular teams.”

The network is the innovator.

Here’s the takeaway: Companies that focus on lowering the transaction costs of collaboration are far more successful at innovation than are those that focus on other things such as individual talent or monetary incentives.

Republished with author's permission from original post.

Patrick Lefler
Patrick Lefler is the founder of The Spruance Group -- a management consultancy that helps growing companies grow faster by providing unique value at the product level: specifically product marketing, pricing, and innovation. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.


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