Distributed product development Mobilizing many to create one

A pattern study from the Center for the Edge’s Patterns of Disruption series Deloitte Consulting LLP’s Strategy & Operations practice works with senior executives to help them solve complex problems, bringing an approach to executable strategy that combines deep industry knowledge, rigorous analysis, and insight to enable confident action. Services include corporate strategy, customer and marketing strategy, mergers and acquisitions, social impact strategy, innovation, business model transformation, supply chain and manufacturing operations, sector-specific service operations, and financial management. Mobilizing many to create one

Contents

Overview | 2

Case studies | 8

Is my market vulnerable? | 13

Endnotes | 15

Contacts | 17

Acknowledgements | 17

About the authors | 18

About the research team | 19

iii Distributed product development

Overview

Distributed product development Mobilizing many to create one

Def. Engage a large number of third parties in product design and development to create supe- rior value.

Rapid advances in communication and collaboration technologies make it easier to mobilize a large number of external participants in product design and development. Even relatively small organi- zations can gain advantages in speed, scale, and flexibility by leveraging the contributions of third parties, shifting sources of strategic advantage from the resources an organization controls to the resources the organization can engage in bringing new offerings to market. The management tech- niques to harness these dynamics are powerful in their own right, but the real power comes from their ability to spawn a continuing series of innovations for the organization and the broader set of participants.

In the report Patterns of disruption: Anticipating disruptive strategies in a world of unicorns, black swans, and exponentials, we explored, from an established incumbent’s point of view, the factors that turn a new technology or new approach into something cataclysmic to the marketplace—and to incumbents’ businesses. In doing so, we identified nine distinct patterns of disruption: recognizable configurations of marketplace conditions and new entrants’ approaches that can pose a disruptive threat to incumbents. Here, we take a deep dive into one of these nine patterns of disruption: distribute product development.

2 Mobilizing many to create one

Figure 1. Pattern snapshot Figure 1. Pattern snapshot

Distribute product development Mobilizing many to create one

Cases Wikipedia x | TripAdvisor x | PortalPlayer x Britannica/Encarta Travel guide books Digital music players

Conditions Catalysts Challenges Where is it playing out? When? Why is it difficult to respond?

Revenue Assets

Assumptions

Markets that are informa- Enabling technology Renders significant assets obsolete tion-rich, in which customers are Digital infrastructure providing Existing product manufacturing facilities largely satisfied with a single richer connectivity may need to be written off to take product to meet a broad range Customer mind-set shift advantage of development opportunities of needs, vendors infrequently From passive customer to active Challenges core assumptions solicit input from third parties, participant Changes assumptions about what and products require a diverse customers want and how third parties set of specialized knowledge for Platform are involved in product development development Scalable learning and aggregation platforms, increasing collaboration

Arenas Technology— Life Oil and gas Commodities— software sciences providers food

More vulnerable More resistant

Graphic: Deloitte University Press | DUPress.com

3 Distributed product development

As information and resources flow more the rate at which we can produce, capture, freely and rapidly, product life cycles across and share information across individuals and many industries have compressed. Even suc- institutions has profound implications for how cessful products fall by the wayside more organizations create and capture value. quickly as new generations come through the Distributing product development is an pipeline in response to changing consumer entirely different model from traditional demand and dynamic markets. In more stable hard-wired development as shown in figure times, once we had learned something valu- 2. It requires the organization to focus on able, we could generate mobilizing and coor- value from that stock dinating rather than of knowledge for a managing and plan- long time. ning.1 In practice, that Today, advances in “There are tends to require a more the tools for coordina- modular approach, tion and collaboration always more which leverages loosely are making engagement coupled groups and models that involve smart people activities that encour- large numbers of exter- age participation from nal participants more outside your diverse, specialized effective and practi- third parties. cable. Organizations company than This approach using these new models allows innovation to to involve passionate within it.” emerge from a larger, third parties, such as —Attributed to Bill Joy more diverse group consumers and sup- of participants, rather pliers, in product than remain in the design and develop- exclusive domain ment processes, can often learn faster and, as a of select executives and R&D specialists.2 It result, move faster to more effectively address is powerful—and threatening—through its the changing needs of customers, with fewer leverage: Accessing resources where they are internal resources. Further, the tacit knowl- and distributing the problem among them edge that is developed and shared around in a decentralized fashion can enable greater specific process and product components lays speed, flexibility, and scalability without the the groundwork for additional innovations institutional overhead or capital requirements. and opportunities for everyone involved. This By affording external parties latitude over shift in the way products can be created, and the ultimate design and form of the product,

Figure 2. Traditional versus distributed processes

Traditional “hard-wired” product develop- Loosely coupled distributed ment processes product development processes

• Top-down design • Emergent design • Procedural • Modular • Tightly coupled • Loosely coupled • Management of activities • Management of entities

4 Mobilizing many to create one

Key stats • In 2005, Wikipedia already had almost 500,000 articles in English compared to Encyclopædia Britannica’s 80,000 and Encarta’s 4,500.3

• Only about 18 percent of all the edits to Wikipedia are done by anonymous users.4

• Sourceforge.net, a source code repository, currently lists 458,850 open-source projects for development and attracted over 3 million unique visitors in August 2015.5

• While a physical travel guide might be a few hundred pages long and updated seasonally, by 2012 TripAdvisor had accumulated more than 75 million reviews and 11 million pictures on more than 1.6 million businesses in over 110,000 destinations.6

distributed product development is distinct development efforts are focused on engaging a from traditional outsourcing arrangements, wide number of participants to develop a single which typically involve only a small set of ven- product whereas product platforms are focused dors executing on tightly defined specifications on engaging third parties to create many vari- over which they have little or no influence. ants of a core product. In both cases, individual Initially, efficiency benefits can be signifi- contributions may be motivated through non- cant; however, they are only a small part of the financial, intrinsic rewards like burnishing a story. Over time, dynamic specialization leads reputation among peers, or the simple sense of to increasing returns. Third parties begin to accomplishment associated with contributing specialize in the activities where they have dis- to a learning community.7 These communities tinctive capabilities and can make the biggest generate passion, and intrinsically motivated impact and shed the activities that can be bet- contributors pursue what they deem most ter performed by others. Companies can then exciting, opening the door for radical innova- become more focused and learn more rapidly tions affecting a large number of people and in their chosen areas of specialization without technologies. In aggregate, these seemingly the distraction of other activities. small contributions can lead to unprecedented The external participants involved in scale and scope. distributed product development—similar to Technological catalysts, such as smart- those building on top of a product platform— phones, laptops, and richer connectivity, dra- can be customers or other businesses within matically expand the power and potential of the ecosystem. One key difference between the crowd by endowing them with increasing those involved in product platforms and those access to information and improved capacities engaging in distributed product development, for computation and communication. Learning however, is that most distributed product and aggregation platforms minimize the cost

5 Distributed product development

to access information and make it easier to find advantage of “pulling” in external participa- opportunities to collaborate and contribute. tion, handing over partial control and shar- As a result, ownership of intellectual capital is ing intellectual property to create increasing becoming more distributed than ever.8 returns.10 Once developed, the capabilities for Whether leveraging the customer or the mobilizing and coordinating external partici- ecosystem, distributed product develop- pants in product development can become ment can prove challenging to incumbents self-reinforcing and help build capabilities accustomed to protecting proprietary stocks throughout the ecosystem to develop offerings of knowledge—the patents, processes, or that would otherwise not be possible. formulas—that are expected to generate a This pattern will likely affect markets where steady stream of customer needs are future returns. It changing rapidly, challenges both products are not their core assump- modular and have tions about where “So, there is a many potential use innovation happens cases and features, as well as what’s huge competitive and there is no sig- required to create nificant credential- value. In the “zero- argument about ing or regulatory sum” view of the requirements. It world, intellectual sustaining the will be most threat- property is closely ening in informa- guarded, and capacity for tion-rich product employee produc- environments that tivity is maximized open-source and rely on limited spe- through ever more cialized knowledge standardized roles consumer-driven and where there and processes. are currently few, Unburdened by innovation, because if any, customer this legacy mindset, touchpoints during new entrants can it’s one of the greatest the development more easily take competitive levers process. against monopoly.”

—Charles Leadbeater, author9

6 Mobilizing many to create one

Digging deeper

How does distributed product development relate to outsourcing?

Distributed product development processes might resemble more traditional outsourcing relation- ships, but with a key difference: Outsourcing relationships, whether they involve outsourcing design to a single party or focus on assembling products from many component manufacturers, typically involve tightly structured arrangements with strict specifications requiring lengthy negotiations and detailed contracts. Distributed product development processes create very different kinds of relationships that are much more flexible in nature and often span a larger scope of the compa- ny’s operations.

How does open innovation compare to distributed product development? If you look at most of the widely cited examples of successful open innovation, the model in use poses a question to a group of “solvers” who then provide an answer. You might call this the trans- actional model of open innovation—while the results can often be significant, the third-party interactions are narrowly defined and short term. Problem posted, solution offered, payment made, transaction completed, all parties move on. This approach has two limitations relative to more robust forms of distributed product development. First, it misses the opportunity to build long-term trust-based relationships among participants. Second, it does not encourage participants to build cumulatively upon the contributions of others.

7 Distributed product development

Case studies

Wikipedia displaces Encarta, which displaced Encyclopædia Britannica

Encyclopædia Britannica likely did not pulling content from less-respected publishers, expect to be displaced soon after earning Encarta attracted customers with its multime- record revenues in a centuries-old stable busi- dia content and ability to link between articles. ness. But as the requisites of success changed, While the 750 MB capacity of the disc limited so did the fortunes of both Britannica and its the amount of content able to be stored, the first serious threat, Encarta. mass-market seemed content with a large First published in 1768, Encyclopædia foundation of core knowledge and the more Britannica was considered for centuries to be frequent updates of content on Encarta. By the premiere source of general interest refer- 1996, Encarta controlled 44 percent of the $60 ence knowledge. In its prime, it relied on a million digital encyclopedia market.12 team of a few thousand specialized and vener- Wikipedia’s entrance in 2001 heralded ated contributors to establish credibility and an innovation in reference information that maintain its leadership of the reference infor- transformed the industry by leveraging an mation market. This premium strategy worked aggregation platform to capture widely distrib- in an era where marginal cost of production uted intellectual capital from passionate and was high and access to expertise was expensive informed contributors that could scale and and difficult to obtain. But manufacturing and update more rapidly than any single institu- distributing a CD-ROM proved to be more tion could on its own. Rather than produc- cost efficient than producing a set of books, ing an encyclopedia in-house, Wikipedia each with thousands of pages, and Encarta was provided the world with the means to docu- able to price lower as compared to Britannica ment its knowledge. It also allowed for emer- ($99 versus upward of $1,200).11 Despite gent design, letting the contributors shape

8 Mobilizing many to create one

content and structure to consumer interest. manual and automated, encourage acceptance Where Britannica and Encarta were focused of communal standards and promote meritoc- on managing resources, Wikipedia focused racy within the volunteer editorial commu- on mobilizing them. Jimmy Wales, founder nity, and their “neutral point of view” policy of Wikipedia, likes to note that Wikipedia inspires confidence in readers. initially had no employees.13 The efforts of a Allowing third parties to edit introduced few (or one, in this case) unleashed the efforts a new standard for reference information: of thousands. broader, more accessible, and faster to update Wikipedia quickly gained traction and than anything before. Incumbents could not surpassed Encyclopædia Britannica in number compete; encyclopedia sales, already dimin- of articles a mere two years after launch. Over ished by the arrival of the CD, fell from more the following decade, Wikipedia attracted than $150 million in 1990 to $10 million in over 750,000 contributors and contained 4.5 2012 (figure 3). Encarta dissolved in 2009 million articles, compared with Britannica’s and Encyclopædia Britannica halted print 4,000 contributors and 120,000 articles.14 operations in 2012.16 In 2009, Wikipedia had Surprising perhaps everyone except the icono- 97 percent share of the online encyclopedia clasts, Wikipedia has been able to maintain market and 184 times the page view volume of accuracy comparable to Britannica at much Encyclopædia Britannica online.17 larger scale.15 Extensive review protocols, both

Figure 3. The two-phase displacement of Encyclopædia Britannica

$160

$140

$120 $101 $100 Britannica $80 ia sales ($ million) Encarta om physical and $60 $45 Wikipedia $40 $35 $27 Revenue fr $20 igital encycloped

d $5 $4 $ 1993 1996 2012 Year

Note: 1996 revenue for Britannica does not include sales of Britannica CD-ROMs; however, based on the rapid decline in the price of Britannica's CD-ROMs (they declined from $1,200 to less than $100 in the span of less than a year), it is clear that Britannica’s CD-ROMs were not selling that well. Online subscriptions, which were first offered to households in 1996 at $150 and then $85 are also excluded for lack of data. 2012 household subscriber revenues only account for households that paid for subscriptions; it does not include any incremental revenues that may have been earned indirectly from those households that did not pay annual subscriptions and instead obtained access through distribution partners such as telecom companies and Internet providers. Sources: Philip Evans and Thomas Wurster, Blown to Bits: How the New Economics of Information Transform Society (Boston, MA: Harvard Business Press, 2000); Jorge Cauz, “Encylopaedia Britannica’s president on killing off a 244-year-old product,” Harvard Business Review, March 2013; Shane Greenstein and Michelle Devereux, The crisis at Encyclopaedia Britannica, Kellogg Case Publishing, 2006, case number: 5-306-504; Leslie Helm, “Microsoft to buy content from Collier’s,” Los Angeles Times, February 9, 1998; Robert Channick, “Encyclopaedia Britannica sees digital growth, aims to draw new users,” Chicago Tribune, September 10, 2014; Farhad Manjoo, “The Encyclopedia Britannica was expensive, useless, exploitative,” Slate, March 2012.

Graphic: Deloitte University Press | DUPress.com

9 Distributed product development

Short story

Apache Who would believe that the organization creating the web server technology used to power over half the Internet has no employees and instead relies on just over 2,500 passionate volunteers?18 Apache HTTP Servers have powered a majority of Internet traffic, currently over 56 percent,19 since shortly after their release in 1995. The product has been so reliable that it displaced the then market leader, the National Center for Supercomputing Applications (NCSA), within a few short months, and continues to power significantly more traffic than competitive products from Microsoft, Google, and Oracle (figure 4).20

Apache HTTP Server protocol is one of the preeminent examples of successful open-source collaboration; the secure, robust technology relies on no professional contributors, instead relying on a core group of developers to mobilize a larger group of developer participants who share the same motivating imperative—that the Internet should have a free, safe, and extensive open-source web server. In the community, competence is currency, and prolific contributors tend to become well- known and respected. While everyone is invited to contribute, governance protocols determine whose contributions will actually be integrated into each new release of the product.

Interestingly, the Apache foundation counts many of its competitors, such as Microsoft and Google, as its sponsors.21 These competitors continue to find it hard to respond because of Apache’s passion, scope, and momentum.

Figure 4. Apache open-source web server technology displaces leading incumbents in two years

Market share for top servers across all domains, August 1995–December 2003 60%

50%

40%

30%

20% Apache Microsoft 10% NCSA Other 0% Aug. Dec. 1995 2003

Source: Netcraft, “December 2003 web server survey,” http://news.netcraft.com/archives/2003/12/02/december_2003_web_server_survey.html, last modified 2003, accessed October 28, 2015. Graphic: Deloitte University Press | DUPress.com

10 Mobilizing many to create one

TripAdvisor disrupts the travel guide book market

Travel guide books, popularized globally in Sourcing content from travelers gave the 19th and 20th centuries by publishers like TripAdvisor a way to reach unprecedented Frommer’s and Lonely Planet, were once the scale at low cost. That scale, both in breadth source of information about travel destinations and depth, inspired confidence in readers to near and far. In a few short years, however, make informed decisions to find the trip that TripAdvisor disrupted these travel guide book best fit their needs. Providing content at no publishers by providing an inclusive aggrega- cost allowed TripAdvisor to enjoy an audience tion platform for travelers to post their own significantly larger than any travel guide before personalized reviews and experiences. By it. Its large audience propelled its growth, both mobilizing the crowd rather than relying on through network effects and the advertising a dedicated group of experts, it was able to revenue they brought in.22 achieve unprecedented scale and deliver the While a physical travel guide might be a few most recent information available. This market hundred pages long and updated seasonally, became particularly vulnerable because, on by 2012 TripAdvisor had accumulated more the one hand, the experience and expertise than 75 million reviews and 11 million pictures it needed access to was widely distributed on more than 1.6 million businesses in over and difficult to locate, and on the other hand, 110,000 destinations.23 Updates came in con- smartphones emerged as a newly available and stantly, and the most recent information was affordable means of letting customers them- prominently presented. This was a key success selves capture and contribute the information factor in an industry with fragmented demand they felt was most helpful and relevant in and a desire for the most recent information. real time.

Figure 5. TripAdvisor grows to be 10x larger than the top travel guides in less than six years

$1000

$800

$600

$400 Top 5 travel guides

Global revenue ($ million) $200 TripAdvisor

$ 2006 2007 2008 2009 2010 2011 2012

Sources: TripAdvisor, "Tripadvisor: 2014 annual report and notice of 2015 annual meeting and proxy statement," http://files.shareholder.com/down- loads/AMDA-MMXS5/548241545x0x827020/D5154D96-F095-49E4-8700-2C38646BA6A4/TRIP_2014_Annual_Report.pdf, last modified April 2015, accessed October 28, 2015. “UPDATED; Lonely Planet and the rapid decline of the printed guidebook,” Jason Clampet, http://skift.com/2013/03/04/lonely-planet-and-the-rapid-de- cline-of-the-printed-guidebook/, last modified March 4, 2013, accessed October 28, 2015.

Graphic: Deloitte University Press | DUPress.com

11 Distributed product development

The leading travel guides have suffered guides, TripAdvisor’s share grew from 46 per- since TripAdvisor’s rise and were forced to cent in 2006 to 91 percent in 2012. shift from being a source of authority to one of Ultimately, while successful, TripAdvisor’s inspiration, and their sales and valuations have use of distributed product development is still suffered dramatically. From 2006 to 2012 (fig- limited relative to its potential to foster more ure 5), TripAdvisor’s revenues grew seven-fold, sustained, significant trust-based interactions from $100 million to $762 million, while travel among users, mobilize participants, galvanize guide sales decreased by more than a third, engagement, and lead to significant future falling from $119 million to $77 million.24 In a business opportunities. market of TripAdvisor and the top five travel

Short story

PortalPlayer While the Apple® iPod® digital music player25 is now synonymous with the MP3 player, the MP3 industry was actually born in 1998 with Saehan Information Systems’s MPMan. The iPod, released three years later in 2001, entered a crowded market, where there were roughly 50 portable MP3 players vying for customers in the United States.26 Within three years, however, Apple sold almost 42 percent of all digital music players and 82 percent of US retail hard drive-based digital music players.27 Apple took its product from initial approval to market in just nine months. This feat was largely due to the collaborative creation nets organized by Apple’s semiconductor contractor, PortalPlayer.28

PortalPlayer had an extremely challenging task ahead of it: Apple demanded a high-performing device integrating specialized electronics. Microprocessors, digital-to-analog conversion technologies, power management circuits, flash memory, batteries, and hard-disk-drives, among other technologies, would need to work together seamlessly. Recognizing the limitations of its organization, PortalPlayer beckoned a global network of leading technology companies, some of whom were traditionally competitors, to complement it in developing what eventually became the iPod.

The network and system were structured to access the most cost-effective, high-quality talent globally, and the product was designed from the ground up to be modular. Focusing on rapid iteration to improve performance and reduce cost, PortalPlayer leveraged loosely coupled participants for high efficiency and engagement. For efficiency, processes were modularized and interfaces standardized to facilitate independent work and reduce integration complexity. For engagement, PortalPlayer selected the best solution for each component every six months. This rapid development cycle produced two major positive effects; the quick turnaround allowed for a continual stream of customer feedback into the development process. Creation network members would focus their efforts on satisfying customer needs in the hopes of winning the upcoming semiannual release, which fostered a healthy environment of both cooperation and competition. On one level, these third parties competed with one another for their particular technology to be included in the next release. If partners were unsuccessful in a particular round, however, they were incentivized to continue to participate and collaborate because there was uncertainty as to which partners would be helpful in successive rounds.

Even industry powerhouses like Apple can perform at higher levels when they leverage ecosystems of participants, like the one PortalPlayer orchestrated. Incumbents were challenged to replicate PortalPlayer’s approach and found the assets available to them were quickly dated in a rapidly evolving market. While Apple was responsible for many of the distinguishing features of the iPod, PortalPlayer was the driving force behind the innovative technology that contributed to the quick ascendancy of the original iPod to market dominance.29

12 Mobilizing many to create one

Is my market vulnerable?

Do I gain my competitive advantage from expertise across fragmented disciplines? More complex products or services that require input from different disciplines will likely benefit more from a model that can dynamically pull in the best thinking or capabilities from each discipline rather than rely on captive resources that are static. Simpler products may not gain an advantage from reaching beyond the four walls for expertise.

Do my offerings have a high degree of modularity? Modular products can more easily be distributed out to separate entities to innovate on part of the product and minimize the effort required to integrate all of the product components. However, disruption is more likely in industries where products have not been modular and a new entrant finds a way to modularize and distribute development on a rigid and tightly integrated product. Then, the best talent can be paired with the appropriate module.

Am I operating in an industry with short or shrinking product life cycles? Shortening life cycles are increasingly incompatible with product companies’ internal product development processes. The use of a flexible, collaborative ecosystem where participants can bring to bear leading capabilities on specific aspects of the design may bring products to market faster.

Do I involve the customer in product development? Customers increasingly expect products that fit their specific needs rather than standardized specifications. Markets that have not typically focused on the customer will be vulnerable to models that bring more personalized products to market, especially through methods that accommodate the customer to help shape the product.

13 Distributed product development

Am I prepared to co-create new intellectual property with third parties? Companies that are focused first on protecting IP will tend to assess third-party participation as too risky or will burden it with formal agreements and processes that prove too cumbersome to move quickly. Markets where IP protection is common will be more vulnerable to a new entrant willing to relinquish control in order to get products to market and into customers’ hands faster.

Are customers using my product to satisfy a diverse set of needs? Customers are more likely to receive significant value through distributed product development when there are diverse needs. If customer needs are fairly uniform, there is less value to be gained from distributing development to specialized experts. Products with more potential uses may also tend to attract more third parties to work on the product requirements for a specific use.

14 Mobilizing many to create one

Endnotes

1. Clay Shirky, “Clay Shirky: Institutions vs. col- 8. Yochai Benkler, TED, “Yochai Benkler: laboration,” filmed July 2005. TED video, 20:46; The new open-source economics,” https://www.ted.com/talks/clay_shirky_on_in- http://www.ted.com/talks/yochai_ben- stitutions_versus_collaboration?language=en, kler_on_the_new_open_source_economics/ posted 2005, accessed October 28, 2015. transcript?language=en, last modified 2. Charles Leadbeater, “Charles Lead- April 2008, accessed October 28, 2015. beater: The era of open innovation,” 9. Leadbeater, “The era of open innovation.” filmed July 2005. TED video, 19:01; 10. John Hagel, III, John Seely Brown, and Lang https://www.ted.com/talks/charles_lead- Davison, “A brief history of the power of beater_on_innovation?language=en, pull,” Harvard Business Review, April 9, 2010, posted 2005, accessed October 28, 2015. https://hbr.org/2010/04/a-brief-history-of- 3. Daniel H. Pink, “The Book Stops Here,”Wired , the-power-o, accessed October 28, 2015. March 1, 2005, http://www.wired.com/2005/03/ 11. Shane Greenstein and Michelle Devereux, The wiki/, accessed November 30, 2015 crisis at Encyclopaedia Britannica, Kellogg Case 4. Jimmy Wales, “Jimmy Wales: The birth Publishing, 2006, case number: 5-306-504. of Wikipedia,” filmed July 2005. TED 12. Leslie Helm, “Microsoft to buy content from video, 20:01; https://www.ted.com/talks/ Collier’s,” Los Angeles Times, February 9, jimmy_wales_on_the_birth_of_wikipedia, 1998, http://articles.latimes.com/1998/feb/09/ posted 2005, accessed October 28, 2015. business/fi-17136, accessed October 28, 2015. 5. “Sourceforge.net,” http://Sourceforge.net, last 13. Wales, “Jimmy Wales: The birth of Wikipedia.” modified 2015, accessed October 28, 2015 (De- loitte analysis); CompetePro, “sourceforge.net,” 14. Tom McCarthy, “Encyclopedia Britannica halts https://siteanalytics.compete.com/sourceforge. print publication after 244 years,”Guardian , net/?metric=uv#.VjEfYrerSc1, last modified March 13, 2012, http://www.theguardian.com/ September 2015, accessed October 28, 2015. books/2012/mar/13/encyclopedia-britannica- halts-print-publication, accessed October 6. TripAdvisor, “Fact sheet,” https://web.archive. 28, 2015; Felix Richter, “The end of an era,” org/web/20121031012637/http://www.tripadvi- Statista, March 20, 2012, http://www.statista. sor.com/PressCenter-c4-Fact_Sheet.html, last com/chart/180/encyclopaedia-britannica/. modified 2012, accessed October 28, 2015. 15. Jim Giles, “Special report: Internet en- 7. Kevin J. Boudreau and Karim R. Lakhani, cyclopaedias go head to head,” Nature: “Using the crowd as an innovation partner,” International Weekly Journal of Science, Harvard Business Review, April 2013, https:// December 14, 2005, http://www.nature.com/ hbr.org/2013/04/using-the-crowd-as-an-inno- nature/journal/v438/n7070/full/438900a. vation-partner/, accessed October 28, 2015. html, accessed October 28, 2015.

15 Distributed product development

16. McCarthy, “Encyclopedia Britannica December 23, 2011, http://www.busines- halts print publication after 244 years.” sinsider.com/how-tripadvisors-business- 17. Kit Eaton, “Microsoft shutters Encarta as works-2011-12, accessed October 28, 2015. Douglas Adam’s encyclopedia model wins,” 23. TripAdvisor, “Fact sheet.” Fast Company, https://www.fastcompany. 24. Jason Clampet, “Updated: Lonely Planet com/1251669/microsoft-shutters-encarta- and the rapid decline of the printed guide- douglas-adams-encyclopedia-model-wins, last book,” Skift, http://skift.com/2013/03/04/ modified 2015, accessed October 28, 2015. lonely-planet-and-the-rapid-decline-of-the- 18. “Return of organization exempt from printed-guidebook/, last modified March income tax,” https://www.apache.org/ 4, 2013, accessed October 28, 2015. foundation/records/990-2010.pdf, last 25. Apple and iPod are trademarks of modified 2010, accessed October 28, 2015. Apple Inc., registered in the United 19. W3Techs, “Usage of web servers for web- States. and other countries. sites,” http://w3techs.com/technologies/ 26. Rod Adner, “From Walkman to iPod: What overview/web_server/all, last modified music tech teaches us about innovation,” 2015, accessed October 28, 2015. Atlantic, March 5, 2012, http://www.theatlantic. 20. Netcraft, “January 2012 web server com/business/archive/2012/03/from-walkman- survey,” http://news.netcraft.com/ to-ipod-what-music-tech-teaches-us-about-in- archives/2012/01/03/january-2012-web- novation/253158/, accessed October 28, 2015. server-survey.html, last modified January 27. Tony Smith, “Apple iPod grabs 82% US 2012, accessed October 28, 2015. retail market share,” Register, http:// 21. Rahman Hakikur, SMEs and Open Innovation: www.theregister.co.uk/2004/10/12/ Global Cases and Initiatives (IGI Global, 2011). ipod_us_share/, last modified October 22. Jeff Bussgang, “The secrets to TripAdvisor’s 12, 2004, accessed October 28, 2015. impressive scale,” Harvard Business Review, 28. For more on creation nets, see John Hagel October 2, 2012, https://hbr.org/2012/10/ III and John Seely Brown, “Creation nets: the-secrets-to-tripadvisors-im%20&%20http:// Harnessing the power of open innovation,” www.businessinsider.com/how-tripadvisors- Journal of Service Science 1, no. 2, 2008. business-works-2011-12, accessed October 29. John Hagel III and John Seely Brown, 28, 2015; Alex Cocotas, “How $3 billion Institutional innovation, Deloitte TripAdvisor’s business works,” Business Insider, Center for the Edge, 2013.

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Contacts

Blythe Aronowitz Peter Williams Chief of staff, Center for the Edge Chief edge officer, Centre for the Edge Deloitte Services LP Australia +1 408 704 2483 Tel: +61 3 9671 7629 [email protected] E-mail: [email protected]

Wassili Bertoen Managing director, Center for the Edge Europe Deloitte Netherlands +31 6 21272293 [email protected]

Acknowledgements

This research would not have been possible without generous contributions and valuable feedback from numerous individuals. The authors would like to thank:

Philippe Beaudette Janet Renteria Carrie Howell Andrew Blau Peter Schwartz Junko Kaji Peter Fusheng Chen Dan Simpson Duleesha Kulasooriya Jack Corsello Vivian Tan Kevin Weier Larry Keeley Lawrence Wilkinson Eamonn Kelly Andrew Ysursa Vas Kodali Blythe Aronowitz Jon Pittman Jodi Gray

17 Distributed product development

About the authors

John Hagel (co chairman, Deloitte Center for the Edge) has nearly 35 years of experience as a man- agement consultant, author, speaker, and entrepreneur, and has helped companies improve perfor- mance by applying IT to reshape business strategies. In addition to holding significant positions at leading consulting firms and companies throughout his career, Hagel is the author of bestselling business books such as Net Gain, Net Worth, Out of the Box, The Only Sustainable Edge, and The Power of Pull.

John Seely Brown (JSB) (independent co chairman, Deloitte Center for the Edge) is a prolific writer, speaker, and educator. In addition to his work with the Center for the Edge, JSB is adviser to the provost and a visiting scholar at the University of Southern California. This position followed a lengthy tenure at Xerox Corporation, where JSB was chief scientist and director of the Xerox Palo Alto Research Center. JSB has published more than 100 papers in scientific journals and authored or co authored seven books, including The Social Life of Information, The Only Sustainable Edge, The Power of Pull, and A New Culture of Learning.

Maggie Wooll (head of eminence and content strategy, Deloitte Center for the Edge) combines her experience advising large organizations on strategy and operations with her love of storytelling to shape the Center’s perspectives. At the Center, she explores the intersection of people, technologies, and institutions. She is particularly interested in the impact new technologies and business practices have on talent development and learning for the future workforce and workplace.

Andrew de Maar (head of research, Deloitte Center for the Edge) leads the Center’s research agenda and manages rotating teams of Edge Fellows, focusing on the intersections of strategy and technol- ogy in a world characterized by accelerating change. He has worked with a wide range of public, private, and non-profit entities to help executives explore long-term trends that are fundamentally changing the global business environment and identify high-impact initiatives that their organiza- tions can pursue to more effectively drive large-scale transformation.

18 Mobilizing many to create one

About the research team

This report and the Pattern write-up series would not have been possible without the hard work of our research team—colleagues who tracked down case studies and cheerfully dug for data and more data on the way to proving and debunking countless possible patterns.

Tamara Samoylova (former head of research, Deloitte Center for the Edge) led the Center’s research agenda. Her particular interests include innovation and new growth opportunities, work environment redesign, and how technology and changing consumer preferences are reshaping the retail landscape.

Carolyn Brown (research fellow, Deloitte Center for the Edge) is interested in emerging technolo- gies/innovations, disruption, organizational structures and approaches to innovation, and the impact of government on innovation and vice versa. Brown’s consulting experience at Deloitte focused primarily on enterprise strategy for large government agencies, with an emphasis on new technologies such as telemedicine.

Leslie Chen (former research fellow, Deloitte Center for the Edge) is passionate about exploring disruptive innovation in a global context with a focus on emerging markets. As part of Deloitte Consulting LLP’s Strategy & Operations practice, she worked on location strategy projects, helping companies determine where to set up their global operations. During her time at the Center, she conducted research to define patterns, and explored how these patterns manifest in international markets.

Andrew Craig (former research fellow, Deloitte Center for the Edge) is passionate about explor- ing the intersection of technology, design, and social science as a way to understand and influence the drivers of business change. At Deloitte Consulting LLP, he works in the Strategy & Operations practice, helping clients realize growth in the face of dramatic social and technological shifts. At the Center, his research and analysis included the maker movement, the collaborative economy, manu- facturing, and macro trends that drive disruptive change.

Carolyn Cross (research fellow, Deloitte Center for the Edge) is interested in finding innova- tive ways for companies to establish lasting customer relationships and deliver seamless customer service. As a consultant in Deloitte Consulting LLP’s Strategy & Operations practice, she has spent the past two years helping clients across a range of industries, including health care and insurance. Cross is passionate about the future of the food landscape as well as blending together business and community to empower small business and non-profit growth.

19 Distributed product development

Austin Dressen (research fellow, Deloitte Center for the Edge) is a self-described catalyst. Although a traditionally trained historian and entrepreneur, he also serves as resident philosopher-in- training. He is interested in the interaction of human beings and machines in our old, new, and unimagined systems.

Brandon Lassoff (research fellow, Deloitte Center for the Edge) is passionate about customer and marketing strategy, particularly in developing cutting-edge and innovative customer engagement plans. As a consultant in Deloitte Consulting LLP’s Strategy & Operations practice, he has spent the last three years working alongside leading high-tech and pharmaceutical clients, developing seam- less customer experiences to address top CMO priorities.

Andrew Reeves (former research fellow, Deloitte Center for the Edge) is a consultant in Deloitte Consulting LLP’s Strategy & Operations group. He has worked with clients across the technol- ogy, financial services, and health care industries, focusing on topics ranging from innovation and growth strategy to process optimization, operational redesign, and supply chain innovation. At the Center, Reeves primarily focused on understanding disruption with regard to the development of platforms for accelerated learning, sharing, and product development.

Jay Rughani (former research fellow, Deloitte Center for the Edge) is passionate about developing new technologies that help people enjoy a better quality of life. His interests span issues ranging from resource allocation to cyber security to climate change. Today, he spends his time building technology-driven solutions to improve outcomes and reduce costs within the health care system.

Max Zipperman (research fellow, Deloitte Center for the Edge) is passionate about emerging technologies and their potential impact on the future of business and society. His primary interests revolve around questions of how best to structure public policy in preparation for unprecedented issues resulting from exponential technologies. At Deloitte Consulting LLP’s Strategy & Operations practice, he has helped large technology and insurance companies prepare for a dynamic future.

20 Mobilizing many to create one

About the Center for the Edge

The Deloitte Center for the Edge conducts original research and develops substantive points of view for new corporate growth. The center, anchored in Silicon Valley with teams in Europe and Australia, helps senior executives make sense of and profit from emerging opportunities on the edge of business and technology. Center leaders believe that what is created on the edge of the competi- tive landscape—in terms of technology, geography, demographics, markets—inevitably strikes at the very heart of a business. The Center for the Edge’s mission is to identify and explore emerging opportunities related to big shifts that are not yet on the senior management agenda, but ought to be. While Center leaders are focused on long-term trends and opportunities, they are equally focused on implications for near-term action, the day-to-day environment of executives. Below the surface of current events, buried amid the latest headlines and competitive moves, executives are beginning to see the outlines of a new business landscape. Performance pressures are mounting. The old ways of doing things are generating diminishing returns. Companies are having a harder time making money—and increasingly, their very survival is challenged. Executives must learn ways not only to do their jobs differently, but also to do them better. That, in part, requires understanding the broader changes to the operating environment:

• What is really driving intensifying competitive pressures?

• What long-term opportunities are available?

• What needs to be done today to change course?

Decoding the deep structure of this economic shift will allow executives to thrive in the face of intensifying competition and growing economic pressure. The good news is that the actions needed to address short-term economic conditions are also the best long-term measures to take advantage of the opportunities these challenges create. For more information about the Center’s unique perspective on these challenges, visit www. deloitte.com/centerforedge.

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