Published:November 21, 2008Paper Released:August 2008Author:Juan Alcacer Executive Summary:

The ready availability of patent citation data has been a tremendous boon to applied research on knowledge and innovation. The role of examiners in the generation of patent citations has been thought to potentially complicate these analyses, but has been difficult to study. Taking advantage of a change in the way patent citation data has been reported starting in 2001, this paper summarizes basic facts on examiner citations, and provides a descriptive analysis of factors associated with citations in a patent. Key concepts include:

• Patent citations reflect the complicated interaction of applicant and examiner strategies, capabilities, and incentives.
• Examiner shares are highest in fields where intellectual property tends to be fragmented (computers and communications, for example), and lowest in fields where patents have been shown to be more important in appropriating returns to research and development (such as biomedical and chemical patents).
• The most prolific patentees tend to have very high shares of examiner citations.
• Examiner citation shares are especially high for foreign firms.

Abstract

Researchers studying innovation increasingly use indicators based on patent citations. However, it is well known that not all citations originate from applicants—patent examiners contribute to citations listed in issued patents—and that this could complicate interpretation of findings in this literature. In 2001 the US Patent and Trademark Office (USPTO) began reporting examiner and applicant citations separately. In this paper, we analyze the prior art citations of all patents granted by the USPTO in 2001-2003. We show that examiner citations account for 63 per cent of all citations on the average patent, and that 40 per cent of patents have all citations added by examiners. We use multivariate regression and analysis of variance to identify the determinants of examiner shares. Examiner shares are highest for non-US applicants and in electronics, communications, and computer-related fields. However, most of the variation is explained by firm-specific variables, with the largest patent applicants having high examiner shares. Moreover, a large number of firms are granted patents that contain no applicant prior art. Taken together, our findings suggest that heterogeneity in firm-level patenting practices, in particular by high-volume applicants, has a strong influence on the data. This suggests that analysis of firm-level differences in patenting strategies is an important topic for future research.

Paper Information

• Full Working Paper Text
• Working Paper Publication Date: August 2008
• HBS Working Paper Number: 09-016
• Faculty Unit: Strategy 

Published:November 20, 2008Paper Released:October 2008Authors:Diego A. Comin, William Easterly, and Erick Gong Executive Summary:

To the extent that history is discussed at all in economic development, it is usually either the divergence associated with the Industrial Revolution or the effects of colonial regimes. Is it possible that precolonial, preindustrial history also matters significantly for today's national economic development? The authors find that technology adoption circa 1500 A.D., prior to the era of colonization and extensive European contacts, predicts approximately 50 percent of cross-country differences in both current per capita income and technology in a large cross-section of countries. When exploring the causes of this extreme persistence in technology, they find evidence in favor of the importance of the effect of current adoption on subsequent adoption as the main driver. This leaves a limited role to country-specific factors such as institutions, geography, or genes to explain the persistence of technology. Key concepts include:

• Precolonial, preindustrial differences have striking predictive power for the pattern of both per capita incomes and technology adoption across nations that can be observed today.
• Technology is very persistent both within countries and sectors. Adoption dynamics vis-à-vis country-specific factors such as institutions, geography, or genes appear to be the mechanism behind such persistence.

Abstract

We assemble a dataset on technology adoption in 1000 B.C., 0 A.D., and 1500 A.D. for the predecessors to today's nation states. We find that this very old history of technology adoption is surprisingly significant for today's national development outcomes. Our strong and robust results are for 1500 A.D. determining per capita income today. We find technological persistence across long epochs: from 1000 B.C. to 0 A.D., from 0 A.D. to 1500 A.D., and from 1500 A.D. to the present. Although the data allow only some suggestive tests of rival hypotheses to explain long-run technological persistence, we find the evidence to be most consistent with a model of endogenous technology adoption where the cost of adopting new technologies declines sufficiently with the current level of adoption. The evidence is less consistent with a dominant role for population as predicted by the semi-endogenous growth models or for country-level factors like culture, genes or institutions.

Paper Information

• Full Working Paper Text
• Working Paper Publication Date: October 2008
• HBS Working Paper Number: 09-052
• Faculty Unit: Business, Government and International Economy 

Q&A with:Todd RogersPublished:November 17, 2008Author:Martha Lagace

We heard question-dodging in the U.S. presidential debates not long ago. And everyone hears it in normal political discourse, in business meetings, and in typical daily life—but are people really listening? Sometimes, it seems, individuals who are asked a difficult question do not answer it, but instead provide distraction by answering something they would rather have been asked. And what is more, oftentimes their listeners either do not notice the verbal sleight of hand or do not mind it.

New research by Todd Rogers (HBS Ph.D '08) and Harvard Business School professor Michael I. Norton listens in closely to the phenomenon of "conversational blindness"—listeners' failure to notice such dodges and to socially punish transgressors unless the attempts are egregious. "More troublingly, listeners preferred speakers who answered the wrong question well over those who answered the right question poorly," the authors note.

"In this research we find that, at least in part, people value style over substance because the style blinds us to the lack of substance," says Rogers.

The researchers' working paper, "Conversational Blindness: Answering the Wrong Question the Right Way," is available for download [PDF].

Todd Rogers, now Executive Director of the Analyst Institute, explained more.

Martha Lagace: What observations or experiences got you interested in studying conversational blindness? Was it inspired by the U.S. election season specifically, or was this topic on your radar for other reasons?

Todd Rogers: This line of research began when I was watching a press conference where the spokesman basically didn't answer any of the questions he was asked. I didn't even realize he was dodging until a question was asked about a topic I cared a lot about (I believe it was something about a specific education policy). I was especially interested in the answer, so when it never came I began to wonder: Has he been dodging questions all along? I think he had been. I told Mike about it, and immediately we knew this would be a very interesting topic to understand better.

Q: How did you go about designing your study in order to get a handle on this topic?

A: It actually took us a couple of tries to come up with this design. The challenge was coming up with an experimental design where the objective quality of the response was equal across conditions, but the egregiousness of the dodge varied. We initially came up with a few different responses that we thought were of roughly similar "quality" and had participants read the same question followed by the different responses. This design worked, but it could not address the concern that those findings might have been the result of different qualities of the responses. The design we report in our paper solves that problem: We hold the response constant and vary only the question that is asked.

Q: What were the results that most interested you, and did they surprise you?

A: There are two findings that we find most interesting. First, it is striking that participants failed to punish the speaker when he dodged the question asked. For example, the speaker paid no price for answering a question about the illegal drug use problem in the United States with a discussion of why we need universal health-care insurance. This lack of penalty might explain why overt dodging appears so prevalent in politics (and in life).

The second interesting finding was that people prefer, trust, and like a question-dodger who is smooth and sounds confident over a question-answerer who is unsmooth and stammers. Perhaps that is not surprising, but it is very concerning. In this research we find that, at least in part, people value style over substance, because the style blinds us to the lack of substance.

Q: What makes conversational blindness so common?

A: Listening is much more taxing than we might think. Listening requires that we hear and comprehend each phrase, relate each phrase to the last, fill in implied components of what's being said, and observe and integrate the speaker's nonverbal communication. Mike and I think conversational blindness occurs in part because real-world conversations occur as a continuous ebb and flow, leaving little time for people to reflect on how every statement links to each previous statement.

Q: Does conversational blindness also serve in some way as social glue?

A: Interesting question. One of the positive results that come from our inability to detect the shifting of a conversation is that we can move seamlessly from one topic to another semantically similar topic. In my experience, some of the most interesting and creative conversations have resulted from this natural (and unnoticed) veering.

Q: If one of us is in a position in which we are potentially susceptible to conversational blindness, how can we get the information we really need?

A: I think the key is to vigilantly remember the question you asked. If you immerse yourself in trying to understand the nuance of what the speaker is saying, you may lose track of your original question. It may be more pleasant to engage fully and go with the flow of a conversation. But if you want an answer, you need to make sure the speaker provides one.

In the first presidential debate Jim Lehrer did this. He asked both candidates whether they supported the economic recovery plan. Neither gave him a direct response, so after several minutes of candidate "answers" he followed up with, "All right, let's go back to my question."

Q: What are you working on next?

A: There are two next steps. First, when two people have a normal conversation, how often do questions go unanswered and unnoticed, and when they do, how does this occur?

Second, we want to see how to prevent unpunished question-dodging. For example, television networks have taken steps to curtail politicians' efforts to dodge questions during political debates by posting the question asked for the duration of the politicians' answers. Mike and I expect this will increase the penalty for dodging a question, and in the intermediate term reduce dodging. Does it work and what other steps can be taken? These are fascinating areas for future study.

Email Todd Rogers.

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.

Published:November 14, 2008Paper Released:September 2008Authors:Kevin J. Boudreau, Nicola Lacetera, and Karim R. Lakhani Executive Summary:

The innovation process is fraught with uncertainty. Managers often do not know ahead of time the ideal mix of individuals and skills needed to solve innovation-related problems. One way around this uncertainty is to have multiple paths, approaches, or designs explored at once. The "parallel search" principle can be used inside the firm just as it may be used more generally by pursuing "open innovation". However, having too many searchers attempting to solve the same problem can undercut the benefits if it leads to less effort and investment. The authors study the outcomes of 645 software development contests, conducted by a software outsourcing vendor, involving over 9,000 coders, to understand the relationship between parallel search and increasing competition and innovation. Key concepts include:

• The key factor favoring parallel search, i.e. increasing the number of independent solvers, is the complexity of the problem at hand.
• The benefits of increased searchers were curtailed when the problems were simple, indicating that the negative consequences of competition matter most for simpler problems.

Abstract

This paper presents econometric evidence of two independent effects of adding more competitors on innovation: 1) a competition effect whereby increasing rivalry shapes, and often decreases, incentives to expend effort and invest in innovation; and 2) a parallel search effect whereby adding greater numbers of "searchers" benefits innovation by broadening the search for solutions. We further show the importance of these effects depends on the nature of the innovation problem being solved. The analysis uses data from TopCoder's software contest platform, on which elite software developers were assigned different problems to solve within assigned groups of direct competitors. Econometric relationships are identified by exploiting random assignment and a separate instrumental variables procedure.

Paper Information

• Full Working Paper Text
• Working Paper Publication Date: September 2008
• HBS Working Paper Number: 09-041
• Faculty Unit: Technology and Operations Management 

Published:November 13, 2008Paper Released:September 2008Author:Zeynep Ton Executive Summary:

Determining staffing levels is an important decision in retail operations. In 2006, retailers spent $393 billion on employee wages, more than 10 percent of their revenue that year and more than their inventory holding costs. Hence, staffing levels have a major impact on retailers' costs. But at the same time, staffing levels affect conformance quality—how well employees execute prescribed processes—and service quality—the extent to which customers have a positive service experience at the stores. While there is overwhelming evidence that conformance quality and service quality improve sales, both generally and in retail settings, their effect on profitability is not clear. To examine how the amount of labor at a store affects profitability through its impact on conformance quality and service quality, Zeynep Ton analyzed extensive data from stores of a large retailer. Key concepts include:

• How well employees execute prescribed processes is an important driver of financial performance.
• It is important to design processes that are simple and easy to follow, especially when there is high employee turnover, as in the retail industry and when offering a self-service environment.
• Good process design needs to be backed up with an organizational culture that emphasizes conformance to these processes.
• Too much corporate emphasis on payroll management may motivate managers to operate their stores with insufficient labor capacity that, in turn, degrades financial performance.
• Emphasis on payroll management can also degrade employee morale.

Abstract

Determining staffing levels is an important decision in retail operations. While the costs of increasing labor are obvious and easy to measure, the benefits are often indirect and not immediately felt. One benefit of increased labor is improved quality. The objective of this paper is to examine the effect of labor on profitability through its impact on quality. Since employees at retail stores perform both production-related activities and customer-service activities, I examine both conformance quality and service quality. Using longitudinal data from stores of a large retailer, I find that increasing the amount of labor at a store is associated with an increase in profitability through its impact on conformance quality but not its impact on service quality. While increasing labor is associated with an increase in service quality, in this setting there is no significant relationship between service quality and profitability. My findings highlight the importance of attending to process discipline in certain service settings. They also show that too much corporate emphasis on payroll management may motivate managers to operate with insufficient labor levels, which, in turn, degrades profitability.

Paper Information

• Full Working Paper Text
• Working Paper Publication Date: September 2008
• HBS Working Paper Number: 09-040
• Faculty Unit: Technology and Operations Management 

Published:November 12, 2008Author:John Quelch

Editor's Note: Harvard Business School professor John Quelch writes a blog on marketing issues, called Marketing Know: How, for Harvard Business Online. It is reprinted on HBS Working Knowledge.

When the book is written on this election, it should not be titled The Making of a President but The Marketing of a President. Barack Obama's campaign is a case study in marketing excellence.

True, it was always going to be a Democratic year. An unpopular war, an incumbent Republican president with rock bottom approval ratings, and many Republican incumbents retiring from Congress as a result all meant that change was in the air. Add to that the economic meltdown that decimated millions of 401(k) retirement plans and undercut any Republican claim to be the better steward of the economy.

But, even so, for an inexperienced, single-term, African-American senator tagged with the most liberal voting record to defeat the heir apparent in his own party and then go on to hold off the much-vaunted Republican machine is a truly remarkable achievement. Much of it has to do with Obama's instinct for marketing.

First, Obama's personal charisma, his listening and public speaking skills, his consistently positive and unruffled demeanor, and his compelling biography attracted the attention and empathy of voters.

Second, Obama converted this empathy into tangible support. More citizens volunteered time and money to help the Obama campaign than any previous presidential candidate. Indeed, he attracted more donors than the entire Democratic or Republican party nationwide. Almost half of Obama's unprecedented $639 million in funds raised from individuals came from small donors giving $300 or less.

Third, his fundraising prowess was aided by his appreciation and use of all communications media, notably the Internet, to engage voters. Obama picked up where Howard Dean left off. He leveraged his website, the blogosphere, and even user-generated content (remember Obama Girl) and video games to engage not just donors and volunteers but all citizens. From the imaginative campaign logo to the thirty-minute infomercial, Obama's communications were professional without being slick, attention-getting without being in-your-face.

Fourth, Obama reached out to all citizens. He targeted his message beyond previous or likely voters. He built a coalition that energized young, first-time voters and registered thousands of previous non-voters. His organization encouraged early voting by Democrats to build well-publicized poll leads and to reduce the chances of supporters being discouraged from voting by long lines at polling places on election day. This policy of inclusion meant that voting records were set in the general election and the primaries.

Fifth, his advertising messages and his tone and demeanor throughout the campaign consistently communicated his upbeat themes of hope and "change you can believe in." The emotional appeal was buttressed with solid and specific policy details. The ability to combine emotional with functional benefits and the discipline to be consistent in positioning and message delivery are core to all successful branding campaigns. Ads that dealt with specific policy issues, even ads criticizing McCain, all continued to communicate the core themes.

Sixth, he anticipated and outsmarted the competition. Throughout, he showed respect for Clinton and then McCain, even as he successfully tagged a McCain administration as Bush's third term. But he and his advisers managed the political chess board brilliantly. Early on, he anticipated and defused negative criticisms by admitting to past indiscretions in his autobiography. His campaign rebutted the criticisms in a hostile biography point by point before they gained traction. Negative advertising by his opponents was countered quickly, not only in ads but on the Internet as well.

Seventh, he fought the ground war as brilliantly as the air war. Building on Howard Dean's 50 state strategy, he built his primary delegate count by investing time in Democratic caucuses in red states; the organizations he built for the primaries in these states set him up to win several of them in the general. In the closing weeks, he put McCain on defense in multiple red states, making it tough for the Republican to focus his efforts. Having relied on public funding, McCain ended up having to make some tough trade-offs regarding where to go and where to spend his money. Obama did not.

Finally, Obama chose an excellent marketing and campaign team, and managed them well. From start to finish, there was no public dissension. He chose a non-controversial, experienced Senator as his running mate who complemented his lack of foreign policy skills. McCain only assembled a smooth-running campaign team late in the day. And the maverick made a surprise choice of an unknown running mate that, in the final analysis, undercut his ability to tag Obama as inexperienced, and called McCain's judgment into question.

Like any great brand, Obama has built up a bond of trust with the American people. His election has also given the United States the opportunity to reestablish its moral leadership around the world. But like any brand, he has to deliver now on his promises, both actual and perceived. In the current economy, that will not be easy.

Join the discussion on Harvard Business Online.

About the author

John Quelch is Senior Associate Dean and Lincoln Filene Professor of Business Administration at Harvard Business School.

Negotiations around gender in organizations most often don't take place across a table, scholars say. Rather they occur during daily interactions concerning the routines of work, from the allotment of office space to stronger opportunities for advancement. An interesting working paper [PDF] on gender challenges in just these contexts appears in a forthcoming issue of the journal Negotiation and Conflict Management Research.

In the article "Beyond Gender and Negotiation to Gendered Negotiation," Deborah M. Kolb and HBS professor Kathleen L. McGinn write, "In these situations, a member of the dominant group might experience a work practice as normal and neutral—a nonissue—whereas a member of a marginal group may experience it as exclusionary." As a comprehensive reflection on research to date in the social sciences, the article includes insights for dealing with common under-the-radar practices.

Cases this week look at the market for Mp3 portable audio players, developing the Amsterdam World Trade Center, and a successful animated TV show, FREEJ, in the Arabian Gulf region.

— Martha Lagace

Working Papers Direct versus Indirect Colonial Rule in India: Long-term Consequences (revised) Author:Lakshmi Iyer Abstract

This paper compares economic outcomes across areas in India which were under direct British colonial rule with areas which were under indirect colonial rule. Controlling for selective annexation using a specific policy rule, I find that areas which experienced direct rule have significantly lower levels of access to schools, health centers, and roads in the post-colonial period. I find evidence that the quality of governance in the colonial period has a significant persistent effect on post-colonial outcomes.

Download the paper: http://www.hbs.edu/research/pdf/05-041.pdf

Cases & Course Materials The Amsterdam World Trade Center

Harvard Business School Case 208-078

Late in September 2001, Hans van Tartwijk, president of Trimp & van Tartwijk Property Development (TvT) of Amsterdam, Holland, was deeply worried about the status of his largest ongoing project: the Amsterdam World Trade Center (WTC). As the discretionary developer, van Tartwijk needed to present his firm's recommendations to WTC owners and municipal stakeholders on how best to manage problems in the renovation of the 27-floor, 60,000 square meter complex. The WTC owners, two Dutch financial institutions, had hired TvT in 1995 to advise how to best handle their property's underperformance, which stood 20% empty and had prematurely aged. 1. Should the Owners sell, perform minimum upgrades, or perform a major upgrade with construction and expansion? 2. What emphasis—commitment made to Green Technologies?

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=208078

FREEJ

Harvard Business School Case 808-121

Mohammed Harib placed his phone on the desk in front of him. As he sat back in his chair and looked out the window, he began to take stock of how his life had taken such a dramatic path over the last few years. Life was good for the founder and CEO of Lammtara Pictures, the United Arab Emirates (UAE) first 3D animation studio. Recently dubbed "Dubai's answer to Pixar" in a recent magazine article, Lammtara's first animated television show, FREEJ, had taken the Arabian Gulf region by storm a year ago. It was November 2007, and the second season of FREEJ had aired earlier in the fall, smashing the first season's record-breaking viewership numbers.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=808121

MP3 Portable Audio Player Market

Harvard Business School Case 608-119

The emergence of the MP3 file-based music format not only disrupted the market for portable audio players, it also had a huge impact on the business models of major record labels. Modularity, and the commoditization spill-over enabled by modularity in the personal computer industry, was a major force in the development of the market. While Apple's iPod today holds the dominant market position, new forces of commoditization continue to drive shifts in the value chain. The case examines the commoditization cycle and contrasts integrated solutions such as the iPod-iTunes software-iTunes Music Store with emerging competition from other MP3 players and the Amazon.com Music Store.

Purchase this case:
http://www.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=608119

Publications Strategy-proofness versus Efficiency in Matching with Indifferences: Redesigning the NYC High School Match Authors:Atila Abdulkadiroglu, Parag A. Pathak, and Alvin E. Roth Periodical:American Economic Review (forthcoming) Abstract

The design of the New York City (NYC) High School match involved tradeoffs among efficiency, stability, and strategy-proofness that raise new theoretical questions. We analyze a model with indifferences—ties—in school preferences. Simulations with field data and the theory favor breaking indifferences the same way at every school—single tie breaking—in a student-proposing deferred acceptance mechanism. Any inefficiency associated with a realized tie breaking cannot be removed without harming student incentives. Finally, we empirically document the extent of potential efficiency loss associated with strategy-proofness and stability, and direct attention to some open questions.

Does Individual Performance Affect Entrepreneurial Mobility? Empirical Evidence from the Financial Analysis Market Authors:Boris Groysberg, Ashish Nanda, and M. Julia Prats Periodical:Journal of Financial Transformation (forthcoming) Abstract

The design of the New York City (NYC) High School match involved tradeoffs among efficiency, stability, and strategy-proofness that raise new theoretical questions. We analyze a model with indifferences—ties—in school preferences. Simulations with field data and the theory favor breaking indifferences the same way at every school—single tie breaking—in a student-proposing deferred acceptance mechanism. Any inefficiency associated with a realized tie breaking cannot be removed without harming student incentives. Finally, we empirically document the extent of potential efficiency loss associated with strategy-proofness and stability, and direct attention to some open questions.

Earnings Quality and Ownership Structure: The Role of Private Equity Sponsors Author:Sharon P. Katz Periodical:The Accounting Review (forthcoming) Abstract

This study explores how firms' ownership structures affect their earnings quality and long-term performance. Focusing on a unique sample of private firms for which there is financial data available in the years before and after their initial public offering (IPO), I differentiate between those that have private equity sponsorship (PE-backed firms) and those that do not (non-PE-backed firms). The findings indicate that PE-backed firms generally have higher earnings quality than those that do not have PE sponsorship, engage less in earnings management, and report more conservatively both before and after the IPO. Further, PE-backed firms that are majority-owned by PE sponsors exhibit superior long-term stock price performance after they go public. These results stem from the professional ownership, tighter monitoring, and reputational considerations exhibited by PE sponsors.

Purchase the paper from SSRN ($5):
http://search.ssrn.com/sol3/papers.cfm?abstract_id=1150701

Beyond Gender and Negotiation to Gendered Negotiations Authors:Deborah M. Kolb and Kathleen L. McGinn Periodical:Negotiation and Conflict Management Journal (forthcoming). (Also Harvard Business School Working Paper, No. 09-064, October 2008) Abstract

Where do we start if we are interested in understanding how gender plays out in negotiations that take place within organizations? Do we start with women and men and explore their individual differences in thought, motivation, style, appetite for risk, and propensity to ask? This approach, primarily carried out in the laboratory, has dominated the recent study of gender in negotiations. Or do we start with belief systems and cultural patterns within organizations and explore ways in which these are gendered and result in gendered negotiations? This is the approach taken throughout this special issue.

A New Generation of Pension Fund Management Author:Robert C. Merton Publication:Chap. 1 in Innovations in Investment Management, edited by H. Gifford Fong, 1-17. JOIM Conference Series. New York: Bloomberg Press, 2008 Abstract

In talking about pension plans at this point in American economic and corporate history, we need to discuss three linked issues: the defined-benefit (DB) corporate plans that worked for our parents; the defined-contribution (DC) plans we're getting today because corporations no longer want to bear the expense and risk of the DB plan; and how we can reshape the DC plan into something that feels more like a DB plan in the near future. Although this chapter focuses on a U.S. context and corporate pension plans, retirement and asset-management issues are a global challenge, and indeed, while the details vary across geopolitical borders, the fundamentals are shared by employers and employees across the globe. What's happening with the DB plan, why is it happening, and what are the implications for asset markets and asset management?

Purchase the book:
http://www.ordering1.us/bloombergbooks/product.php?pid=321

Published:November 10, 2008Author:Martha Lagace

Internet-connected televisions, social media, and the power of simplicity were all cited as launch pads for future innovation in technology, according to a panel of experts that convened at Harvard Business School as part of the HBS Centennial Business Summit in October.

And though advertisers love the Internet, to what extent they can capitalize on these transformations remains an open question.

HBS professor David Yoffie moderated the session on "The Technology Revolution and its Implications for the Future," with panelists James Breyer (HBS MBA '87), partner of the venture capital firm Accel Partners; Susan L. Decker (HBS MBA '86), president of Yahoo! Inc.; and Eric Kim (HBS MBA '81), senior vice president and general manager of Intel Corporation's Digital Home Group.

The first computer, the ENIAC, cleared the path for future innovation in the late 1940s, said Yoffie, who set the context for the ensuing discussion. Today, millions of Web users generate free content, and we are witnessing an "explosion" in video and cell phone use, he continued, with more than 100 million smartphones already in use. In addition, there is the phenomenon of virtual worlds, where approximately 217 million online players interact.

This is an evolving landscape, with much growth remaining, Yoffie said. Of 6.5 billion people in the world, about 1.5 billion have Internet access, more than 300 million have broadband access to the home, and 3 billion have cell phones, a growing number of which offer Internet access.

What these statistics suggest is that "the most precious currency today is information," said panelist Jim Breyer, an early investor in Facebook and a director of Wal-Mart Stores. "Each year there is more information created on the Web than in all the previous years combined. Investment initiatives are around participating in the information flow. We [at Accel] are interested in companies that help us understand how to structure information, communicate, categorize some of that self-generated information, and then act on it."

A sticking point currently for businesses is spanning the gap between the physical and the digital world, he continued.

"Right now there are significant problems understanding how to take what we are getting at point of sale in the physical world environment—very valuable info on customers—and how to integrate it with all the information that is being generated on the Web. To date, there is no company that allows one to take quickly all this information 'in the cloud' and integrate it with the vast arrays of information in the physical world."

Difficulties aside, Breyer said the promise of technology meant that innovation to solve a problem could arrive from any quarter: prominent companies, nonprofit enterprises, "two students in a dorm room, or mothers or fathers after they have done their school pickups." He continues to be impressed by businesses that start with little capital—anywhere from $10,000 to $50,000—yet get to scale quickly and build new applications on the Web.

Sleeping by the cell phone

Just as technology is influencing society, society is increasingly making demands on technology, said Sue Decker of Yahoo!

"The way we live, love, communicate, and work will influence technology, and the greater population will be exercising an increasing amount of control," she said. Decker cited statistics suggesting that in 2007, 12 percent of newlyweds met online. In addition, of the users in the United States, half sleep with a cell phone or other electronic device nearby, and married couples usually do not share cell phones.

Innovation will serve people who want simplicity of technology usage. As the network gets larger it becomes less relevant to individuals, she said, so people want to organize their experience according to their own interests. "Companies that will do pretty well will create a dashboard of simplicity that is very open to the whole Internet, not just to the company it may be associated with, and will elevate social connections in a way that drives dollars."

How exactly social connections will drive dollars remains to be seen, she added. Although some sites such as Yahoo! include premium services that require fees or subscriptions, the largest business model by far is advertising: a $45 billion industry globally that has been growing about 20 percent per year, said Decker. Advertising on the Web is very effective in the sense that advertisers can reach great scale and do precision targeting. The challenge is to discern consumers' intent.

"Search is unbelievably efficient because you look at a little query box. You can tell exactly what people care about, and you can serve an ad that is relevant at scale. In social media, that is very difficult to do. It's very hard to know what people care about with respect to buying things, because you are inferring intent, you're not taking intent directly from the consumer," said Decker.

"Advertisers really want to be there: They love the demographics, they are increasingly comfortable with some of the brand risks of what that might mean. But Internet advertising still doesn't perform very well, and that's a challenge. How do you serve the right ads to the right user and understand what it is that that individual would be interested in buying?"

TV and the Internet

Pressure has been building for a merging of television and the Internet, said Intel's Eric Kim. Consumers now expect Internet service everywhere, with implications for entertainment and advertising.

For almost 90 years, the television has been a one-way device, and it should be a two-way device. "This is not a new idea," Kim clarified. "Many attempts have failed. It primes us for success." Prices of televisions are going down, and the industry as a whole is mature, leaving an opportunity for the Internet to disrupt both the value chain and the content industry. Advertisers, for their part, continue to feel comfortable placing ads on TV, gauging that their dollars will not be wasted. Emerging markets further propel the growth potential for innovations combining the Internet and television, which is a natural, low-cost, and ubiquitous way for people in emerging markets to engage with the Internet, he said.

"We think there's a lot of room for innovation here and a lot of room for richness and choices," Kim concluded.

"There is no silver bullet in a lot of these economic models," added Breyer. "It's almost always the case that the business models shift in every successful company. I think it's our job as board members, CEOs, and investors to find breathtakingly brilliant entrepreneurs who then try to find breathtakingly brilliant operating executives who also understand the products, and try to spend a great deal of time finding pockets of monetization. There will be a great deal of experimentation. Some of it will work and a lot won't. Five years from now, many of them will have found highly successful business models," but it is tricky at the beginning of a new venture to predict what those models might be.

A dashboard concept is very important as the key to innovation, said Decker.

"Increasingly, companies will find ways to leverage whatever social networks you're in, find ways to service those in ways easy for you to access, and try to go for more simplicity," she said. "Simplicity is the single thing people really want. It's going to get faster in terms of technology. There's going to be more opportunities and interconnections.

"But fundamentally, removing the complexity and adding simplicity so you can easily access in an open way everything you want, and leverage a lot of social connections rather than going to multiple ones, is how the user experience will evolve."

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.

Published:November 10, 2008Author:Jim Heskett

The Internet and related technology has freed customers to express their feelings, exchange information, and act in ways that previously were unheard of. Several recent writings suggest that the next phase in the activation of customers will be putting them to work in the service of an organization. Characteristic of this thinking is an article in the October issue of the Harvard Business Review by Scott Cook, Co-Founder and Chair of the Executive Committee of Intuit.

Cook argues that a number of successful organizations have gotten that way by making it easy for "volunteers" to contribute to their success. Business models are designed so that volunteers (often customers, but also others) can easily contribute content (opinions and ratings for Zagat guides), "stuff for sale" (eBay online marketplace), behavioral data (Google's search engine algorithm), and even resources (Skype's Internet-based phone system). What is contributed benefits other users (as, for example, when a network is enlarged) as well the organization itself (providing lower costs, greater resources at little cost, better customer service, more effective marketing, increased employee engagement, and better design).

Research reported in a book, The Ownership Quotient, that three of us recently co-authored suggests that the benefits of customer contributions are significant. Further, an organization's best customers—measured in terms such as size, loyalty, or lifetime value—often are the most willing to go to work for it, whether that means referrals of new customers, ideas for new products or processes, or even help in the selection of its frontline employees. Of greater significance than satisfaction or even the willingness to recommend the organization to others, these "ownership" behaviors can make some customers more than a hundred times more valuable than others.

Just how far can ownership be taken? What's its downside? Those are questions explored by Pete Blackshaw, the incoming Chair of the Better Business Bureau, in his new book, Satisfied Customers Tell Three Friends, Angry Customers Tell 3,000. The title is a play on the standard pre-Internet belief, based on the results of only one research study that became a mantra, that satisfied customers tell five others but dissatisfied customers tell ten. Blackshaw's experience with consumer-generated media suggests that consumers today can be a major force in making or breaking a product or service. But they have to be given the latitude and freedom to do so, involving a risk that few organizations are willing to take.

Note that the term "marketing" has not appeared thus far. Our work suggests that customer and employee "ownership" has as much relevance for operations and human resources as it does for marketing. Blackshaw argues that organizations that regard their web sites as marketing devices run the risk of destroying the credibility of information presented there, thereby losing their effectiveness with potential "volunteers" and "owners." It requires that marketers, as Blackshaw puts it, work in an "atmosphere of complete honesty," something sometimes difficult for them to do.

These phenomena raise interesting questions. Just how much risk do organizations with well-established names, policies, and processes take in encouraging volunteerism and ownership on the part of customers? How can the risk be mitigated? Are customers being underutilized by the typical enterprise? Going forward, will customer-fueled strategies provide significant competitive advantage? How much can you ask of your customers? What do you think?

To read more:

Pete Blackshaw, Satisfied Customers Tell Three Friends, Angry Customers Tell 3,000: Running a Business in Today's Consumer-Driven World (New York: Doubleday, 2008).

Scott Cook, "The Contribution Revolution: Letting Volunteers Build Your Business," Harvard Business Review, October 2008, pp. 60-69.

James L. Heskett, W. Earl Sasser, Jr., and Joe Wheeler, The Ownership Quotient: Putting the Service Profit Chain to Work for Unbeatable Competitive Advantage (Boston: Harvard Business Press, 2008).