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Crowdsourcing: Managing Radical Innovations in Emerging Markets

Adam Nemeth Central European University

Hungary nemeth_adam@student.ceu.hu

Abstract This paper aims to outline the theoretical framework in which crowdsourcing, a

new phenomenon for marketing management, can assist radical innovations in emerging markets. In order to achieve it, this paper highlights new approaches like the Learning Strategic School, the End-user Model of innovation, Blue Ocean strategy. Henceforth, I demonstrate the characteristics of innovation in emerging markets. As a key concept of my paper I put the emphasis on the expression of crowdsourcing, its background theory and its model as well. Forasmuch as my ultimate purpose I analyze how crowdsourcing can be utilized in radical innovation management in emerging markets. My conclusion is that it facilitates it, since it both reduces technical and market uncertainty. Finally I resolve this idea by putting it under SWOT analysis.

Keywords: Crowdsourcing, Emerging markets, Innovation management.

Introduction

Nowadays management faces and needs to overcome brand new challenges. These phenomena came into play due to new means having arisen either on the field of methods applied, either the emergence of untouched markets. In my paper I attempt to investigate how crowdsourcing could play a role in radical innovations in emerging markets. To provide a deep insight to this issue, however, I have to clarify numerous fragile topics having an immature literature. For instance, even the term crowdsourcing was coined only in 2006. Companies from the “core world‟ are just about pondering to enter emerging markets. Therefore I must admit that the strength of this paper is its drawback at the same time: since this theme has not been elaborately developed. This is likely to represent the challenging reason why I decided to work on this topic. Since it requires both analytic and practical oriented skills to elaborate a theoretical framework for the method well functioning in leading economies; and which could be applied in such a perilous and unstable field like emerging markets.

Crowdsourcing could serve as a means to prevent companies from committing crucial mistakes imputable to the pure lack of experience earned in emerging markets. Therefore, the method being demonstrated can be utilized in favour of reducing uncertainty and gaining a first-hand insight to markets at comparatively easy and reasonable costs.

In my paper, first of all, I am covering the term strategy; and trying to outline a definition in whose framework the comprehension of an innovative strategy in emerging markets is facilitated. After that I introduce innovation and its types with an emphasis on radical innovation. In the next session I outline the characteristics of innovation in emerging markets. Following this I instantiate the theory of crowdsourcing exemplified with cases. Finally, as a conclusion t I investigate the possible links between crowdsourcing and radical innovation in emerging markets.

Strategy

In relation to entering fresh markets, it is a crucial must for companies to come up with a strategy. However, to internalize a strategy into the corpus of an enterprise demands certain theories. Mintzberg‟s approach can suffice this goal. A strategy defines the acts of an enterprise, therefore its route of future as well. A strategy sets up a long-term valid pattern of behaviour either for the decision maker, or for the members of an organization. (Mintzberg, Ahlstrand and Lapel, 1998, p.16). Whether we start from a descriptive or a prescriptive approach of strategy, the Mintzbergian 5Ps model perfectly exemplifies the variety and common points on how strategy can be perceived:

1. Plan – a purposeful phenomenon, brought into existence not by chance 2. Pattern – can be perceived as an adopted behaviour from which the organization

intends to profit since others do as well 3. Position quoting Michael Porter (1996, p. 68) Strategy is what differentiates the

enterprise’s unique position including different activities 4. Perspective Strategy equals to corporate vision 5. Ploy – strategy can be a mean for deceiving the competitive entities

In their study Mintzberg, Ahlstrand and Lapel (1998) differentiate 10 basic strategic schools: design, planning, positioning, entrepreneurial, cognitive, learning, power, cultural, and environmental and finally configuration. From my point of view, the learning school is the one which if further explained could let us understand how crowdsourcing is able to play an outstanding role in forming corporate strategy in innovative efforts in emerging markets.

Learning Strategic School

Learning Strategic Schools originate from questioning the normative functions of other theories. According to the learning strategic school strategy is nothing but a vision along which decision makers or the members of the organization form their acts. Since the actions are led by the will to overcome as fast as possible the arisen obstacles, and not by searching for possibilities. Therefore, in case of a numerous decision makers there is hardly any chance to elaborate an unambiguous coordination conducing everyone’s action. That is why a strategy is not solely the facts put into practice. (Mintzberg 1998, p. 179)

Even we might be able to outline a splendid picture of how strategy is set up and utilized, we must face the fact that only 10% of the strategic plans are put into practice. (Kiechel, 1984, p.8) Therefore, for my purpose I am applying the conception of strategy of outlined in the learning strategic school theory. This school out of the 5Ps highlights the perspective presence of strategy, claiming that a prescriptive approach – i.e. a theory considering strategy a force to shape every step of the company – is far not an efficient way of handling strategy. Learning Strategic School approaches from a descriptive point of view saying that due to the large number of people involved in an action, which cannot be disposed by an overall strategy. Strategy must come from within the corpus of the organization.

“The real strategy tends to evolve as internal decisions and external events flow together to create a new, widely shared consensus for action among the key members of the top management team. In well-run organizations, managers pro-actively guide these streams of actions and events incrementally towards conscious strategies.” (Mintzberg et al.. 1998, p. 180).

As a conclusion a really useful definition can be formed in favour of understanding the upcoming topics. From this point of view, the strategy of an organization can be seen as an incremental action combined with a strong perspective-oriented framework. Therefore, the role of the top management is not creating strategy, but shaping it. In order to incorporate the information coming from outside of the organizational framework – in this category even the incremental information can make a part of outsider information, since it is out of the viewpoint of top managers – strategy has to be similar to the one described under learning school. This can be observed on the 1st diagram.

Figure 1. Strategies Deliberate and Emergent

Source: (Mintzber et al.g, 1998, p. 12)

This diagram expresses how a realized strategy is set up. It is obvious that if we insist on our own notions, we will end up with putting into practice only the upper arrows. It is likely to lead to a crucial mistake, namely ignoring all the forming ideas coming from the “outsiders”. A smartly elaborated strategy has to contain and select the emergent strategies as well.

What learning strategic school contributes as a new factor into an ordinary strategic elaborating chain is adding learning to planning step; thus the chain changes to information gathering planning and learning acting model. (Mintzberg et al., 1998, p. 180).

As a final result a company applying learning strategy is characterized by the following pertains.

1. “Learning organizations assume that the managers and the workers closest to the design, manufacturing, distribution, and the sale of the product often know more about their products than their superiors….managers have to learn the art of asking questions…”

2. “Learning organizations spend a lot of energy looking outside their boundaries for knowledge…In the past, organizations have tended to limit their interactions with buyers to marketing research, and interaction with suppliers to formal channels. “(Mintzberg, et al., 1998, p. 214)

Drawing the conclusion from this point cannot be biased; since I must admit that the possibility of indulging in exaggerative is present. Putting too much emphasis on learning from our mistakes might result in a no strategy state. I do consider, however, that if the golden mean is found, learning strategy is the most adequate mean to handle the challenges demanded by entering an emerging market.

Innovation

“Innovation is not a new phenomenon. Arguably, it is as old as mankind itself. There seems to be something inherently “human” about the tendency to think about new and better ways of doing things and to try them out in practice.” (Fagerberg et al. 2005, p.1)

In the Hungarian language we have two words for the same meaning as innovation coves, one is innováció, the other is újítás; both have the same translation. Therefore, for those speaking Hungarian innovation is újítás, who do not, innovation is innovation. (Hronszky)

From other perspective a differentiation of invention, innovation is a must. Invention describes the generation of the idea of innovation. Innovation refers to some useful changes in technology, and technology describes organization of people or artefacts for some goal. (Howels 2005, p.1)

The function of innovation is satisfying the needs of consumers at a new and higher level. Its main characteristics are consumer orientation, novelty and uncertainty. (Chickán 2005, p. 248) Naturally, the innovation itself is dependent on the life curve of the product concerned. Therefore, we can differentiate four different sorts of innovation along their goals.

Figure 2. Purposes of strategic innovation

Source: Chickán, 2005, p. 226

As it is described on the 2nd chart, in accordance with the object of the innovative purpose, we can differentiate the ones aiming to have a novelist impact on the market or on the organization. In my paper, since my goal is to demonstrate emerging markets, my subject belongs to the innovation of the organization category.

Sorting Innovation

Having defined innovation leaves a lot to be desired to gain a proper insight in plus. Probably, the most important differentiation of innovations – from a conservative point of view – whether it is incremental or radical. An incremental innovation is realized within the framework of the organization. Its source is in most cases can be linked to the appearance of a smaller problem. It can occur even at developing a new technological, organizational solution by using own resources. Incremental innovations happen in stable organizational and market environment.

Radical, breakthrough, architectural or higher order innovation, (there are a lot of names for the same issue), however, leads to a disruptive technological change. (NB! Not only radical innovations can lead to disruptive innovations!)Radical innovations must have an irreversible impact on the organizational structure. (Hronszy 2006) My purpose is to analyze this type of innovation.

Figure 3. Purposes of strategic innovation

Source: Hronszky,2006, p.32

As the 3rd chart explains, radical innovation is accompanied by either a high market either by high technical uncertainty. This phenomenon, put in other words, also means that the capacities – capital, time etc. – invested into a radical innovation are not guaranteed to return. Since, in spite of the fact, that generally these innovative actions are the most capital intensive ones, the extent of uncertainty they are encompassed with calls into question their success. This is the key reason why the reduction of incertitude plays a crucial role in managing radical innovations. In my paper, the focus is on reducing the market uncertainty.

Linear Model – End-user Innovation

From another aspect, innovation can be divided along not from the object, but the subject or source of innovation. Originally, the source of innovation has always been considered to follow a linear model. Namely, the beneficent of the innovative action modifies either a product or an organizational structure. Thus innovation comes from within the organizational structure, including in this option e.g. hiring experts to provide advice. The linear model is connected to the so called closed innovation, rather typical in the 20th century. It is based on the capability and capacity of the in-house R&D. Even then, real linear processes have proven to be semi-linear, feedback looped actually. With the recent technological revolution some revival of the linear model is also occurring as a belief in the strong growth in supply possibilities. Actually, it may more lead to a flood of pseudo-innovations never accepted by the market; if we differentiate innovation by its success on some market. Concerning the score probability of meeting the needs of some sorts of consumers by some creative idea one has to consider that from thousands of ideas only 100 will be developed into a patented form.

From 100 patents 2-3 realised, and more than 75 % of these will be assessed by the customers as not enough user friendly – as the typical tale tells it.

But still, this sort of innovation dynamic has its advantages and disadvantages as well. Since the innovator has influence over the resources applied in the production; he/she knows well what modifications can be performed at a reasonable cost imposing executable changes. Additionally, there might be an underlying knowledge, for instance, a failure of other attempts, a conclusion can be drawn from; or pre-existing social capital with experts on the field. This way of innovation has been long perceived the sole way how innovation could work out. However, we must take some of its drawbacks into consideration. First of all, due to the source of the occurred obstacle to overcome and the origin of the solution is the same, or at least shares the organizational culture, this fact radically narrows down the thesaurus of possible solutions. Numerous genuine ideas do not have a chance to appear, since the organizational framework that implies those problems is quite unlikely to reconsider its faults and to come out with a brand new solution, admitting the faults it had committed. Secondly, applying this innovative method usually induces severe costs. Hiring experts on the field is really expensive, and coins up other questions: why people having no involvement in certain case could find out better solutions. Since they are not connected to the organization, and generally nor to the market.

This phenomenon was the source why end-user innovation came into play. According to the type of innovation, the process has to work upside-down. Its main principal might be characterized with this quotation:

“In a cathedral, everything is coordinated from above. In the bazaar, everything is coordinated—if that word even applies—from below.” (Howe, 2006, p.28)

Therefore, if we really want to understand the essence of the problem, we have to step down from the stage of cathedral. Thus, the prior thing that has to be considered is what the market wants from us, and not what we want from the market.

Despite the fact that end-user type of innovation was always present, it was treated as a neglectable phenomenon or a side effect or a part of the linear model. But Eric Von Hippel found out that users play an outstanding role in innovations put into practice.

“…we began to see that there was a clear answer to our question regarding the source of innovation in the field of scientific instruments… it emerged that users were the developers of fully 77% of all the innovations we studied…This pattern was uniformly present in all four instrument families studied.” (von Hippel, 1994, p. 13)

“We have now found three innovation categories in which it is typically the product user, not the product manufacturer, who recognizes the need, solves the problem through an invention, builds a prototype, and proves the prototype's value in use. If we apply this finding to "stages" of the technical innovation process, we find-somewhat counter intuitively -that the locus of almost the entire innovation process is centred on the user… This finding is at odds with conventional wisdom and with most of the prescriptive literature in the new product development process directed to manufacturers.” (von Hippel, 1994, p. 25)

“This finding that non-manufacturers may be the innovators in some industries certainly opens the way to an interesting new view of the innovation process. After all, accurate knowledge of who the innovator is essential to much innovation research and practice.” (von Hippel 1994 p. 26)

I must admit that this is not the very same sample I am investigating, because von Hippel looked for quasi experts, scientists. However, they might serve as a good example, since on

one hand at these examples the experts represented the market; on the other hand, they were not employed organizations searching for those innovations.

To be more accurate, it is really interesting, how von Hippel’s opinion has been evolving in time. (Since he is the Head of Innovation and Entrepreneurial Group at MIT his writings have an enormous impact on the rest of the world.) .) He recognized the importance of he needs of end-users, already in 1986, actually by his own experience. His first book I quoted from, Sources of Innovation was published in 1998. At that time he emphasized rather the importance of a special group of users, the lead users and manufacturers. However, in his second book, Democratizing Innovation, published in 2005, he starts with the following thought:

“When I say that innovation is being democratized, I mean that users of products and services—both firms and individual consumers—are increasingly able to innovate for themselves. User-centered innovation processes offer great advantages over the manufacturer-centric innovation development systems that have been the mainstay of commerce for hundreds of years. Users that innovate can develop exactly what they want, rather than relying on manufacturers to act as their (often very imperfect) agents. ” (von Hippel, 2005, p. 1) As we can see von Hippel serves as a good example of how the thoughts about the sources of innovation evolved.

Among all the approaches and sorts of innovation I am investigating in in my paper ‘s context are exclusively radical innovations; and due to the special characteristics of crowdsourcing I am dealing with solely end-user innovations. Therefore, it also means that all the drawbacks radical end-user and radical innovations have, cannot be disguised. Even thought sometimes I demonstrate the ideas and methods to incorporate the breakthrough solution for every problem, I must lay down that these methods have their own weaknesses. All the disadvantages of an end-user innovative process, e.g. cannot be put into practice, because it requires exaggerated resources, will not be solved. However, I presume that if we carefully apply the upcoming methods in a special conscious of the intrinsic default, better results can be achieved. Hronszky (2002) reminds that von Hippel’s vision seems to see the whole market as dress-show presenting exclusively goods created by users having the highest requirements. But this is narrowing down the focus and leading to partly misleading conclusions.

Innovation in Emerging Markets

Many think that nowadays we are the witnesses how history repeats itself. As Japan electronic sector managed to overwhelm its American peer, the market of emerging world seems to bring off a similar action. By that step Japanese not only changed the structure of car industry, but revolutionized the entire world economy.

Beside this, we must take into consideration that the distribution of the world’s population has radically changed. Despite the fact that the dominance of quantity is on the side of Asia and Africa, we –from Europe - tend to neglect their importance. On the second diagram we can clearly see that in terms of population how dominant Asia and Africa are.

Figure 4. Division of Word Population

Source: http://www.ethiopianreview.com/content/8897

These data are especially interesting if take into account that majority of this population is just about entering the global market. This mass of people represents such an non-parlayed market that has not been experienced probably since the great industrial revolution. Additionally, the growth of their economies far succeeds their North American or European peers’. It catalyzes the tempo of masses entering the market. (Shown on the 5th diagram)

Figure 5. Growth in GDP Emerging Markets contra US

Source: The Economist Special Report (2010)

Defining Emerging Markets

At this point I must set up a definition for emerging markets. It is common knowledge that emerging economies are in-between developed countries, for instance the USA, Japan, Western Europe etc, and underdeveloped countries. However, to draw the exact bordering

line I applied a study of FTSE group where they define emerging market. (This choice might be questioned, since this builds on national income and development of infrastructure. But whatever concept we take, they are made along similar characteristics, thus whether the debate that a country belongs to emerging markets or not does not influence my matter.)

According to FTSE we can distinguish advanced and secondary emerging countries. My goal is not to demonstrate the aspects these countries are selected, nor to characterize their market, since it would make up another paper. That is why I just list the countries along the two aspects:

FTSE Advanced Emerging Countries:

Brazil, Hungary, Mexico, Poland, South Africa and Taiwan

FTSE Secondary Emerging Countries:

Chile, China, Colombia, Czech Republic, Egypt, India, Indonesia, Malaysia, Morocco, Pakistan, Peru, Philippines, Russia, Thailand, Turkey and UAE1

In the first chart of Annex I display what are the proportions of the above-listed countries compared to the world’s population. It turns out that these countries possess the 57,88 % of the entire population; and this number keeps on soaring.

New Model of Innovation

As a peculiarity of emerging markets usual marketing tools often malfunction. Many of the attempts were followed by failures. Even the conception that globalization is driven by the West is called into question; companies like the Indian ArcelonMittal or the Mexican Cemex are taking over their Western equivalents. Meanwhile Western companies invest enormous efforts into keeping by spreading R&D centers; the ones from the emerging world are becoming hotbeds of innovation with ease. (The Economist, Special Report, 2010)

This phenomenon can be interpreted if we consider the difference between the markets involved. According to the globalized perception of innovation it originates from a breakthrough made in West, and then the outcome of this breakthrough is espoused by the Western elites, than it spins down to lower levels, and finally utilized by emerging countries.

This logic is broken into chunks, the market is no more working like it used to. The splendid ideas are coming from the bottom of the pyramid. Since those luxury product cannot be sold for people living under a welfare average. These people decided not to wait for morsels from the West. They decided to walk their own path, innovate from the bottom; and this decision is likely to have a colossal impact on the rest of the world.

What turned the thought upside down is taking the expectations of poor consumers as a starting point. This can be well trapped back from an example of an interview of Vijay Govindarajan.(2010)

“One example is the GE MAC 800. In 2008, GE innovated an ECG machine, MAC 400 to serve the rural market. This ECG is portable. Rural population cannot afford expensive healthcare. The MAC 400 costs about Rs50,000 ($1,000), a fraction of the cost of the appliance-sized premium machines sold in the US. In 2009, GE has brought an improved version of the portable ultra low cost ECG machine into the US, which is sold as MAC 800. This low-priced ECG machine has created new applications in the US in accidents sites and in emergency rooms where portability and small size are huge advantages. “

What are the principles that this new way of innovation applies? Sounds simple: break all rules. This “reverse” innovation involves not only redesigning products, but starting from

production processes to re-conceptualizing of business models. However, there is no way of forgetting about the motivator, the price. Therefore costs have to be depreciated as much as possible. Three ways of doing it are proving to be utilized:

1. Contract out even more work. For instance, Bharthi Aitrel, Indian mobile-communication company has contracted out everything but cell phone calls. In favor of doing it Bharthi convinced its partners to modify their business models

2. Use existing technology in new, imaginative ways. E.g. TCS, basically engineering products based Indian corporation developed a method to connect mobile phones to television sets, thus one can use the TV to surf on the internet via mobile phone transmission

3. Apply mass-production techniques in new areas. For example, the Narayana Hrudayalya Hospital, Bangalore, applies Henry Ford’s management principles for hospitalization. Keeping more than 1000 beds enables the hospital to provide outstanding medical service at a low price. (The Economist Special Report, 2010, p. 4)

All these principles seem to be simple, but might be extremely difficult to put them into practice. Additionally, targeting the price which involves the “bottom of the pyramid” but signifies a considerable income is definitely challenging and risky as well.

Blue Ocean Strategy a theoretical response

The theory of blue ocean strategy, a brand new idea burst out in 2005, basically formed the way the term market is perceived. It claims the following:

“Red oceans represent all the industries in existence today. This is the known market place. Blue oceans denote all the industries not in existence today. This is the unknown market space. In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known…cutthroat competition turns the red ocean bloody. Blue oceans, in contrast, are defined by untapped market space, demand creation, and the opportunity for highly profitable growth.” (Kim, 2005, p. 5)

Since Blue Ocean strategy redefines market, from the old, Red Oceanic point of view, due to its lacks – e.g. legal, moral etc. -, an emerging market would not meet the expectations required for an investment. However, Blue Ocean Strategy offers a proper framework why organizations should consider emerging markets to be a fruitful field for investing. Despite the fact that it requires more efforts to examine the market, the benefit from having no competitors is worth pondering it. For this purpose Kim and Mauborgne offer a new toolkit how to treat these markets.

Figure 6. The Four Actions Framework of Blue Ocean Strategy

Source: Kim and Mauborgne, 2005, p. 28

This strategy in substance focuses on the expectation of the consumer; claiming that it suffices if we do not want to meet all the expectations but the consumers’. The core aspect is creating distinctive attributes.

From the perspective of Blue Ocean Strategy emerging markets represent the hotbeds for exploitation of such possibilities. On these markets most of the attempts bear on as a novelty; that is why instead of concentrating on competitiveness we can focus on the market.

Crowdsourcing

“We were making many decisions not based on what others were doing, but on what customers wanted us to do” / P.J. Hough, Microsoft/

Harnessing the wisdom of crowds

In 1906 Francis Galton executed an experiment, aiming to prove his statement according to which the crowd was obtuse and only the experts had the knowledge that kept the society “healthy”. In the annual West of England Fat Stock and Poultry Exhibition the following competition was played: anyone could make a bet for the useful weight of an ox– i.e. the

slaughtered ox. 787 persons cast his or her vote, regardless he/she was an expert on the field or not. After having collected all the votes, Galton calculated an average vote, with an intention to affirm an average voter knew very little. To his astonishment, the value of mean vote turned out to be 1.197 pounds. The ox weighted 1.197 pounds. (Surowiecki, 2004, p. 1)

Galton’s experiment was the first study showing that regardless the expertise the aggregated opinion of individuals can be more precise than the experts’. The reason why his finding had a stupendous impact could be made out outlined in the following saying: "The IQ of a crowd is the lowest individual IQ divided by the number of people in the crowd"1 Thus Galton launched a flow of researches investigating how wise the crowds are. Despite our instilled persuasions they turned out to be really smart, often smarter than experts.

To move further first of all I must set up a definition outlining what crowd is. For this purpose I use what James Surowiecki gave in one of his interviews:

“A "crowd," in the sense that I use the word in the book, is really any group of people who can act collectively to make decisions and solve problems. So, on the one hand, big organizations—like a company or a government agency—count as crowds. And so do small groups, like a team of scientists working on a problem. But just as interested—maybe even more interested—in groups that aren't really aware themselves as groups.”(James Surowiecki Interview)2

Moreover, Surowiecki claims there are four conditions that have to be fulfilled in favour of “proper” crowds emerge:

1. Diversity of opinions - since only way how different pieces of information can be put together if the crowd does not converge towards a common idea, but incorporates diversity

2. Independence - even it is not restrained that people from the crowd should not be acquaintances, however, redundant relationships will unintentionally influence how the pieces of individual information are shaped. Moreover, if this phenomenon comes into play it radically narrows down the limits of aggregate knowledge

3. Decentralization – this point is linked to the one before. The additional matter is the involvement of specific local knowledge. To have people add their very own saying they have to have no influencing impact on each other.

4. Existence of a mean to summarize people's opinions into one collective verdict.

Out of the four point, this one is probably the most obvious. In lack of a mechanism generating and shaping a final, common idea, there is no conclusion.

(Surowiecki, 2004, p. 27-36)

As a conclusion of the theoretical approach of we can claim that the reason why crowds can be smart lies in aggregation of chunks of information is put together it can have better result than any person’s guess.

At this point I must add a critical comment on this theory. Surowiecki claims that wisdom of crowds works well if there is special task, problem to solve, “cognition problems”. (James Surowiecki Interview) However, look at the example of the world-famous mathematician, Laszló Lovász. He called for the public for solving mathematical problems he is working on. In this example the given “cognition problem” exists; and since it is on the

1 http://news.bbc.co.uk/2/hi/uk_news/magazine/8788780.stm 2 http://www.randomhouse.com/features/wisdomofcrowds/Q&A.html

internet anyone can make a try, Thus the crowd satisfies all the criteria outline above. However, at this point, mainly thanks to the genius of Laszló Lovász, no one can solve these samples. Therefore, despite having a proper crowd with its wisdom, Surowiecki’s model won’t work out. Along these lines we restrain the thought of “cognitive problem” to obstacles not as specialized as the problems that cannot be solved by one of the best mathematician in the world.

Crowdsourcing, the Model

The expression, crowdsourcing was coined in June, 2006, followed by the article in Wired magazine of Jeff Howe, titled The Rise of Crowdsourcing. To understand what crowdsourcing is let me demonstrate an example.

Claudia Menashe was in need of pictures of sick people. However, she decided not to take them or have someone do so, but searched for pre-existing pictures. A professional photographer, Mark Harmel offered her to deliver the wanted pictures, since he had taken them, and offered them $100 to $150 each. Thus, Menashe ordered them and was charged for $600. However, in few weeks time, Menashe found a web page, called iStockphoto, offering the pictures of amateurs. At iStockphoto pictures cost $1 to $5 per each; and because of having more than 22000 contributors, it can easily destroy the market of professional photographers. In February, 2005, iStockphoto, with profit monthly growth of 14 percent, iStockphoto was purchased for $50 billion by Getty Images; whose CEO commented on the acquisition as the following: “If someone’s going to cannibalize your business, better it be one of your other businesses,” (Howe 2006 p.34)

This example clearly shows how crowd-made products can gain ground on field having been possessed by experts; moreover how amateurs can conquer professionals.

Under the term of crowdsourcing I mean what Jeff Howe applied: “crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take the form of peer-production (when the job is performed collaboratively), but is also often undertaken by sole individuals. The crucial prerequisite is the use of the open call format and the large network of potential laborers.”3 From this definition the example of iStockphoto clearly meets the demands of a crowdsourcing phenomenon: large network of people upload their photos, in this case with no collaboration and the open call is the reward refunded– even if it is just a few dollars.

Numerous multinational companies realized the possibilities lying in cheap work force accompanied with a first-hand marketing analysis and outstanding results. Thus as pioneers of crowdsourcing we can list Starbucks, BMW or the Amazon’s Mechanical Turk.

Even though I have outlined – in an unintended form - how crowdsourcing is supposed to be launched and managed, for a clarifying purpose I am listing the steps to follow:

3 http://crowdsourcing.typepad.com/cs/2006/06/crowdsourcing_a.html

Figure 7. Process of Crowdsourcing

Source: Own diagram after Howes,( 2006)

It seems to be simple, however we must put effort either to involved as many individual as possible, either not to exclude idea generators.

Furthermore, there are 10 principles to follow created by Jeff Howe (2006):

1. Pick the Right Model first step has to be the clarification of the ultimate goal a. Collective Intelligence – The Principal is the groups posses more knowledge than

individuals b. Crowd creation – Companies have to make efforts to allure Crowd c. Crowd voting – use the judgement of crowd to shape the decision making process

itself. The crowd need not to be aware of this, e.g. Google search is being shaped after the searches having made

d. Crowdfunding – if once large amount of people volunteer in the crowdsourcing process it creates trust, thus others will join more easily

2. Pick the Right Crowd – to avoid the receiving useless solutions en masse the open call has to be formed to prevent this. However, the golden mean has to apply for not excluding real outsider information.

3. Offer the Right Incentives – to keep the crowd a vibrant, committed community, individuals must feel involved all the time. It can be achieved by constant feed backing, rewarding and setting up a competition.

4. Keep the Pink Slips in the Drawer – thus if one idea is dishonoured the crowd should have no clue of it.

5. The Dumbness of Crowds or the Benevolent Dictator Principle – Despite the fact that Surowiecki emphasized the importance of decentralization of crowd, practice shows that a leader has a really good impact on evolvement of the process

6. Keep It Simple and Break It Down- Simplicity and breaking the task into chunks ease a lot of confusion, moreover fasten the pace of crowdsourcing as well.

7. Remember Sturgeon Law – else wise 90% of everything is useless. Therefore, we can expect that at least the nine tenth of responses are useless.

8. Remember the 10 Percent the Antidote to Sturgeon’s Law – This principle focuses on the remaining 10%, claiming that this subgroup of people posses the ability to correct and select the 90% and to find the best solution without outside interference.

9. The Community is Always Right – even you want to lead to crowd, finally you end up with following it, due to its wisdom lies not in one person, but the mass.

10. Ask Not What the Crowd Can Do for You, but What You Can Do for the Crowd This is a practical and a moral advice at the same time. Crowds participate because individuals have needs to be satisfied. If once you fail to amuse it, you will loose your crowd and its faith and enthusiasm as well.

Types of Crowdsourcing

At this point I must clarify a pivot of wisdom of crowds that in many papers authors fail to differentiate. There is a huge underlying difference between two phenomena. One is Galton’s experiment. He faced numerous individuals constituting a real crowd, they knew not each other, and many of them were not experts on the field. The example the world famous book, Wikinomics enters upon is also misleading, but reflects on the two main types of crowdsourcing.

Rob McEwen, the CEO of Coldcorp Ltd. faced serious problems in terms of operating its goldmine. Constant strikes, high exploitation costs and experts’ report that the gold deposits had been exhausted just worsened his situation seemingly inevitably leading to bankruptcy. Moreover, in spite of having explored large deposits, geologists were unable to identify its position. Then McEwen, after having heard a presentation how Linux open source system operated, made a decision to put the same principle as Linux applied into practice. His breakthrough idea was the following: create a file including all the data of the goldmine dating back to 1948; share this on the internet and ask for help how to exploit the presumptive gold. However, since gold mining has always been a strictly confidential industry, geologists at Coldcorp were distressed. In March, 2000 as Coldcorp Challenge those who find the best location and method were offered $575.000. Since all the information was available on the website of Coldcorp, multitudinous solutions were sent. An astonishing result was that from the marked deposits 80% was correct, double that had been known. Finally Coldcorp achieved an excelling profit; every $100 invested in 1993 into Coldcorp is now worth more than $300.000. What is really surprising in this case is beside geologists numerous mathematicians, physicians, university students, doctors and even military officers participated. As a matter of fact in elaborating the final solution non-geological comments and methods played an outstanding role. (Tapscott, 2007, 17-20)

As conclusion to draw from this example there are a few factors to highlight: primarily the application of a brand new method that gained success in other sectors. What Linux benefited from could be well utilized for Coldcorp as well. Secondarily involving people outside of the organizational framework was a key too. However, what added the most was the fact that those people had widely different backgrounds; separately might have proved to be moderately useful, but aggregated it resulted in a breakthrough.

Consider another example: eBird, a bird watching and counting organization could achieve by providing basic checklist on bird to amateur birders that it counted over 1,15 million sightings. All eBird did was having amateurs play a game against each other which

subject was bird counting. Thus eBird was able to increase its sightings from 100,000 to 1,15 million in 5 years time. (Howe 2008 p.29)

What are the points in common of the case of Coldcorp, iStockphoto and eBird? They had an idea contrarily to methods implemented before. They relied on an unknown mass of people and their knowledge; each emitted an open call via internet reaching numerous people.

However, there is a huge difference between the cases that many literatures fail to distinguish. When Coldcorp called for answers it basically meant experts involved in gold mining. Even though they had different backgrounds, they shared the interest and expertise. Meanwhile iStockphoto and eBird limits not on experts, but on real amateurs.

Hence I must distinguish two types of crowdsourcing, in terms of crowd:

1. In classical sense one is when the open call is for a crowd that meets all the criteria Surowiecki outlined, among them many non-experts, in Howe’s approach when he analyses the rise of amateurs. iStockphoto and eBird fit into this category

2. However, the second is when the open call is announced for people having background knowledge, sort of experts; even if it is not included in the open call, the subject excludes the participation of amateurs.

In the further analysis we always have a clear differentiation of which one of the two types of crowdsourcing is intended to be applied. Naturally, the line of demarcation can be blurred, since we cannot purposefully influence the composition of the crowd; however, the manner how the open call is formed can select the people willing to participate.

Appearance in Hungary

In Hungary by the time I started my research in the topic, the total absence was the main characteristic of crowdsourcing. However, nowadays the wind of this idea has appeared in Hungary as well. Let me demonstrate – just for the pure curiosity of mine – two examples. One is the first crowdsourcing website in Hungary, www.creativeselector.hu sponsored by T-Mobile and HTC. The other has idea which has just emerged is creating a common website offering a possibility to discuss new the new constitution of Hungary4

Internet Usage in Emerging Markets

This chapter has nothing to do with management theories, however, plays an outstanding role in evaluating crowdsourcing possibilities in emerging markets. Since crowdsourcing is basically realized via internet – even if it is not a necessitous condition – it is crucial to think about the differences as internet functions. Even I am Hungarian; I have elaborated my way of thinking on basis what I read from American, British, Canadian etc. writers. Thence I must spurn from this perspective and investigate the fulfilled position of internet in emerging countries.

4 http://outsourcingcenter.hu/2010/09/10/mi‐is‐az‐a‐crowdsourcing/

Firstly let me share my presumption with the dear reader: before having started researching in the issue, I had been convinced that there had been a huge gap between the developed markets and the emerging ones. This assumption of mine turned out to be correct, however, the picture is far more complex.

Developed countries are characterized by a proportion of internet users around 80%. This datum is incredible high, especially comparing to the world average 28,7%. Some of the advanced emerging countries show similar results – see the first table of Annex – Hungary around 60% Taiwan at 70%. However, in general we can claim that with an 39,2% proportion of internet users in the whole society with a relatively high standard deviation of 0,133 even these countries lag behind the developed countries by at least 30%.

The situation is even worse in the second group: the average shows that only every third person is an internet user. However, the standard deviation of 0,051 prompts that this tendency is mostly valid in each country.

However, there is another factor that has to be taken into account, the growth rate. In developed markets the number of internet users increases far beneath the world average; comparing to 444.6% increase in the number of users, in Japan the growth only 110,6%.(At this point to avoid being biased I must admit that the comparison of growth rate of a developed market and an emerging one has to be really cautious. We have to take into consideration the slender amount of existing internet users.) Thence, the average rate of growth of 806,7% - with a relatively high, 5,01 standard deviation referring to the inequalities - which can be the fundamental of spreading internet based marketing methods, like crowdsourcing.

What is really amazing is the data that the secondary emerging markets produce: on average the growth rate of 2103,1% - with an extremely high standard deviation 38,67 – can be the key how crowdsourcing could spread in the futures via internet.

Is Internet a necessity?

However, I have been solely focusing on internet based crowdsourcing. There is an example showing that crowdsourcing is not fundamentally attached to the internet. Nathan Eagle, young entrepreneur, founder of Txteagle set up a model on how to outsource tasks to Kenyan people having no access to internet. The model is the following: given a problem to solve in Western part of the world, break it into chunks, give it to rural Kenyan people who have received cell phones to work with and send these chunks for those people. In this manner such tasks could be performed that require local knowledge, e.g. translation.5

Even though it resembles in many points to crowdsourcing – the article and the company claim Txteagle to act like a crowdsourcing company – however, it is not. Regardless the problems are broken into chunks, delivered to crowd and exists a mechanism collecting the ideas, the essence is missing. There is no open call; and without it Txteagle is nothing, but a special form of outsourcing.

However, Txteagle proves that internet is not a necessity for outsourcing. It seves as the evidence that crowdsourcing can succeed without internet. Thus, as an answer for the question raised in the title of the chapter, internet is not a necessity, but facilitates crowdsourcing a lot.

5 http://txteagle.com/?q=services/local_knowledge

Applying Crowdsourcing to Manage Radical Innovations in Emerging Markets

In this, final chapter I put together the pieces having been shown so far; I demonstrate and analyze the possibility – from a theoretical perspective – how crowdsourcing could be utilized in favour of managing radical innovations in emerging markets.

Theoretical framework

As we can derive it from Chart n.2 entering an emerging market definitely belongs to the

“suicide square” where decisions are surrounded by either market, either technological uncertainty. Furthermore, what really appears to mean a problem is that companies neither familiar with the market to enter, probably nor with the technology used for fabricating different product. Therefore, on both hands there are huge uncertainty factors. Thus, if we want to escape from this “suicide square” two obvious options are offered: one is familiarization of the market; the other is reducing technological uncertainty. In the upcoming lines I will argue that the application of crowdsourcing is an effective tool to reduce the uncertainty of the two factors at the same time.

However, before outlining the idea, let’s take two examples: in Bangladesh women were given mobile phones for free of charge. However, as mobile phone producers experienced one phone was used by multiple persons; thus the register had to be switchable to adjust the phone to the person using the mobile phone. (Social Business Conference 2010) Another excellent example how new Anurag Gupta, an Indian telecoms entrepreneur used mobile phones and finger-print scanners to replace ATMs thereby enabling banking in the rural parts of India as well. (The Economist, Special Report 2010 p. 4). The above-mentioned two examples show that new products often require new fabrication technologies which involve technical uncertainty.

The idea is the following: as once entering a blue ocean emerging market we have to face the challenges originating from market and technical aspects. To overcome this challenges crowdsourcing can be applied to call the wisdom of crowds for technical solutions. In case of sufficient amount of people can be involved, brand new technological ideas could arise; at the same time the crowd select and evaluate it as well. However, parallel to this activity of the crowd it gives us a first-hand marketing insight of the values, perspectives the population of certain target market is aligned along. Therefore, a ground of knowledge for managing both dimensions of strategic innovation is provided.

In the next few paragraphs I am giving a basic analysis mainly concentrating on the major characteristics of the “idea”. After having considered the possibilities I selected SWOT analysis; since I am presumed that this method is apparently the most approximate to the human decision-making processes, thus probably can be comprehended and applied to be more effortless.

SWOT analysis

Strengths As far as I mentioned the greatest strength of utilizing crowdsourcing for managing radical innovations in emerging markets primary lies in the “wisdom of crowds” principle. Whatever technique the company endeavours to plot the unmapped areas of emerging markets, there will always be great defectiveness. For instance, for understanding the Chinese households’ cell phone using habits anthropologist were sent to live with Chinese families in order to gain pioneer information on the expectations Chinese demand. (The Economist, Special Report, 2010, p. 6) However, even these data collection methods will never come out with as appropriate results as when the Chinese people themselves voluntarily make efforts to tell you what they want. In this way at least the data collection part of research the possibility of bias is reduced – even if it occurs again at interpretation. Crowdsourcing is more probable than anthropological methods to attract lead users to express their opinion. Furthermore, it also provides a platform in which these people can argue, discuss and come to conclusion. Another key aspect is that individuals from the crowd do not feel aggrieved, since they volunteer, play and have the opportunity to be rewarded as well. Additionally, one key element is that crowdsourcing costs radically less than other methods even collecting the fraction of data. The reason can be named to exemplify it: firstly there is no need to outsource tasks to contractors, nor applying anthropologists to live with Chinese families for months. Secondarily, rapidity means saving money; since the crowd raises as many solutions as they know, likewise selects and filters them to conclude a solution presumed to be the best, this method is a lot faster than outlining a strategy with amendment to obtain the best-fitting solution.

Weaknesses Two types of weaknesses have to be separated: one having its origin in crowdsourcing, the other in the special characteristics of emerging market application; and there are some sharing both aspects.

There are many faults that might occur during crowdsourcing. First stumbling-stone is in concern with the open call. If it turns out to be too complicated than the “amateur” part of the crowd – who might posses the breakthrough information – will be discomforted. However, if it is brought out in a simplistic manner than the stream of answers can paralyze the summarization of people's opinions into one collective verdict. The same applies to break of tasks: if we fail to properly simplify the problem and break it into chunks than the answers will not be specific enough. Thus if the open call is malformed we can easily get misleading information. This plays a crucial role because organizations, companies are often not aware what they want exactly apart from increasing their profit.

However, what is the most important weakness of applying crowdsourcing is the chance of being unable to involve proper – i.e. quality and quantity count – crowd. In Western markets the use of internet is as wide spread as post offices. However, to analyze this aspect I made a research how the usage of internet varies from the world average and developed markets to emerging markets. At certain points the dividing line between internal and external aspect are blurred because of having so much point in common. Therefore, I am just reflecting upon some points mentioned in the chapter titled: Internet Usage in Emerging Markets. An internal disadvantage, a weakness of crowdsourcing if the constitution of the crowd does not meet the expectations, than the critical 10% of Surgeon Law could plummet down towards useless. Hence the compensation for huge efforts is little, and mud will hide the diamonds.

Opportunities Crowdsourcing is not only a method to harness the wisdom of crowds, rather familiarizing the name of the company, the product with people within the market. If we consider the example of crowdsourcing the Hungarian constitution, even significant thoughts might appear, however, the main goal is rather to make people accept and internalize the constitution. That is why crowdsourcing has it strengths in three ways at the same time: creating solutions for problems, performing a market research and developing public relations.

Furthermore, this method can be the means for providing the sufficient advantage for the company to enter the Blue Ocean market. That is why the most important opportunity is occupying a non-possessed market segment.

Threads Other weaknesses originate from the distinctiveness of the market. It might sound really strange in certain places to add one’s opinion via internet or other forums. Therefore, people will not understand the process how crowdsourcing work; that is why companies might consider it a tool to exploit crowds. This possibility can be avoided with good PR and a proper rewarding system.

Moreover, in emerging markets the patent system is not always perceived in the same way as it is ,for instance, in the US. Therefore, the results achieved by crowdsourcing can be easily “borrowed” especially these process takes place mostly on the internet.

Conclusion

I have demonstrated a possible means of how an organization can facilitate its task in case of entering an emerging market. Firstly I highlighted that the aspect Strategic Learning Schools added to strategic theories, namely that in most of the cases the most important facets of strategy lies in learning and paying attention outside of the organizational framework. If this approach is accepted – not necessarily entirely – than the idea of crowdsourcing is legitimatized; forasmuch as the basic principle is harnessing the knowledge of crowds, people outside our framework.

Henceforth, I demonstrate a brand new phenomenon that gave impetus and reason to agitate for the developed markets, innovation in emerging markets. This sort of innovation incorporates the ability to throw off the balance of world economy.

Furthermore I attempted to give an overall picture on how crowdsourcing works and what are the theories in its background. Many scientists argue that crowds possess the ability to overcome the performance of aggregate individuals if a proper opinion collecting mechanism exists.

Finally, I concluded that crowdsourcing is definitely probable to offer a means for managing radical innovations from three aspects: one is market uncertainty, second is technical incertitude and the third one is establishing public relations.

My ultimate goal was evoked by the numerous concerns about Western countries loosing their world economy leader role. One of the reasons disquietedness might have arisen is that fact that Western organizations, companies in case of entering emerging markets face challenges that almost disable them to operate properly. I am personally convinced that if crowdsourcing is consociated with other elements it can mean outstandingly effective means to assist managing the radical innovation demanded by emerging markets.

References

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Social Business Conference 05/10/2010 at Corvinus University of Budapest

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34

1. ANNEX

Diagram 1 Proportion of Population of Emerging Countries6

6 if what emerging markets represent 3 962 426 401 persons, the world’s population’s 57,88%, is 100%

35

Source: Internet Usage Stats

Diagram 2 Proportion of Internet Users of Emerging Countries7

Source: Internet Usage Stats

7 if what emerging markets represent 921 661 25, the world’s population’s 46,87% is 100%

36

Table n.3 User Growth (2000-2010) Internet Users in Emerging Countries8

Source: Internet Usage Stats

8 if the world’s average 444,6% is 0%