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Crowdsourcing can generate valuable ideas for firms

February 3rd, 2012

Carnegie Mellon UniversityResearchers from Carnegie Mellon University have published a new study that refutes three key criticisms of crowdsourcing, a popular tool for new idea generation for firms as they seek to develop new products and services and to improve on their existing offerings in an increasingly competitive marketplace.

The study finds that crowdsourcing is not the misguided fad that some critics have suggested but that the process of crowdsourcing actually — under the right conditions — creates more knowledgeable consumers and, in time, leads to more efficient, lower-cost generation of high potential ideas.

The study, “Crowdsourcing New Product Ideas Under Consumer Learning,” was conducted by Kannan Srinivasan, the Rohet Tolani Distinguished Professor of International Business and the H.J. Heinz II Professor of Management, Marketing and Information Systems at Carnegie Mellon’s Tepper School of Business; Assistant Professor of Information Systems Param Vir Singh, also of the Tepper School; and Yan Huang, a Ph.D. student at the Heinz College at Carnegie Mellon.

The team set out to investigate the three most common criticisms of crowdsourcing: that individuals’ limited view about firms’ products leads to the contribution of mainly niche ideas; that consumers’ limited knowledge about firms’ cost structure leads to too many infeasible ideas; and that firms’ lack of response to customers’ ideas leads to customer dissatisfaction.

“Although crowdsourcing initiatives are being widely adopted in many different industries, the number of ideas generated often declines over time, and implementation rates are quite low,” Srinivasan said.

Understand the dynamics to find valuable ideas

“Our findings, however, suggest that a better understanding of the dynamics at work in the crowdsourcing process can help us to address the common criticisms and propose policies that draw out the most consistently valuable ideas with the highest potential for implementation from crowdsourcing efforts in virtually any industry.”

The policies suggested by the study for effective crowdsourcing rely on the implementation of a system for peer evaluation, rapid company response to ideas that receive significant positive endorsement from the community of idea contributors, provision of precise cost signals that enable contributors to assess the feasibility of their ideas, and a system to reward contributors whose ideas are implemented rather than one that rewards individuals when they post ideas.

“Using a peer voting system, consumers are empowered to both contribute their own ideas and vote on the ideas submitted by others, enabling firms to infer the true potential of ideas as they begin to screen for ideas that are truly worthy of implementation,” Singh said.

Singh added that the initial field of ideas generated in a crowdsourcing effort tends to be overcrowded with ideas that are unlikely to be implemented as consumers overestimate the potential of their ideas and underestimate the cost of implementation.

“However, individuals learn about their abilities to come up with high-potential ideas as well as the cost structure of a firm through peer voting and the firm’s response to contributed ideas, and individuals whose ideas do not earn the favor of their peers or the backing of the firm drop out of the process while contributors of high-potential ideas remain active,” he said.

“Over time, the quality of generated ideas — in terms of their actual potential for implementation — improves while the total number of ideas contributed through crowdsourcing decreases,” Huang said.

“So, the cost to screen contributed ideas is reduced, the efficiency of the process is increased and the crowdsourcing initiative yields high-value ideas with the greatest potential for implementation.”

Although crowdsourcing initiatives have become rapidly popular, the usefulness of this relatively new approach to idea generation has been heavily debated. There have been few academic studies of crowdsourcing despite the enormous business and media attention the topic has attracted, and this study by the team at Carnegie Mellon proposes answers to some of the most hotly contested concerns regarding the value of these initiatives.

Findings of the study in detail

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