182. Gordon Miller: What’s Your Absorptive Capacity for User-Generated Innovation?

It’s often the case that lead users — the most sophisticated, committed, and energetic users — are an excellent source of innovation ideas. Those customers who are most engaged are thinking the most intensely and the most creatively about what they want from the usage experience. We came across a particularly instructive example: video game modders. Who are modders, what do they do, and what can we learn from them? Professor Gordon Miller has studied this important entrepreneurial phenomenon, and he joins Economics for Business to share his knowledge.

Key Takeaways and Actionable Insights.

Modding is user-generated value innovation.

Modding, from modifying, is the act of a changing a game, usually through computer programming, with software tools that are not part of the game. This can mean fixing bugs, modifying content to improve it, or adding content. But modding is not an activity taken on by those at game companies—developers release patches and downloadable content, not mods. Modding is instead done by players and fans of the game… Modding is more than adjusting the preferences or game settings, it is making changes that cannot be made through the game as it is.

Game producers and designers enable and encourage this user innovation.

Game producers have come to recognize that the creative ideas and initiatives of the modding community can contribute new value to their businesses and franchises. Games like Minecraft enable users to explore, within a predesigned GUI, a practically endless 3-dimensional world to build innovative structures and other things like functional computers and console emulators. Minecraft also makes available code and tools for modders to create mods that are essentially new games, or major innovations within the original game. The famous DOTA (“Defense Of The Agents”) game is entirely the product of the modding community, encouraged and enabled by the developer, Valve Software.

Modding is a practical application of the theory of absorptive capacity.

Absorptive capacity refers to the capability of a firm to recognize, collect, assimilate, process, transform and use external knowledge for competitive advantage in innovation, flexibility, and overall business performance. The external sources of knowledge are knowledge networks, either formal or informal or a combination of both. Formal networks might include suppliers and partners, university research departments and labs, and even industry share groups. It’s sometimes called open innovation — actively looking at and tapping into what other firms are doing.

Informal networks are those like the modder community — lead users, user groups, tinkerers, and so on. This is sometimes referred to as distributed innovation or user innovation — it’s not the producer originating the innovation, but an external informal source.

The challenge is to be able to generate awareness of these sources of knowledge, evaluate them, bring them inside to the company for evaluation and processing, and turn them into useful innovations or internal changes.

In highly dynamic industries, it is productive to tap into these knowledge networks.

Professor Miller refers to the external networks of knowledge, both formal and informal, as the wisdom of the crowd. If you are operating in an environment characterized by high dynamism and rapid change, the wisdom the of crowd is an important and often decisive resource.

1. The wisdom of the crowd can contribute to innovation and business performance, especially in the form of idea diversity.
2. Innovation performance improves through better firm capitalization of knowledge resources.
3. The wisdom of the crowd offsets firm rigidity — making it more receptive to new ideas,
4. Entrepreneurial judgment can increase innovation performance by increasing absorptive capacity.
5. Innovation performance feeds back into absorptive capacity, creating an iterative self-improvement loop.

Professor Miller proposes three areas of business development by capitalizing on external user groups.

First, firms struggling to innovate due to internal rigidities may well benefit from developing communities — similar in concept to modding communities – connected to their own industries. By absorbing and incorporating the learning that occurs in such groups, they can take advantage of readily available innovative ideas for change.

Second, these communities may also provide a wellspring of talent for enhancing the firm’s absorptive capacity in useful ways. This is a pool of unique and entrepreneurial individuals with the potential to enhance the firm’s human capital and make the firm more explorative.

Third, even if the firm does not fully tap in to all the knowledge coming from the community, there is still the potential for new solutions to emerge that are stimulated by external ideas. There are always hobbyists and fans, and technology easily facilitates their interactions. Crowdsourced knowledge provides a uniquely useful tool for enhancing organizational innovation.

The wisdom of the crowd is a path to profit.

Modding as an art form allows players to express what they most want games to be. This becomes a useful indicator for determining the most profitable paths to pursue. Firms seeking to enhance their innovative capabilities and remain profitable must pay attention to external sources of learning, however informal.

Additional Resources

Download our free E4B PDF: “Assessing Your Firm’s Absorptive Capacity”: Mises.org/E4B_182_PDF

The Invisible Hand In Virtual Worlds: The Economic Order of Video Games by Matthew McCaffrey: Mises.org/E4B_182_Book