"No matter who you are, most of the smartest people work for someone else" -- Bill Joy, co-founder of Sun Microsystems.

Innovation is the topic du jour in many companies. Competition from developing nations eats away at market share from below, while the very assumptions of mass markets is being challenged by the bifurcation of buyers into price-sensitive and luxury, with the middle being abandoned.

Clearly, if you want to succeed in tomorrow's economy, pursuing yesterday's strategy won't work -- just look at the travails of US auto companies for a stark illustration. The mantra for companies today is to develop new offerings that are better suited to customer tastes -- whether that customer is an end consumer or a business that uses the product or service to create something that eventually is sold to an end consumer.

But how to do that? The traditional method is to look to the "folks in research." Those boffins, companies feel, are thinking big thoughts and working on things that will become tomorrow's products. The only thing is, the track record of research is quite mixed. While many innovative products have been created in the labs of great companies -- like the disk drive, developed by IBM's research division -- other company's research efforts show dismal outcomes. Microsoft's research division hasn't resulted in much, although the next generation of their OS, codenamed Midori, is supposed to be based on work done there (I plan to blog on this in the near future). And, of course, Xerox's PARC is practically a cliche for unapplied research, although many companies, among them Apple, benefited from Xerox's investments.

The other place that companies traditionally turn for developing new offerings is customers. Focus groups. Surveys. Intuition based on customer interaction. The challenge for many companies is that these methods often are inadequate -- people lie on surveys, and focus groups are artificial settings peopled by unrepresentative participants. And interacting with customers usually provides unenlightening information -- they feedback offered is usually based on a customer addressing shortcomings in the current products, which offers the opportunity for improvement, but little chance for innovation -- as Henry Ford once put it, "If I'd asked people what they wanted, they would have said a faster horse."

There is another way, however, which is to move from internally generated invention or externally gathered research to externally generated invention. In short, apply Web 2.0 principles to product innovation. Web 2.0 offers the ability for internal employees to collaborate with external parties with the aim of generating innovation that can be applied to new products or services. Instead of trying to imagine what customers want (generate innovation internally via expensive research efforts) or collect customer feedback (via filtered information gathering), let outsiders directly participate in product or service creation.

In his book, Democratizing Innovation, MIT Professor Eric von Hippel cites a study done at 3M, in which internally generated innovations were compared with externally generated innovation (3M allowed outside parties to directly participate in product creation). Not only were the outside innovations more creative (versus internal innovations, which tended to be more extensions to existing functionality), they were more profitable as well. Von Hippel also cites the kiteboarding industry, which was entirely end user invented, with kiteboarding startups harvesting user creations to develop new businesses.