Big business, small suppliers and the race for innovation

In many of today’s industries, products are complex and technical, such as cars, personal digital assistants or engineered solutions in the chemical industry. Innovations therefore require sizeable investment. Businesses that do not rigidly manage their product portfolios and try too hard to stay ahead of the technological curve suffer from exploding costs.

Look at how Apple has financially outperformed Nokia over the past years: it has spent less on research and development yet delivered a number of market-leading innovative products. Innovators among large corporations have had to build systems to manage the new products and services, and work together with external value-chain partners to speed up the process of innovation with lower costs and fewer risks. The consequences are manifold:

• The development of an in-house management system becomes more challenging.
• Goods or services must be acquired externally to generate more value.
• Companies must gain an understanding of innovation management across the value chain.

The pressure to keep innovating at lower cost is a particular challenge for businesses. Collaboration with external partners, based on appropriate product structures and interfaces, can allow for cost reduction and increased efficiency.

While many companies do collaborate, striving to develop a leading practice can raise difficult questions, such as how to develop the market sense to identify potential partners from among millions of corporations worldwide. And, once a potential partner is considered for collaboration, a company should know how to clarify legal issues on intellectual capital, as well as how to manage cost, time and the quality of work.

A business will achieve better results if it is aligned with its value-chain partners, the suppliers of the suppliers. Benefits include customer value and cost savings, and a shorter time period before a product becomes profitable. Manufacturers don’t usually have exclusive rights to a supplier’s innovations, so they should be looking at suppliers further down the production chain.

Going straight to the suppliers’ suppliers, however, has its own challenges. Not only are there discrepancies between the capabilities of the larger company and smaller supplier (with regard to the scaling of innovative solutions and financing of larger orders) but also between their operational and management abilities. Leading manufacturers can achieve better results by developing the capabilities of their smaller partners.

Once down-chain suppliers become more involved in the development of innovative products or services, the process of procurement changes. When acquiring external goods or services, cost reduction can’t remain the core focus; achieving differentiation in the market becomes more important. Large businesses must evaluate a supplier’s innovativeness, the breakthrough potential of the innovations and their own ability to develop smaller suppliers in accordance with corporate requirements.

A balanced understanding of innovation management is vital for a successful value-chain network. The closer the companies and organizations in the chain are linked, the easier it is for the whole to differentiate itself in the market. What is required is a clear understanding of the level of ambition and the strategic fields in which they offer innovation to the market.

Author: Kai Engel is a partner with AT Kearney and the Innovation Practice lead for Europe.

Image: Businessmen hold a globe, 9 February 2007. Kieran Doherty/REUTERS

This blog is part of a series of articles lending context to the World Economic Forum’s work in the field of European entrepreneurship. Click here to read Nicholas Davis’s introduction to the series. 

For more articles on entrepreneurship in Europe, click here.