Working closely with your customers to tweak offerings and even business models is a standard business practice. But some companies gain ideas and insights from their customers’ customers as well.
By JAMES C. ANDERSON AND MARC WOUTERS
INNOVATIVE COMPANIES fund internal research and development to help them gain a future edge in the marketplace. They also work closely with their suppliers in an effort to offer greater functionality and performance for their customers. However, some critical new product insights come not from suppliers and customers working together but from the customer’s customers.
Although the supplier may have demonstrated the basic commercial viability of its offering, uncertainty can remain about what the best applications are and how to realize potential value. When suppliers and customers cooperate, they can “tweak” the technology. Relatively small changes can lead to big gains in value for the customer’s customers.
Recent research on customer-oriented supplier innovation has focused on how suppliers and customers can cooperate to create innovative products and services, with cost savings as the principal goal. Other research has taken an outcomes-driven perspective on supply chains, treating innovation as one of many outcomes. By contrast, our research focuses on the innovation process involving three participants in the value chain — the supplier, its customer and the customer’s customer — to understand how to achieve outcomes that otherwise would not occur, in a process we call tweaking the supplier’s offering. (See “About the Research.”)
First, we consider ways for suppliers and customers to increase openness to tweaking. Second, we discuss issues that are critical to successful tweaking. And finally, we explore how suppliers and customers can share the fruits of collaboration so that all parties gain from the interaction.
BEING OPEN TO TWEAKING
Although some progressive suppliers and customers saw potential benefits early and sought opportunities to co
To improve a medical product for dairy cows, Blue4Green launched a pilot program with a large veterinary practice that works closely with dairy farmers. operate in tweaking suppliers’ innovations, many of the executives we spoke to regarded this kind of cooperation as something to be done as a last resort. Being open was not the way that many companies — particularly large ones — preferred to operate. Typically, small suppliers saw large prospective customers as slow to make decisions. Meetings took too long to arrange, and even after basic understandings were reached, multiple levels of approval were needed before formal agreements could be worked out. In addition, large customers were known for being extremely aggressive in claiming any intellectual property rights to come out of collaborations, and this often undermined cooperation before it could begin.
ABOUT THE RESEARCH
We draw upon our research about both successful and unsuccessful instances of cooperation and tweaking to provide guidance on increasing the chances of success in situations where they are potentially valuable. Our management practice research during the past three years has repeatedly found that in the majority of instances the potential benefits from cooperation and tweaking are not realized. We sought research participants that had recent experience in working with customers or suppliers to improve the value of offerings delivered to the customer’s customer. We pursued several channels to identify potential research participants. First, we participated in the Institute for the Study of Business Markets New Offering Realization Consortium and provided a brief overview of our intended research. Consortium members gave feedback on our proposed research, and we invited interested businesses to participate. Second, ISBM sent a request for research participation to its member companies, outlining our proposed research. Third, we contacted the directors of Kennispark, a network of startup businesses, and VentureLabTwente, a new business incubator for entrepreneurs, both located in Enschede, the Netherlands. They directed us to businesses that they believed would be good research participants. Fourth, we contacted businesses associated with the Technology Innovation Center, an Evanston, Illinois, business incubator. Finally, one of the authors was a faculty member at the Kellogg School of Management’s executive program, “Creating and Managing Strategic Alliances,” where he solicited research participants.
In all, our research is based on 24 companies, located in the United States and Europe. They represent a variety of industries, including bioenergy, consumer electronics components, food packaging, microfluidic devices, motion sensors, telecommunications, veterinarian diagnostic devices and way-finding systems. In most cases, we conducted field interviews with senior managers. We did follow-up interviews to pose additional questions and to learn of the progress that they were making in their initiatives. As is often the case with inductive management practice research, few businesses excelled in all aspects. In developing the article, we drew on best practices and lessons learned from unsuccessful experiences.
Large customers also tended to withhold information from their suppliers about how they used the suppliers’ technologies and their customers’ applications. They also limited access to their own customers. Certainly, businesses should protect proprietary information. Nevertheless, our research suggests that some go too far, losing out on opportunities to improve value for their own customers. Micronit, a microfluidic device manufacturer in the Netherlands, estimated that it could have reduced costs to one customer’s customer by 20% had the customer been more open about the requirements of its customer.
Viewing problems as opportunities to further develop the technology. Many suppliers of innovative technology are small, young startups seeking to get the most out of limited resources. Frequently, they are so oriented toward further developing their technology that when customers contact them about technical problems their customers are experiencing, the startups may see it as a nuisance. We found, however, that suppliers can benefit when they treat problems as opportunities to build out applications. By being open, they can gain knowledge that can subsequently be applied to other applications and advance the technology itself. XSENS, a Dutch supplier of three-dimensional motion sensor technology, offers a good example. A German customer using XSENS’s technology for a new application was seeing initial success in tests and field trials, but then it encountered a problem. In diagnosing the cause of the difficulty, XSENS identified a potentially fertile area of development. The customer introduced XSENS researchers to one of its customers, which allowed XSENS to examine the problem in detail and develop a technical solution. Although the new solution required users to change their operating procedures (for example, periodically changing the orientation of the motion sensor), it improved accuracy by an order of magnitude.
Identifying opportunities to tweak. Rather than resisting collaboration, some technology businesses consciously integrate opportunities to cooperate with their customers and customers’ customers into their business model. For example, Knowfort Technologies BV, based in the Netherlands, sells technology for applying coatings to films used in transparent packaging. Managers at the company recognized early on that because there are many types of packaging, they needed to work closely with customers and, in some instances, their customers’ customers, to produce the right solution for each application.
Although Knowfort is a subsidiary of Royal DSM, a large life sciences and materials science company based in the Netherlands, management was wary of how difficult it might be to negotiate deals with large companies. So rather than pursue large company customers, it focused on medium-sized, regional film producers that might be interested in licensing its technology. Because these businesses operate without large R&D departments or pilot plants, they are more likely than larger companies to be open to partnering with suppliers that can give them and their customers a competitive advantage.
Blue4Green, a company in the Netherlands that markets a handheld device for measuring the calcium level in the blood of dairy cows, pursued a different partnering route. Although the company’s founders knew that calcium deficiency in dairy cows was a serious problem for dairy farmers — resulting in lower milk yield, lower fertility and higher veterinarian costs — they recognized that creating useful products required active engagement with its customers and those customers’ customers. The company initiated a pilot program with a prospective customer (a large veterinary practice) that worked closely with a large number of dairy farms.
Based on feedback from the customers, Blue4Green made some important changes to its prototype. For example, it improved the way data were displayed, making the data more user friendly, and it added Wi-Fi connectivity, which was more practical for most users than mobile phone network connectivity. The customer interaction also opened management’s eyes to an opportunity that was potentially bigger than they had originally seen. Rather than focusing only on those animals that were seriously ill, they could monitor the dairy farm’s entire herd to increase milk production. ISSueS To ReSolVe For companies looking to take advantage of tweaking to improve their product offerings, there are two key issues to consider:
1. Is direct contact between the supplier and the customer’s customer preferred, or will indirect contact through the customer suffice?
2. How does a business bridge different partial understandings to improve its chances of success?
Should contact be direct or indirect? Direct contact with the customer’s customer gives companies unfiltered feedback and the chance to better resolve ambiguities that arise in real time. Such open channels of communication can spark discussions that highlight problems and point to opportunities that might not otherwise surface. Although being able to interact with the customer’s customer directly is desirable in many instances, businesses that aren’t able to arrange for this can take steps to maximize what they learn from their indirect contacts.
Consider Demcon, which develops advanced mechatronics subsystems in the Nether lands for use in high-tech systems and medical devices. In collaborating with customers on new products, Demcon’s managers and engineers review the most recent documentation from the customer; unfortunately, the final specifications are often still being determined. Even so, Demcon is able to ask questions, evaluate the decision-making process and make judgments about whether the customer was sufficiently rigorous. How many doctors did the company talk to? Which user scenarios were described, and how were they documented? Depending on what Demcon learns, it can either ask additional questions or request direct contact with the people who will be using the new product. In some instances, Demcon even asks to observe the medical procedure for which the new device is intended.
Companies use a variety of techniques to get the most from indirect contact with customers. As part of its product development process, for example, Micronit advises its customers what they should ask their customers and prospective customers. As the company’s chief technical officer explained, it’s critical to understand the conditions under which a product will be used. For example, if a customer accidentally drops a cartridge, should it be durable enough to still be usable? Direct contact with the customer’s customer, however, can provide valuable insights, as a recent experience of SONR Labs nicely illustrates. SONR, a Chicago-based provider of chips, software and reference designs for use in consumer electronics accessories, was collaborating with a customer to develop a dock that enabled Android smartphones to play music. As part of the research, the customer encouraged SONR to take part in joint sales calls with prospective retail customers. During one such call, a new application came to light. What about having the dock function as a speakerphone as well as a device for listening to music? Responding to this suggestion, SONR was able to tweak its technology to make that possible.
In cases where direct contact between the supplier and the customer’s customer occurs, the customer may need to inform the supplier about commercial concerns. The customer should coach the supplier beforehand as to what’s okay to discuss and what to stay away from. For example, one research participant told us of an instance in which the customer advised him not to comment on the overall construction it had done (for the customer’s customer, this was a sore subject), but to limit his comments to his technical expertise for testing potential fixes for the problem.
How do you bridge different partial understandings? An inherent challenge in tweaking supplier innovation is bridging different partial understandings. Suppliers may not know how the customer’s customer would use the supplier’s technology and how it interacts with other technologies that are part of the application. The customer’s customer may not be fully aware of the supplier’s development capability and the types of technical changes that are feasible. Finally, the customer in the middle often lacks a complete view of either its customer’s application or its supplier’s technology and consequently how to relate the two. Finding ways to bridge those partial understandings is critical to generating the insights that lead to successful tweaks.
When three businesses in a value chain — a customer, its supplier and the customer’s customer — work together to improve an innovation, the challenge of achieving a sufficiently shared understanding of technical detail to enable problem solving becomes greater than when just the customer and its supplier are working together. The task becomes even more difficult when a customer opportunistically withholds information gained from its own customers, rather than sharing that information with its supplier.
Businesses can work to expand their abilities to transfer and integrate knowledge from other parts of their value chain into their own businesses. Biomass Technology Group, for example, provides technology and critical parts for converting biomass into liquid biofuel. Its customers operate plants commercializing this technology to produce biofuel. To learn more about its customer’s customers, BTG, based in Enschede, the Netherlands, started a new business to do contract research into applications of liquid biofuel. The business, BTG Bioliquids, assists its customers’ customers in developing markets for biofuel and acquiring knowledge about how their product can be used in existing power plants. At the same time, BTG gains insights into how it can tweak the technology it supplies to its customers, which consequently makes the biofuel more valuable to its customers’ customers.
Smart Signs Solutions, also based in Enschede, the Netherlands, takes another approach to bridge different partial understandings in its value chain. It designs dynamic sign systems for large buildings, including directional signs, door signs, meeting room signs and message boards. Although the company sells its offerings to installation companies, the sign systems are used in settings such as hospitals that are notoriously complicated for visitors to navigate. To better understand the context of the customer’s customers, Smart Signs relies heavily on direct communications with the facilities managers and intended users. It uses storyboards to display the overall design, the vision based on its completed projects and the technological possibilities. For prospective users, the storyboards are intended to stimulate thinking about what signage can contribute and what will help visitors find their way around. Smart Signs then refines its proposed offering based on the feedback it receives.
Perhaps the most inventive way to bridge different partial understandings is to share an employee. When Blue4Green and its veterinarian-practice partner were developing the prototype for the handheld device for monitoring the health of dairy cows and test its features, the veterinarian practice hired a young veterinarian on a one-year contract specifically to assist with the pilot program project. The veterinarian was responsible for taking measurements at the dairy farms and learning about the dairy business in order to make the measurements relevant in treating calcium deficiency. After the pilot program, Blue4Green recognized that it needed the expertise of a vet to assist in further developing its product. Blue4Green reached an agreement with the veterinarian practice that the individual who worked on the pilot program remain on the payroll of the veterinarian practice, with Blue4Green paying 50% of her salary, plus expenses.
An intriguing finding from our research about what suppliers learn from working together with their customers and the customers’ customers wasn’t about fine-tuning product features but about evolving business models. Some suppliers discovered that changes in their business models could make their offerings more valuable. Because its offerings were so technically oriented, Smart Signs, for example, assumed that customers were attracted to its offerings because they were state-of-the-art. However, management discovered instead that customers preferred simpler versions of the offerings, but they did find an integration service valuable.
This revelation came during a presentation the company made with a partner organization to a prospective hospital customer. Managers presented two alternatives: option one included only door signs, leaving it to the hospital’s IT department to develop the control system and integrate it into the information system. Option two had Smart Signs developing the control system and taking responsibility for system integration. The hospital chose the second option, which was priced 20% higher but saved the customer work and potential headaches. Even though the higher price didn’t cover all of Smart Sign’s development costs, it permitted the company to produce a more complete offering that it could market to other prospective customers.
Being open to new business models can result in new opportunities for growth. Blue4Green’s initial plan was to develop a test on a chip for a handheld device that could test dairy cows for serious calcium deficiencies. Based on the pilot program, though, the company decided to launch a second business offering to veterinarians and dairy farmers — an online veterinary management system and a preventive calcium-deficiency program.
SHARING THE FRUITS OF TWEAKING
When a supplier and its customer cooperate to tweak the supplier’s innovation for the customer’s customer, each has a stake in success. First, both the supplier and the customer want to secure the business relationship in hopes of tapping into future business. Second, through a better understanding of the respective costs and rewards — the “gives and gets” — the supplier and customer can look for ways to make cooperation more profitable for each of them. Finally, the supplier and its customer can create mechanisms for allocating the fruits of success whose value will become known only later.
Securing the business. Tweaking normally occurs during product development and testing, before an offering is in the market. When collaboration between a supplier and its customer results in improved value for the customer’s customer, both sides want to make sure of benefiting from initial sales and any future business related to the collaboration. A common starting point is for the supplier and its customer to have an agreement that defines their respective participation in the resulting business. In collaborative agreements with customers, Micronit, for example, seeks to define exclusivity in terms of time, product market area and specific design. It also tries to get permission to share cases of successful collaboration with others, which some counterparts will allow and others will not. When agreements can be made that reflect and reinforce the collaborative spirit between the supplier and the customer, both parties are motivated to secure new business that they otherwise could not.
When a supplier is willing to work directly with the customer’s customer, the supplier has an opportunity to demonstrate how it can add value or reduce cost. This can give the supplier an inside track when the customer’s customer details its future requirements. SolMates, which makes equipment for depositing thin layers of material in sensors and disk drives using lasers and is based in Enschede, the Netherlands, offers a case in point. Recently, SolMates worked closely with a customer’s customer to enable use of a thinner (and less expensive) coating layer. Based on this collaboration, the company in question is committed to purchasing equipment with specifications that only SolMates can supply.
Understanding the “gives and gets.” A supplier and its customer have a better chance of succeeding at collaboration when each understands how they would both be better off by cooperating. A “gives and gets” analysis can help clarify the opportunities. “Gives” are the resources that each participant will need to contribute, such as time and money. “Gets” are the gains that each can expect to receive, such as profits and intellectual property. Businesses must understand and evaluate these from both their own perspective and that of their counterparts.
When a supplier and its customer find things that they can do for each other for less than what those things are worth to the other party, mutually advantageous cooperation can occur. Although the participants in our research may not have done this kind of analysis in a formal way, there is evidence that both suppliers and customers were aware of how trading off “gives and gets” provided mutual advantages.
The patent filings by Knowfort offer a telling example. Knowfort has innovative technology that continues to improve as it collaborates with its customers on new applications, leading to new knowledge. The customers, medium-sized film producers, are more interested in working with Knowfort to commercialize the technology and gain an advantage in their markets than in focusing on the resulting intellectual property. Most customers are happy that Knowfort files the patents and pays the filing cost (Knowfort’s “give”) for developments that are the result of codevelopment (the customers’ “give”), particularly since Knowfort makes its patents available to all of its customers. Thus, every Knowfort customer benefits from the new knowledge created by Knowfort’s collaboration with other customers (the customer’s “get”), while Knowfort is able to augment its intellectual property portfolio faster than it could do alone (Knowfort’s “get”).
A recent experience of Vobal Technologies, of Evanston, Illinois, illustrates how the costs associated with a “give” are not the same as the value a business might place on the “get.” Vobal provides hardware and software for data compression, used to reduce the bandwidth needed for voice over Internet protocol (commonly known as VoIP). It tailors its offering to satellite Internet service providers, which provide data services to ships. One of Vobal’s customers mentioned that its customer, a shipping management company, wanted to be able to call its vessels as though each ship was simply another telephone extension at its office, and to do this for a fixed monthly fee. Further, when such companies were located outside of the United States, they didn’t want to pay international surcharges. Based on this feedback, Vobal was able to tweak its software and enable the shipping companies to communicate with their ships via Vobal’s servers and the Internet. In some instances, Vobal’s customers have found that this service option has helped them close sales with certain companies.
Allocating the later fruits that unfold. Sometimes the value of cooperating won’t be known for months or even years. Astute suppliers and customers can sidestep disagreements over future value by designing mechanisms that define the calculation for sharing the fruits rather than specifying prices or payments. Blue4Green and the veterinary practice it collaborated with were successful with their original pilot program. Yet both parties knew that their venture would be even more successful if they could enlist Wageningen University, an internationally recognized authority on dairy cows. When they were successful in doing so, their solution to the issue of how to value the intellectual property was an agreement whereby Blue4Green would have exclusive use of the resulting knowledge for commercial purposes, while the revenues from it would be shared three ways.
In a similar fashion, Knowfort, the coating technology supplier, hoped to collaborate with customers to develop new applications, but it was impossible to know if the projects would be successful or how much value they might generate. To deal with the uncertainty, Knowfort’s technology license agreements have two parts: an access fee and an application-licensing fee. The access fee is a onetime payment based on how and where the customer plans to use the technology. The licensing fee is a royalty based on the net value added by the use of the technology; Knowfort gets 25%. Although calculating the actual payment can be complicated, the mechanism provides clear incentives for customers to cooperate with Knowfort.
Cooperating to tweak supplier innovation for the customer’s customer makes sense under certain circumstances. Rather than reducing the customer’s costs, which has been the thrust of most supplier innovation, the supplier’s innovation instead is valuable because it enables the customer to deliver superior value to its customers. Separately, though, the customer must be able to contribute significantly to the value that its offering provides. When these circumstances occur,
there is potentially much to gain from cooperating to tweak, while each business can be secure because each plays a significant role in delivering superior value.
Based on our research, we have found that many suppliers and customers do not realize the potential value of the supplier’s offering for the customer’s customer. By following best practices, suppliers and customers alike can gain from successful tweaking. (See “Guidelines for Supplier and Customer Cooperation.”) When a supplier has success in cooperating with a customer to tweak the value of its innovation for the customer’s customer, we recommend that the supplier document the success in a value case history. This documented capability then can be used to persuade reluctant customers in other situations to give the approach a chance. Doing so can potentially enable those customers to deliver superior value to their customers, thereby helping them to differentiate their offerings from those of competitors. Given the many challenges of developing innovative technology, why let untapped potential slip by?
James C. Anderson is the William L. Ford Professor of Marketing and Wholesale Distribution at Northwestern University’s Kellogg School of Management in Evanston, Illinois. He is also the Irwin Gross Distinguished ISBM Research Fellow at the Institute for the Study of Business Markets at Penn State University. Marc Wouters is a professor of management accounting at Karlsruhe Institute of Technology in Karlsruhe, Germany
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