Open your open innovation to suppliers
The role of suppliers in open innovation should be reconsidered as high tech companies have difficulty identify product/process innovation solely from users and customers. Dell pioneered to have its suppliers proactively engage in product and process innovation along open innovation process. Can Dell make the best practice of open innovation in high tech industry?
[Why open innovation with suppliers is important to Dell]
In the high-tech industry, open innovation is the commonly used method to drive product/process innovation by leveraging fresh perspectives from external stakeholders such as customers, user, and suppliers. Many technology giants such as Apple, Google, Baidu, and Microsoft proactively leverage open innovation to solve critical issues they face – they mostly seek innovation seeds from customers and users [1]. However, there have been less focus on who else can play a critical role in open innovation process in high tech and the role of suppliers has been often less highlighted than that of customers [2].
In today’s economy, competitive landscapes have evolved from competitions between individual companies to competitions between eco-systems of a group of companies – i.e., companies in one supply chain eco-system collectively compete with companies in another supply chain eco-system. Given that suppliers are usually involved in supply chains of multiple companies in the same industry, it’s significantly to have closer relationships with suppliers and have them play critical roles in open innovation in our company. In this regard, it’s the high time to rethink the role of suppliers in open innovation.
This situation is extremely relevant to Dell, the giant IT solution provider, since it has difficulty identifying innovative ideas from existing open innovation sources such as users. Dell has operated Dell IdeaStorm, an online platform, since February 16, 2007, to allow Dell to gauge which ideas are most important and most relevant to the public [3]. The innovation ideas are mostly centered around product innovation and marketing and/or service improvement, and few fresh ideas have been generated from users as time passes by. Dell is highly required to explore all key players and sources in open innovation process in order to continuously drive product and process innovation at the company – the key players/sources in open innovation are listed in Exhibit 1 [3].
[What Dell currently do to have suppliers in open innovation]
In order to get suppliers fully engaged in open innovation process, what Dell does differently are following three actions: (1) key supplier selection, (2) Innovation tour and (3) supplier innovation workshops. First, Dell evaluates technology capabilities of its suppliers and select top suppliers who Dell wants to collaborate with for product and process innovation. This evaluation and segmentation is done by the cross-functional teams that can evaluate suppliers’ attractiveness holistically from engineering capabilities to marketability.
Once target suppliers are selected, Dell conducts so-called innovation workshops with its select suppliers. Dell invites suppliers to workshops and give them chances to share pain points they experience and/or provide opportunities they see and brainstorm ideas together to solve the situations they mention or capture opportunities they describe. The areas of problem solving and innovation do not limit to new product development – they actually cover all possible interactions that Dell and suppliers can have through business operations. The ideas generated from workshops mostly handle short-term situations and opportunities [3].
For medium-term innovation, Dell make annual innovation tour to those select suppliers in order to understand what future technology they possess and what opportunities those technology ownership would generate for suppliers and Dell. A cross-functional team with deep engineering expertise and market understanding visit suppliers and try to find technology disruption in 2-3 years down the road. Given that suppliers need to share confidential information on their future technology, this activity actually takes quite a long time for both suppliers and Dell to agree to implement [3].
[What Dell can do differently]
In the short term, one thing Dell can do differently is to build true partnership with its select suppliers not only at working team level but also at CEO level. Dell can encourage CXOs to share company vision and product and service innovation strategy, thereby sparkling conversations on join research and development efforts.
Also, Dell should consider how they can become choice of customers to their suppliers over time. In order to receive innovation ideas, prior to competitors, from suppliers, Dell should become suppliers’ most favorite customer. Toward this end, Dell should build mutually beneficial relationships with its select suppliers over long term so that they can ensure having first hand access to innovations from suppliers. With these efforts, they can fully have its select suppliers in open innovation.
Open question: how can we continuously incentivize suppliers to share innovation ideas with us ahead of our competitors?
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[Citation]
[1] Kris Ferreira, Marco Iansiti, Karim Lakhani, Allison H. Mnookin, Willy C. Shih, and Michael W. Toffel, TOM Challenge: 2018, Harvard Business Review, October 22, 2018
[2] Xavier Nouguès, Damien Calderini, and Stephan Picard, OPEN INNOVATION: HOW CAN PROCUREMENT CONTRIBUTE EFFECTIVELY?, Oliver Wyman, 2017
[3] Dell IdeaStorm, http://www.ideastorm.com/idea2AboutIdeaStorm?v=1351322692099
In response to your question: I’m very skeptical that you can compel suppliers to share ideas with Dell ahead of competitors unless there are clear monetary incentives – either because Dell owns the leverage against its suppliers relative to its competitors or because Dell is offering favorable payment terms. Knowing how Dell manages its suppliers, I’m relatively skeptical that they will be willing to offer discounts or extended payment periods. As a result, I think Dell would have to make some sort of commitment to its suppliers (i.e., a willingness to use a certain supplier for a long period of time) in order to get suppliers on board with open innovation.
Your essay is thought provoking and caused me to consider other examples of innovation bubbling through supply chains and potential advantages of this. One that I found is the case of Taiwan Semiconductor (TSMC). TSMC is a semiconductor contract manufacturer that serves major firms such as Qualcomm, Nvidia, and AMD. For a long time, their technology lagged Intel, but over the past few years, a consensus has emerged that TSMC is out-innovating Intel[1]. Due to the nature of TSMC’s business model as a contract manufacturer, customers come to TSMC with ideas for things they want and ask if TSMC can make them, which provides TSMC insight into future customer demand and allows them to build new capabilities, whereas Intel performs no contract work and tries to predict where markets will go. As it served customers over time, TSMC developed significant differentiated know-how and proprietary technology.
For a more direct response to your question about how Dell may be able to benefit more from creativity in the supply chain, I might submit that Dell may have unused leverage with suppliers, and it can exert this leverage instead of attempting to curry favor with those suppliers. In 2003, The MIT Sloan Management Review published an article that segmented the open innovation ecosystem into Innovation Explorers, Innovation Merchants, Innovation Architects, and Innovation Missionaries[2]. Explorers seek advances in basic science, Merchants are companies such as Qualcomm that invest in and earn royalties from their IP portfolios, Architects are companies with strong commercial acumen such as Boeing that create parameters for a new product and then outsource significant R&D to suppliers, and finally, Missionaries are people and groups that develop new technologies without profit in mind, and Linus Torvalds, who developed Linux, is a prime example of this. Dell, it would seem, fits into this framework as an Architect because, even in its infancy, its success revolved not around fundamental R&D, but in operational efficiency it could wring out of the supply chain[3]. I would propose that, as long as Dell maintains its position as the third-largest computer vendor[4], it will have preferential access to cutting edge ideas from suppliers. In fact, I propose one thing Dell may be able to do better is leverage its heft to get suppliers to develop technologies for it, the way Apple does[5]. In order to do this and to take advantage of the creativity inside suppliers, Dell can potentially focus on moving up the value chain with respect to the products it creates: the company can define needs for suppliers and let them perform the innovation behind those products, while Dell focuses on its competency discovering market needs, marketing, and selling product.
[1] Ben Thompson, “Intel and the Danger of Integration,” Stratechery, June 25, 2018, https://stratechery.com/2018/intel-and-the-danger-of-integration/, accessed November 2018.
[2] Henry Chesbrough, “The Era of Open Innovation,” MIT Sloan Management Review, April 15, 2003, https://sloanreview.mit.edu/article/the-era-of-open-innovation/, accessed November 2018.
[3] Richard Ruback, “Dell’s Working Capital,” HBS No. 9-201-029 (Boston: Harvard Business School Publishing, 2003), p. 1.
[4] “Gartner Says 2016 Marked Fifth Consecutive Year of Worldwide PC Shipment Decline,” Gartner press release (Stamford, CT, January 11, 2017).
[5] Tim Bajarin, “How Corning’s Crash Project For Steve Jobs Helped Define The iPhone,” Fast Company, November 10, 2017, https://www.fastcompany.com/40493737/how-cornings-crash-project-for-steve-jobs-helped-define-the-iphone, accessed November 2018.
Interesting strategy by Dell. You’re right; most companies think of open innovation as it pertains to customers, but not really suppliers. There could be something to be gained by going Dell’s unique route!
To your question (how can we continuously incentivize suppliers to share innovation ideas with us ahead of our competitors?), I would say that the answer comes down to simple economics. If the innovation the supplier shares with us brings value to customers, and therefore customers have a higher willing to pay or buy the product at a higher volume, you could share some of the extra revenue earned with your supplier. If the supplier benefits from working with you than with your competitors, it will choose to work with and share information with you instead of them!
Great article and gives me an insight into how Dell manages its suppliers so well. However, I find a potential conflict with approach. The first step of selection is based on a supplier’s existing technical capabilities. These capabilities are further enhanced post the training which widens the gap between suppliers. If that be the case, unless a supplier had a close idea of getting selected, it would be difficult for them to share.
I wanted to respond to your question related to how companies can incentivize suppliers to share their innovation ideas.
There seems to be a fundamental tension here: To the extent that a supplier has an idea for innovation, why would it share the idea with a single customer instead of rolling it out across all of its customers (or leveraging it for its own, private label product)? The only way I can imagine this working is if a supplier and its customer somehow have their long-term incentives aligned. One way this could be true would be if a supplier believes a certain customer has the most promise moving forward (and would therefore generate the most profit by sharing their innovation with that customer). However, an even more innovative approach might be to somehow share economics of innovation between the supplier and customer. Perhaps the supplier could be an investor in the customer’s business to align incentives.
Very interesting article! I agree that most companies tend to think about open innovation from an exclusively customer-focused vantage point. Given how well-known Dell is for its management of suppliers, it would seem like the company is particularly well-suited to be a pioneer in engaging in open innovation with suppliers. Beyond ensuring that suppliers are incentivized to engage in innovation with us versus our competitors, I would also be concerned with ensuring that our suppliers are incentivized to promote the “right” kinds of innovation. Suppliers may be financially incentivized to propose process changes that reduce their own costs without materially benefiting Dell or its customers (or, in the worst-case scenario, actually harming Dell and its customers). With this in mind, I think Dell needs to think critically about what innovations they’re looking to their suppliers for and how to incentivize them appropriately. For example, innovations designed to specifically improve the customer experience should be tied to incentives related to end customer product sales.
It is important to maintain a good relationship with the suppliers by establishing the relationship at the CEO level; however, at the end of the day, all parties must benefit from a relationship in terms of economic. I would suggest that Dell set up incentive structure with its suppliers to align their interests by incorporating some variable fees so that both Dell and its suppliers want to make sure that they both will benefit together. I would also encourage transparency among the entities. They should share information and continuously brainstorm in order to maximize collaboration and come up with innovation.
Oh, this is cool! It reminds me of how Toyota worked closely with their suppliers to improve their processes and make sure Just-In-Time production would work. It also relates to the beer game, where we saw how the impact of poor coordination and communication within suppliers can cause costly impacts on the entire supply chain.
I believe that, in order to incentivize a supplier to share innovation, companies need to establish trust and suppliers need to believe that they will have a higher benefit by sharing. What Dell is currently doing addresses those two aspects, even more so when enhanced by the additional suggestions by the author. However, I also recognize that this might not work for other industries with different competitive landscapes.
This write-up provides an intriguing argument on how open innovation in one’s supply chain can benefit all organizations within the supply chain. Oftentimes, when people think of open innovation, they consider only the end user of the product. Feedback of this form routinely leads to comments that focus on creating a product that increases usability and adoption. However suppliers are uniquely positioned to provide feedback that can reduce cost, improve design, leverage best practices or draw from other field, address technical constraints and streamline manufacturing or operating process inefficiencies. To gain buy in from suppliers, Dell needs to effectively and adequately communicate how supplier feedback can not only lead to a better final product but increase profits for its suppliers. The information should flow in both ways as both Dell and the supplier should start a two-way dialogue on how to optimize production and supply chain management. There could also be a monetary, contract or branding/marketing incentive of some kind that promotes collaboration of innovative ideas.
This is an interesting issue. I think that open innovation in the supply chain will only work with suppliers with whom Dell has had a long-lasting relationship, and who exclusively (or largely) serve Dell. To your question about how to incentivize suppliers to share innovation ideas with Dell ahead of its competitors, I think that the best way to do it is through generous profit sharing agreements or through some sort of vertical integration (i.e. Dell being a shareholder of the supplier).
The practice of sourcing innovations via open innovation with suppliers seems logical at face value. However, one challenge of open innovation not addressed is its potential to actually increase costs. Dell likely has a extensive network of suppliers from whom it sources ideas. This inherently incurs substantial costs from the coordination of those ideas and collaborations. Just imagine all the incremental labor hours and infrastructure required to effectively manage this task; it cannot be insubstantial. It also poses the risk of Dell becoming dependent on outside innovation and losing its own internal innovative capabilities.
Dell has been able to successfully execute on the incentives to create a more efficient relationship with suppliers. I believe it is wise for organizations to share their ideas on innovations as long as it is mutually beneficial for both parties. If the organization is able to approach its suppliers with an innovative idea before its competitor, then it will be able to create a synergistic relationship between the two parties and generate a competitive advantage in the marketplace.
I think towards the end of this post, you began to address ways by which Dell could guarantee that suppliers share innovation ideas with them first. By creating a mutually beneficial relationship, Dell can encourage open flow of ideas and innovation. Currently, it may feel like Dell is using its suppliers and treating them as subordinates. By going onsite to observe them, Dell is creating a hierarchical structure that may not allow for the psychological safety needed for the open flow of ideas. Open knowledge should be a two way street in order to result in an exceptional product.
Great article!
I think such partnerships with suppliers have the potential to be advantageous to both parties, and more companies should look to innovating in collaboration with their suppliers. However, there are challenges to accomplishing this. To your question, companies need to create the right long-term financial incentives for suppliers (ex. revenue sharing) to make their suppliers willing to enter such agreements. In addition, trust is critical – there must already be long-standing relationships between the companies.