'I': an endless source of innovation
Innovation can deliver game changing value to an organization. When it does happen it can establish and build a brand, create differentiators, create and grow market share and drive business growth. Innovation alone has the potential to transform a business and unlocking it requires some unique approaches. Therefore the fourth reason for a relationship and source of value is that of innovation.
It is easy to assume that supplier innovation means the supplier brings innovation to us. However, there are in fact four levels of supplier innovation, each providing different potential value (Figure 2.3). In its simplest form supplier innovation can mean taking advantage of new offerings or new technologies that a supplier provides into the marketplace, available to all. For example, the Apple iPad and successive tablets allowed organizations to use this new tool to become more effective: estate agents/realtors no longer need to carry files, school classrooms don't need books and designers can sketch out a concept and transmit it immediately. If we can agree exclusive rights to a supplier innovation, whether proposed by them or specifically commissioned by us, then the potential value is greater as we are securing the resultant competitive edge solely for our benefit. However, the ultimate value from supplier innovation comes through collaboration with the supplier throughout the entire innovation process, creating innovations that will either help the supplier and be made available to all or will be exclusive to us.
When Apple launched the world's first iPod back in 2001 it achieved this through supplier collaboration and managed to create new global demand in an entirely new and uncontested global marketplace; it created something people needed but hadn't realized so until they saw it. Kim and Mauborgne (2005) call this 'Blue Ocean' strategy and one that can create dramatic wealth and value for an organization. Many contributors helped create Apple's Blue Ocean product including key suppliers. The first iPod brought together many new supplier-led component innovations necessary to combine functionality with miniaturization including - ultra miniature hard drives, new flat lithium iron battery technology and new touch wheel technology. This, together with collaborations with content suppliers to create iTunes, and the innovation was realized. The rest is history, and the succession of different innovative world leading products since the iPod all feature significant supplier contributions within the innovation process. In November 1998 Steve Jobs told Fortune Magazine: 'Innovation has nothing to do with how many R&D dollars you have.' Indeed Apple's innovation appears to be more about the approach used which seeks to involve rather than instruct. Apple innovate with their suppliers rather than have their suppliers innovate for them. These suppliers didn't happen to turn up at the right time with precisely what Apple needed, instead it required a coordinated effort and that is precisely what is needed if we want innovation from our suppliers.
FIGURE 2.3 Degrees of supplier innovation
A further example is that of the Indian car manufacturer Tata who launched the Nano in 2009 - the cheapest car in the world, with a price tag of around $2,500. The Nano is made and sold in India and quickly became not only the lowest-cost four-wheeled passenger vehicle in the country but also one that rapidly appealed to the many Indians who drove motorcycles as, prior to the Nano, a car would have been unaffordable. In essence the Nano also opened up an entirely new marketplace. Achieving the Nano necessitated a complete innovative approach to car manufacturing. At the heart of the Nano was extensive Frugal Engineering, a phrase previously coined by Renault Chief Executive Carlos Ghosen in 2006 (Sehgal et al, 2010). However, this doesn't really do justice to the innovation behind the Nano, which is much more than just doing the same thing cheaper: instead it demanded a completely new approach called Low Cost Disruptive Innovation (Lim, Seokhee and Hiroshi, 2009). This disruptive innovation was achieved by putting the right suppliers on the design team but first Tata needed to select the suppliers they were going to work with. Although the Nano is an Indian car, Tata selected a handful of suppliers; each global players and leaders in their respective fields. Tata decided to engage with those companies who had the knowledge and expertise that could be applied to create a disruptive innovation product. Fuel and engine management systems by Bosch, tail lights by US company Lumax, driveshaft's by GKN, hollow steering shafts from Germany by Sona Koyo, Software by French company Dassault and exhausts by Emcon (Lim, Seokhee and Hiroshi, 2009). In the end Tata limited the number of direct suppliers to 100 who had the right capacity and capability to help Tata achieve its goals. 85 per cent of the Nano's components were outsourced to 60 per cent fewer suppliers than normal thus increasing leverage, economies of scale and reducing transaction costs (Johnson et al, 2008). This ground-breaking innovation was possible because the right suppliers were part of the design team.