Skip to 0 minutes and 8 secondsSo far we have been discussing about aspects of open innovation, and discussing some of the benefits associated with it. The big question however that arises is, how does it happen and what actually collaboration means. Now, research has been dealing with such questions for quite some time. It has, for instance, tried to answer questions about how this collaboration leads to performance improvement. It has also tried to explore what aspects exactly of an organisation can you integrate with a customer or a supplier. Another interesting question is, what is the maximum level of integration after which potentially performance could start decreasing? And the final question is, what exactly is it that enables collaboration and integration?

Skip to 0 minutes and 53 secondsWhat factors does an organisation, or indeed a supply chain, need to have in place to allow the sharing of ideas across its channels?

Skip to 1 minute and 4 secondsNow, many of these questions have been explored by research that has been conducted not necessarily in an innovation related environment. So, for instance, we know that if you share information of forecasts and real-time sales, performance is likely to improve. What I mean here is that when, for instance, a customer is thinking or developing some sort of longer-term strategy about what they think they're going to sell in the future, they might be willing to share that with the suppliers. Similarly, if they know how much they're selling and when they're selling it, they might also want to share it with their suppliers.

Skip to 1 minute and 44 secondsSo for instance, these days if you go to the supermarket and buy something, chances are that that purchase that you're making has been communicated down the supply chain as well. And another aspect which is being developed with more than one organisation, with the supplier and the customer, can be the strategy where potentially a supplier and a customer sit together and they try to think about how to co-develop a strategy for where both are going in the future. There might be other business critical information which is being shared, but you can see that the point here is that working together and trying to share information across the supply chain can potentially improve performance.

Skip to 2 minutes and 26 secondsNow, some of the most prominent research that has been developed for this area has been conducted by Professors Frohlich and Westbrook. And what they did is that they classified the different types of integration according to how well and to what direction an organisation integrates with customer suppliers, and they referred or identified five different types-- inward, periphery, supplier, customer, and then what are called outward facing integration.

Skip to 2 minutes and 56 secondsNow, what they found, in a nutshell, is that different profiles of integration can lead to different levels of performance. And what they also argue is that the types of integration which are more outward looking, as in looking more towards a customer and a supplier, are the ones which are better linked with improved levels of performance. So questions that accrue from that is why does this actually happen? Well, one reason is because this kind of collaboration, integration, sharing of ideas and information is more likely to improve decision making. If you have, for instance, some idea about how many items, how many products your customers are going to buy, you're better able to make decisions about the capacity of your organisation.

Skip to 3 minutes and 41 secondsIt also enables calculated risk taking. If you have an element of certainty about how many products a customer is going to buy, you are better able to take risks and make investments about your organisation. It also increases commitment. You can imagine, for instance, that the supplier and the customer that are sharing data, they're better able to commit to each other, so it generates commitment to business and potentially provides access to new markets as well. So, for instance, suppliers, being businesses themselves, they might be looking for opportunities to expand into a different market, and that's potentially something that the customer can benefit from as well.

Skip to 4 minutes and 24 secondsNow, on the innovation side, things are a little bit more complex. Again, integration and collaboration is a good thing, as I'm going to conclude in a minute. But things are a little more complex, not necessarily because the type of information which is being shared is likely to be different, but again, it is key. Information here also acts as a means of gluing the supply chain together. It also allows the development of trust. You have to remember that when we're talking about sharing of ideas and sharing of knowledge, you're potentially sharing something which is not out there in the public domain. It's also likely to have a longer-term implication.

Skip to 5 minutes and 2 secondsSo again, openness to innovation requires the sharing of ideas, knowledge, and even new technology that is not actually developed yet. So if you accept, which we have accepted earlier in the course, that idea generation does not happen in a closed environment, the innovation must be outward looking, accepting that the best ideas are out there.

Skip to 5 minutes and 29 secondsNow, there are several examples of how this can actually happen in practise. Now, first of all, suppliers and customers form alliances. For instance, a supplier and a customer might enter a new market in a new country, and they might want to do it together to share the risk, or to spread the risk, or to learn from each other. Some users can actually generate innovation. In fact, many of the innovations, many of the new technologies that you see quite often in sports equipment, quite often they do originate from people that actually use this sport equipment, so the other ones are more likely to have a direct benefit from it.

Skip to 6 minutes and 7 secondsSo there is a need to identify where this happens, and develop a process which allows the organisation to develop these integration opportunities, to share these ideas, and so on. And if this takes place, in general, research supports the view that integration is actually a good thing. It leads to improved performance, and in this case, to better products and services.

Skip to 6 minutes and 29 secondsSo it can help generate new ideas, potentially identify opportunities for improvement. So for instance, you can identify an area where a supplier, or a customers for that matter, underperforms in the way they produce a product and they can share ideas about how to improve a process. It can help develop a forum for testing the feasibility of internal ideas. So for instance, if a customer comes up with an idea which they may think has a commercial success, the supplier can then tell them whether that's a feasible thing to create, or whether that's a feasible thing to make and also explore new markets. So for instance, both the customer and the supplier side can open new doors in new markets.

Skip to 7 minutes and 15 secondsNow, later in the course we will be exploring some of the risks associated with open innovation, because clearly after a certain point some of these things can actually lead to decrease in performance. And we will also be revisiting the impact of integration as well.

Collaborating with suppliers

From the earlier exercise you might have found examples where a final product has been the result of several suppliers, customers, and sometimes even competitors working together.

This may lead us to ask:

How does it happen? Does it lead to performance improvement?

In this video, we’ll be looking at research on supply chain management which has been trying to address these questions for several years. One prominent piece of research, Frohlich and Westbrook (2001), makes the case for how integration leads to improved performance. We’ll discuss this and look at how collaboration can lead to greater trust, improve capabilities to forecast and plan ahead, help test out the feasibility of new ideas and explore new markets.

However, we are about to look at some of the risks associated with open innovation and we will be revisiting its impact on integration as well.

Further information

Liker, J. K. and Choi, T.Y. (2004) ‘Building deep supplier relationships’, Harvard Business Review, 82(12), pp. 104-113.

Flynn, B. B., Huo, B. and Zhao, X. (2010) ‘The impact of supply chain integration on performance: A contingency and configuration approach’, Journal of Operations Management, 28(1), pp. 58-71.

For a good discussion of the impact of key customers and suppliers on performance, see:

Al-Zu’bi, Z.b.M.F. and Tsinopoulos, C. (2012) ‘Suppliers versus lead users: examining their relative impact on product variety’, Journal of Product Innovation Management, 29, pp. 667-680.

Reference

Frohlich, M. T. and Westbrook, R. (2001) ‘Arcs of integration: an international study of supply chain strategies’, Journal of Operations Management, 19(2), pp. 185-200.

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Open Innovation

Durham University

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