Perspectives on supply network-enabled innovations.
Recently, an increasing number of academic and practitioner articles in supply chain management have stressed the importance of leveraging supplier capabilities for innovation performance (e.g., Choi & Krause, 2006; Henke & Zhang, 2010; Ketchen & Huh, 2007; Koufteros, Edwin Cheng, & Lai, 2007; Van Echtelt, Wynstra, Van Weele, & Duysters, 2008). In knowledge-intensive industries such as computers, electronics, automotive, and semiconductor manufacturing, firms are increasingly relying on their knowledge assets and that of specialized suppliers in their supply network to produce innovative products (Macher & Mowery, 2004; Macher, Mowery, & Minin, 2007; Sturgeon, 2002). Firms like Hewlett-Packard and IBM have outsourced large parts of their manufacturing operations to contract manufacturers such as Solectron and Flextronics (Sturgeon, 2002). Similarly in the automobile industry, a significant shift in the value chain of the automotive firms has occurred where suppliers are increasingly responsible for designing new products and delivering subassemblies to the original equipment manufacturers (OEMs) (Sturgeon & Florida, 2004).
In these knowledge-intensive industries, value creation activities are dispersed among firms in the supply network that specialize in a particular technology or activity, with the focal firm acting as the "knowledge integrator" to create greater value for the stakeholders (Dhanarag & Parkhe, 2006; Moller & Svahn, 2006). This trend toward specialization and dispersion of knowledge in several industries ensures that firms can focus on what they do best while utilizing the unique capabilities of their suppliers for their innovation needs (Langlois & Robertson, 1992; Robertson & Langlois, 1995). However, a network of suppliers cannot be orchestrated for creating innovation without considering the firm's own internal innovation efforts (Foss, Laursen, & Pedersen, 2011). Therefore, it is important to understand how firms should integrate their knowledge assets with that of their supply network. In a recent review of literature on the role of interfirm networks in innovation (Ozman, 2008), this aspect has been identified as an important gap in the current literature.
This article addresses this important gap in our understanding of how a firm's supply network can enable it to achieve superior innovation performance. It focuses on the issue of how organizations should leverage knowledge in the supply network and integrate it with their own knowledge assets to increase innovation performance. Our aim in this article is to stimulate thought on this issue and identify key research frameworks relating to supply network--enabled innovation. We offer two closely related research frameworks that are anchored in the theories of absorptive capacity (Cohen & Levinthal, 1990) and ambidexterity (Gibson & Birkinshaw, 2004), respectively. Absorptive capacity is defined as the firm's "ability to recognize the value of new external information, assimilate it, and apply it to commercial ends" (Cohen & Levinthal, 1990, p. 128). Ambidexterity is defined as the capacity to "simultaneously demonstrate alignment and adaptability across an entire business unit" (Gibson & Birkinshaw, 2004, p. 209). The article draws upon information gathered from interactions with supply chain executives and current literature on innovation. Further, the article is also derived from a keynote speech that the lead author gave in Kolding, Denmark at an academic conference devoted to "Innovation in Business Networks."
The rest of the article is organized as follows. First, we define innovation and review the literature on how suppliers contribute to innovation efforts of firms. In the next section, we discuss the literature on absorptive capacity, the key theoretical anchor, and develop the arguments for the first framework that examines the role of suppliers in furthering a firm's innovation efforts. Next, we develop a framework that examines how firms can pursue both open and closed innovations simultaneously to generate superior innovation performance by adopting ideas from the literature pertaining to ambidexterity and the competing values framework (CVF). We suggest that highly innovative firms are likely to be ambidextrous in leveraging both open and closed innovation efforts.
INNOVATION AND THE SUPPLY NETWORK
Innovation is defined in this article as the process of making changes to products, processes, and services that results in new value creation to the organization and its customers by leveraging knowledge efforts of the firm and (or) that of its supply network partners. This definition of innovation lays emphasis on new value creation. These value creation efforts can be through product and service offerings or new business models, which change competitive dynamics for which the customers and markets are willing to pay a premium. Further, value creation is an important aspect of innovation that separates it from invention (science). For invention to be valuable, it must be embedded in a product, service offering, or a business model. This definition of innovation is also neutral to the innovation typology, that is, product or process innovation, and incremental or radical innovation, and the activity context, that is, manufacturing or service. Further, the definition recognizes the importance of the supply network as an enabler of innovation. In each of the innovation typologies, suppliers are equally likely to be innovation enablers. Noteworthy examples of supplier enabled innovations in different typologies exist.
In the product innovation context, Autoliv, a Swedish automotive supplier, helped Mercedes and BMW in the development of a new collision avoidance system and camera-based driver-assist system, respectively (Businesswire, 2012). Toyota's R&D centers have select suppliers embedded in its operations to further its product innovation efforts (Oliver, 2015). In addition, other firms like Cisco have extensively leveraged their suppliers for furthering their product innovation efforts (Gassmann, 2006). Similarly, in the process innovation context, suppliers have helped firms innovate their processes (e.g., Francis & Bessant, 2005; Voss & Zomerdijk, 2007). For example, OEMs in the auto industry actively collaborate with suppliers to improve environmental performance to cut hazardous waste in the automotive painting process (Geffen & Rothenberg, 2000). Ettlie, Bridges and O'Keefe (1984) and Song and Di Benedetto (2008) note that suppliers contribute to both incremental and radical innovations of the buyer. Incremental innovations introduce discontinuities at the firm level (microlevel) by requiring changes to technological, marketing, and operational processes. In contrast, radical innovations introduce discontinuities in the technological, marketing, and operational processes of the entire industry (macrolevel) (Garcia & Calantone, 2002). An example of this is Apple's introduction of iPod and iTunes that created a radically new business model requiring elaborate supplier relationships with contract manufacturers and with content providers.
In addition to being typology neutral, our definition also emphasizes the role of the supply network in innovations. While much of the current literature in supply chain management focuses on the role of supplier integration in specific innovation efforts (e.g., Azadegan, Dooley, Carter, & Carter, 2008; Droge, Jayaram, & Vickery, 2000; Ettlie & Pavlou, 2006; Koufteros et al., 2007; Peterson, Handfield, & Ragatz, 2005; Schulze & Hoegl, 2006; Song & Di Benedetto, 2008; Wagner, 2012), an important element of leveraging the supply network is that firms not just focus on innovation inputs from individual suppliers; rather, firms should adopt a strategic approach to leveraging innovation opportunities from the supply network. Drawing upon the definition of Choi and Krause (2006, p. 638), we define a supply network as "the possible network of upstream suppliers in the firm's value system directly or indirectly." The difference is that our definition includes possible suppliers in addition to current suppliers. It extends the definition of Choi and Krause (2006), who focus on existing direct and indirect suppliers of the focal firm. The importance of "possible" suppliers in the supply network arises under "open innovation" (Chesbrough, 2006).
In open innovation, a firm might involve suppliers in multiple stages of the product development process as needed. An important element of open innovation is the ability of the firm to utilize inputs from a diverse set of suppliers, small and large, during the research and development (R&D) phases (Chesbrough, 2006; Chesbrough & Crowther, 2006). This has been called an "outside-in" innovation process (Enkel, Gassmann, & Chesbrough, 2009, P. 312). A highly noted example of open innovation is the "connect and develop" program of Procter and Gamble (Huston & Sakkab, 2006). The program successfully integrates smaller suppliers to solve specific product and process problems. These problems are solved as they arise in the context (Huston & Sakkab, 2006). Further, suppliers that engage with the buyer in the open innovation process may, or may not, have had prior relationships with the buyer. In particular, specialized suppliers might be involved in solving a specific R&D problem that arises during development. These arguments and examples demonstrate the criticality of the supply network in furthering the innovation efforts of firms. We now develop our first research framework of firm-level supply network--enabled innovation efforts.
RESEARCH MODEL OF ABSORPTIVE CAPACITY, SUPPLIER INTEGRATION, AND STRATEGY INTEGRATION
Value chains are increasingly becoming modular (Sturgeon, 2002). Given this trend, firms find it difficult to keep up with new and emerging technologies and to invest in detailed development of the multifarious technologies available to them (Mol, 2005; Van de Ven, 2005). In the context of knowledge-intensive industries, several authors have noted that suppliers need to focus on what they do best and use best in class suppliers (Kogut & Zander, 1992; Quinn, 2000; Van de Ven, 2005). Van de Ven (2005, p. 367) notes, "As firms follow this advice, they become nodes in the network of a technological innovation system." As the experience of firms like Procter and Gamble suggests, firms no longer rely on just a set of immediate suppliers and their subsuppliers, but on a larger network of potential smaller suppliers with whom they may, or may not, have a current relationship. In this regard, the supply network is of critical importance in leveraging supplier technologies and processes. To enhance the likelihood of successful innovations, firms must increase their ability to engage with both "potential" and current suppliers. The importance of developing relationships with current suppliers in solution development and joint problem-solving is noted by several new product development studies (Azadegan, 2011; Azadegan et al., 2008; Dyer, 1996, 1997; Handfield, Ragatz, & Peterson, 2003; Wagner, 2012).
Organizational Knowledge and Supply Networks
In leveraging its supply network, the firm needs to commit itself to supporting innovation across the network (Dhanarag & Parkhe, 2006; Musiolik, Markard, & Hekkert, 2012). This can happen in two important ways. First, the firm must pursue practices that enable it to increase knowledge of products, processes, or technologies that have potential to add value to the customer. Knowledge can be developed by focusing supplier development efforts to aid firm specific R&D efforts and by developing supplier competencies to align with R&D activities (Choi & Krause, 2006; Mahapatra, Narasimhan, & Barbieri, 2010). These may require investments in technologies, processes, and people both within and across suppliers. In this context, Brusoni, Prencipe and Pavitt (2001) argue that firms should possess greater knowledge than what is currently used in order to be innovative. Second, mechanisms for two-way exchange of knowledge need to be implemented (Noordhoff, Kyriakopoulos, Moorman, Pauwels, & Dellaert, 2011; Sivadas & Dwyer, 2000). Evans and Wolf (2005) suggest several techniques that include simple communication, transparent processes, inculcating the right thinking, and encouraging teaming.
Kothandaraman and Wilson (2001, p. 382) note that in the context of a networked environment: "The drive to create value requires the assembling of core capabilities beyond the capabilities resident within the firm. Putting together a network of firms to build the set of capabilities necessary to build a market offering that delivers high value to the customer becomes a major strategic thrust of the firm." However, assembling the capabilities in the supply network requires effective integration of resident knowledge in the supply network with that of the firm. Supplier integration refers to the degree to which the firm is linked with its network of suppliers (potential and current) in exchanging shared ideas and solutions. Existence of shared mechanisms and common knowledge bases are important components of supplier integration.
Next, effective supplier integration must align with a firm's R&D strategy. We suggest that supplier integration must be aligned with strategy integration. Strategy integration is defined as the degree of awareness that the various departments within the firm have with respect to the R&D strategy of the firm. Awareness and alignment of the R&D strategy across departments involves two key steps. First, the firm should have a clear knowledge of its technology requirements and a plan for acquiring the technology, that is, it needs to develop a technology strategy. Second, technology strategy should be backed by appropriate financial and knowledge resources (Chiesa, 2001). Alignment between supplier integration and strategy integration is required to leverage supply network resources for innovation.
Organizational learning literature suggests that creation of new knowledge is often an evolutionary process that arises from a combination of innovation opportunity, technology appropriability, and the overall knowledge base of the innovating firm (Malerba & Orsenigo, 1993; Mazzanti, Montresor, & Pini, 2007; Schumpeter, 1934). Thus, when the firm's R&D strategy is in alignment with its supplier integration efforts, the organization might better deploy internal capabilities to create, combine, and appropriate both internal knowledge and that of its supply network. The rationale is as follows. Aligning strategy integration and supplier integration creates a better context around innovation efforts (Cassiman & Veugelers, 2006). Creating the appropriate context can reduce search efforts for new problem solution within and across the organization (Rosenkopf & Nerkar, 2001). The reduction in search efforts can lead to product concepts that are more likely to be acceptable to customers as creating new value, as the organization has a clear focus on the innovation context. We refer to the degree of success in generating ideas that create recognized customer value as "exploration success." It is these ideas that can turn into potential commercial successes for firms as they decide to back a product's commercialization in existing or new product markets. This definition of exploration success is related to exploratory innovation defined as "entering new product-market domains" (He & Wong, 2004, p. 483).
Further, successful commercialization of products that ultimately yield profits for the firm will require a significant amount of effort in successfully launching the new product. We refer to a firm's ability to successfully produce the new products and ensure their commercial success as "exploitative success." This definition of exploitative success is also similar to He and Wong (2004, p. 483), who refer to exploitative innovation as "technological innovation activities aimed at improving existing product-market domains."
In achieving exploitation success, the organization has to utilize its prior product, process, and technology knowledge in launching the product. Such prior knowledge is the cumulative result of the firm's past internal-and supplier-related efforts and is an important attribute of the firm's absorptive capacity (Cohen & Levinthal, 1990). Specifically, prior knowledge of the firm sets up the cognitive structures that underlie learning efforts (Ellis & Shpielberg, 2003). These cognitive structures are pivotal in a firm's ability to recognize new information that is externally available and relate such information to internal knowledge. Thus, prior knowledge is critical to processing and assimilating new knowledge into the organization's existing knowledge base (Cohen & Levinthal, 1990). Zahra and George (2002) note that absorptive capacity is not just the ability to acquire and assimilate information, but also the ability of firms to transform and exploit the information to create useful innovations. Accordingly, firms with superior absorptive capacity might be better at transforming exploration success into exploitation success as they can better manage products in ideation stages to make them a commercial success. However, the degree to which exploitation success is possible is controlled by the level of technology volatility (Choi & Krause, 2006; Johnsen & Ford, 2007; Johnsen, Phillips, Caldwell, & Lewis, 2006) and the degree of competition within the industry. In addition, other issues are critical to the innovation efforts of the firm pertaining to network attributes and firm's innovation culture. These are discussed next.
Supply Network Attributes and Innovation Culture
To effectively utilize supplier capabilities and technologies in product innovation efforts, a firm must take into account its position with respect to the supply network, complementarity of technologies within the supply network, and the method with which the focal firm controls the suppliers in the network.
First, the position of a firm in the supply network can influence the way in which the firm innovates (Ahuja, 2000). The number of direct ties that firms have with their supply network partners is a significant factor in superior innovation performance. In contrast, indirect ties are not as helpful in furthering innovation performance (Ahuja, 2000). In traditional supply chains, such ties may refer to the "tier" of the supplier in the network (Borgatti & Li, 2009). The number of direct ties can refer to the number of first tier suppliers to whom the firm is directly connected. Considering the position of the firm in the supply network is also important in realizing success in innovation efforts as the firm's position dictates the knowledge flows and innovation outcomes (Borgatti & Li, 2009; Galaskiewicz, 2011).
Second, the complementarities of technologies and products provided by the firms in the supply network can also influence the firm's ability to innovate (Luo & Deng, 2009; Sivadas & Dwyer, 2000). Firms such as Apple or Microsoft source both hardware and software components from suppliers. The sourcing of such complementary technologies might influence the overall efficiency of the new product development efforts of the firm.
Third, an important variable that impacts the ability of a firm to successfully utilize new knowledge in its supply network is the way in which the firm controls the network. Lamming (1996) dassifies the mechanisms of supplier control as cascade and interventionist. With cascade control, the firm "sits atop the network" and decides the policies within the network. The focal firm delegates the responsibility of the policy to suppliers and makes suppliers responsible for their actions (Lamming, 1996, p. 191). For example, the application developers for Google and Apple are independent businesses that take minimal direction from the focal firm. Many of these external developers are free to exercise creativity in product development given the autonomy provided to them by the focal firm.
In contrast to the cascade approach, with the interventionist approach, the focal firm tends to intervene in the supplier's actions. Such an interventionist approach is adopted by firms when the supplier plays a large role in the firm's core product offerings and influences its profitability. For example, Toyota, actively manages its network of suppliers and consults with them for process issues (Dyer, 1996, 1997). Johnsen and Ford (2007) label these two alternative strategies for exploiting supply network capabilities as "network delegation" and "network intervention." These strategies can significantly impact the firm's ability to develop new products.
Establishing an innovation culture is critical for managing innovation within the firm. For example, Lafley and Charan (2008), pages 2-3) note "Since A.G. Lafley became chief executive officer in 2000, the leaders of P&G have worked hard to make innovation part of the daily routine and to establish an innovation culture. ...They sought to create an enterprisewide social system that would harness the skills and insights of people throughout the company and give them one common focus: The consumer. Without that kind of culture of innovation, a strategy of sustainable organic growth is far more difficult to achieve." We discuss the influence of innovation culture in greater depth in the following section.
Our discussions thus far suggest the research model that is shown in Figure 1. It is a research model based on observational data and conceptual reasoning. To our knowledge, this framework is the first to integrate absorptive capacity (and organizational learning), strategy integration (organizational factors), supply network integration (external knowledge and supplier integration), and contextual variables (e.g., innovation culture) in a single research model. Further, it disaggregates exploration success and exploitation success as constituents of organizational innovation process. This framework when tested and validated would contribute to both the innovation and supply management literatures.
OPEN INNOVATION, CLOSED INNOVATION, AND AMBIDEXTERITY
Thus far, we have discussed the roles of absorptive capacity and supply network integration in the context of firms pursuing innovation. In this section, we discuss how organizations can pursue open and closed innovation in the supply network context. We suggest that organizations need to be able to manage both types of innovation effectively. This suggestion is rooted in the idea of ambidexterity. The framework is based on the CVF that brings to light the inherent tensions that underlie the pursuit of both open and dosed innovation efforts simultaneously.
Open and Closed Innovation
The role of suppliers, discussed in the previous section, can also be seen in light of the emergent phenomenon of "open innovation." According to Chesbrough (2006), "open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas ... Open innovation assumes that internal ideas can be taken to market through external channels." The current literature on innovation distinguishes between closed or internal and open or external innovation (Chesbrough, 2006). In the closed innovation process, research, development, and marketing phases are distinctly identified. Within the closed innovation process, the confines of innovation activities are within the firm. This can be attributed to intellectual property concerns as firms strictly control the management of their ideas (Chesbrough, 2006). From a product development viewpoint, Chesbrough (2006) notes that closed innovation allows a firm to overlook false positives in product development efforts. Unlike closed innovation that relies on "internal" knowledge utilization and exploitation, open innovation utilizes supplier leveraging, codevelopment, joint venturing, and/or crowd sourcing. In open innovation, the degree of interaction with outside entities (e.g., suppliers) and leveraging of external knowledge is high, and hence, open innovation might generate better ideas that create customer value.
In today's supply chain environment, it may be argued that all large-scale innovations are open in that some part of an innovative product might be purchased from the suppliers. This misses the point. The resolution of this confusion is to be found in the definition of open and closed innovation. While open innovation integrates external (including supplier) knowledge, it is different in the sense that open innovation is characterized by a loose governance process compared with cultivating a structured supplier involvement in a long-term relationship. Further, in comparison with close collaboration with a supplier, open innovation efforts focus on problem-solving where a buyer can engage with smaller suppliers for specific projects in addition to cultivating long-run suppliers. In contrast, dosed innovation is characterized by a structured governance process, ownership of intellectual property, and internal development and management of innovations. A pictorial depiction of the distinction between open and dosed innovation is shown in Figure 2. (1) As seen in Figure 2, the boundaries of the open innovation process are more porous than that of the closed innovation process. It should be noted that supplier integration in the context of open innovation differs subtly from that of dosed innovation, which conforms to the traditional view of supplier integration, in that the innovating firm can search and engage with suppliers opportunistically.
To successfully leverage the open innovation efforts, an organization also needs to consider its own, that is, within-firm, innovation efforts. While the literature often discusses supplier integration, few studies have considered the role of how open innovation efforts and closed innovation efforts coexist. The simultaneous pursuit of open and closed innovation efforts might also assist the firm in more effective supplier and strategy integration. Despite the advantages of open innovation, our review of the literature and discussions with managers in multiple large firms that have successful innovation programs suggest that it is imperative for an organization to have efficient inhouse R&D efforts in order to leverage the supply network for innovation efforts. In addition, Moller and Svahn (2006) and Dhanarag and Parkhe (2006) in the context of an innovation network, note that firms must play a central role within an innovation network to be able to integrate the knowledge across the network. Thus, if a firm needs to exploit the knowledge available in the network, it must possess knowledge of how the diverse constituents interface with each other. A firm might possess such knowledge if the firm's own innovation efforts are relatively strong, and the firm is good at conceptualizing new products that will be successful in the marketplace. Therefore, there is an implied dependence between open innovation and closed innovation. Overall, organizations need to be equally good at managing both external open innovation efforts and internal closed innovation efforts. Thus, open innovation efforts, if pursued in the absence of internal innovation efforts, may not result in superior innovation performance. We now discuss the role of within-firm processes in closed innovation efforts. In addition, we present two case studies that offer varying degrees of open and closed innovation in order to motivate the issue of ambidexterity in innovation efforts before motivating our research framework stemming from this discussion.
Managing Stages of Innovation
In this section, we focus on the role of within-firm processes that enable innovation efforts. We then discuss the stages in which the firm may integrate its efforts with its supply network via open innovation. Innovation in organizations proceeds through discernible stages, from initiation (or discovery) to successful commercialization of a new product or service or implementation of new business models and new ventures. Based on the experiences of a major durable goods manufacturer, (2) the various stages through which the innovation cycle proceeds are: (a) initiation or discovery of an invention, (b) launching an innovation initiative, (c) embedding the initiative in the organization, (d) focusing the innovation effort, and (e) successful commercialization of innovation. Figure 3 captures the various stages of this innovation cycle.
While initiation and launch of an innovation initiative are situations characterized by an abundance of ideas, the embedding stage narrows down the innovation project to concept refinement in a traditional product development funnel, and finally, focusing the innovation effort is important for refining and finalizing the product and building commercial versions for the marketplace. At *this stage, the innovation can yield revenues for the organization. Successful commercialization is the key to appropriating value from innovation efforts. We refer to such value appropriation as exploitation. In particular, new idea generation (on product or process) might be a critical component of the launch, embedding, and focusing stages. In these stages, the organization needs to invest in building value (value investment) into the product and returns are negative. Activities in these phases may be classified as exploratory as the organization will engage in learning through planned experimentation and modification of its ideas (Baum, Li, & Usher, 2000, p. 768). During the exploration stage, the resource commitments to innovation efforts will far exceed returns.
In contrast, it is implementation of ideas that generate value to the firm by leveraging innovation initiatives. In this innovation phase, the organization has actively commercialized the product and is appropriating the value that is invested in the innovation. This phase is characterized by value appropriation. Activities in this phase can also be referred to as exploitative as the organization engages in learning through refinement of the ideas in commercialization and leverages existing routines for appropriating commercial value of the product (Baum et al., 2000; p. 768). These terminologies also have parallels to traditional definitions of exploration and exploitation as argued in the learning and innovation literature (Baum et al., 2000; March, 1991). We refer to the phase between the value investment and value appropriation as "innovation burst," to reflect the commercial returns that start flowing from the product(s). This is the key phase where potential spin-offs of existing innovations are possible, and innovation activities in the firm reach their peak (see Figure 3). In the early stages of innovation, the organization needs to be accommodative of the variations that are possible in order to gain a successful product(s). Commercialization and extension of product lines are activities where firms refine products and rely on existing routines to appropriate value. From a strategic perspective, an organization might choose to engage suppliers at any phase of the innovation life cycle. However, depending on the stage of involvement, the level of supplier integration and strategy integration must vary. The stage of involvement might also set the boundaries between open and closed innovation efforts within the organization. Such a boundary might have an impact on both exploration and exploitation success of the organization, and also the financial returns from innovations, as discussed later. Irrespective of the boundaries, organizations must have some facilitating factors in place. Based on interactions with executives from a large consumer durable manufacturing firm, these facilitating factors can be identified as important enablers in making internal innovation effective across the phases in Figure 3, more so during the exploration phase. These include innovation culture, involvement, and commitment of top management, dedicated (and dispersed) innovation teams, metrics and incentives, resources, and a structured set of processes to guide the innovation effort. Some of these factors have also been alluded to in the NPD literature (see, for example, Cooper & Kleinschmidt, 1995).
Establishing a strong innovation culture might be a prerequisite to inculcating an innovation mindset in employees. Innovation culture is defined as the freedom that the employees of the firm get in generating new ideas, experimenting with existing ideas with a view to increasing customer value (e.g., Wei, O'Neill, Lee, & Zhou, in press). The literature on the resource-based view suggests that an organizational culture that is supportive of innovation can be an important competitive advantage that is valuable, rare, and inimitable (Barney, 1991). The culture of innovation can increase the ability of the firm to generate superior ideas through multiple pathways. These include a better ability to manage uncertainty (Covin & Slevin, 1989; Wei et al., in press), superior employee satisfaction (Zhou, Gao, Yang, & Zhou, 2005), and a better ability to engage with both internal employees and suppliers on innovation efforts. A culture of innovation leads to the formation of cognitive structures within the organization that are conducive to building routines that encourage innovation (Fiol, 1991). An innovation culture is developed by openness to new ideas, willingness to experiment, challenging new ideas and solutions openly, willingness to take risks, rewarding risk-taking behavior, and structural and infrastructural support to individuals and teams (Amabile, 1996). Defining the right set of challenges during the launch and embedding stages is a leadership responsibility (Laursen & Foss, 2003).
Innovation culture within the firm facilitates exploration of new ideas and exploitation of those ideas into new products across the stages of innovations described in Figure 3. Human resources management practices along with top management involvement and adequate resource allocation are key components of establishing an innovative culture and unleashing the creative potential of an organization (Kelley, 2001). Specific practices have to encourage experimentation and risk-taking without fear of failure (e.g., see Berkun, 2007; Kelley, 2001). Examples of encouraging innovation-driven culture are found in firms like Google and 3M. Google is known for providing about 20% of the employee time for creative activities within the firm; so is 3M, known for allowing employee-sponsored projects (Berkun, 2007). Products like Post-it notes and Google news are byproducts of these practices (Hayes, 2008). Focusing on top management, the support of top management is critical to innovation processes (Cooper & Kleinschmidt, 1995). Specifically, top management support enables the organization to allocate necessary resources to innovation efforts. In addition to defining the right set of challenges and setting the culture, organizations must also develop a comprehensive measurement framework for their innovation efforts to appropriately direct resources. Such measurement efforts must span the different phases of innovation efforts from conceptualization to commercialization. For an example of such a framework, we refer the reader to Kerssens-van Drongelen and Cooke (1997). Such efforts might improve internal R&D efficiency.
Organization Structure and Innovation
Our discussions with executives suggest that an important issue that merits attention is the structure of the innovation-driven organization. Certain forms of organizational design within the firm can influence absorptive capacity. In particular, new organizational forms and team structures in organizations influence knowledge creation, dissemination, and utilization. Further, the structure of the organization might also impact how organizations learn and integrate internally and with suppliers. For example, new organizational forms are emerging in organizations such as Google that emphasize autonomous learning units that function as "pseudo-startups" and do not suffer from the layers of bureaucracy characterized in a typical large organization (Lacy, 2010). We call these free-forming, continually evolving knowledge-driven organizational forms--"knowledge cells" (KC). KCs are characterized by: (a) absence of formal reporting structures; (b) self-forming knowledge centric teams dispersed throughout the organization; (c) knowledge sharing both internally and externally; and (d) proactive informal networking and relational networking with suppliers and other knowledge entities that increase absorptive capacity. The presence of these multiple dispersed knowledge cells creates a dispersed organization structure which we term: "cloud organization." Figure 4 depicts a cloud organization, where the boundaries of the organization are not rigid; the cells depicted by dots in Figure 4 are dispersed in various parts of the organization. Two important aspects of the cloud organization are worth noting: (a) the dispersed nature of knowledge cells (i.e., node centrality is low) and the dense connections across functional boundaries (i.e., high network density), and (b) the openness of the organization to interact with external knowledge communities. Another important aspect of cloud organization is its ability to form and dissolve, and adapt and change as needed. Understanding cloud organizations, its determinants and outcomes will aid in explicating the contribution of such organizational forms to the innovativeness of organizations. Network theory and complexity theory could offer useful avenues for inquiry in this regard.
Combining Open and Closed Innovation Efforts
As mentioned before, firms might engage suppliers at any point in the innovation life cycle starting from ideation to commercialization. While suppliers might engage in the exploration efforts where they can help in idea generation and problem solutions, suppliers might also be involved in commercializing and sourcing activities. For example, Procter and Gamble often involves external suppliers in value creation opportunities (Huston & Sakkab, 2006). These suppliers could also be smaller suppliers that have unique solutions to a specific problem that P&G might face (Yuva, 2011). Such engagements might have an influence on the product development effort of the firm. Involvement of the respective stakeholders, internal or external, requires setting appropriate policies with regard to reward and involvement (Yuva, 2011).
In as much as innovation can be open or closed, it might be useful to think of the innovation "environment" of the firm as both internal and external. The internal environment refers to the R&D efforts that are internal to the firm and external efforts might relate to the R&D efforts that the firm engages in with its supply network. Firms often pursue both efforts simultaneously, and often to varying degrees. We illustrate this mix with the development of the iPhone and the Android-based smartphones.
First, the iPhone, widely considered to be an important breakthrough innovation in the fast-changing mobile phone industry, was started with collaboration between Apple and Cingular wireless--before Cingular wireless was acquired by AT&T (Vogelstein, 2008). The majority of the hardware and software were developed for the device by Apple on their own (Remneland-Wikhamn, Ljungberg, Bergquist, & Kuschel, 2011). For example, the touch-screen technology was developed and perfected inside the company for over a year. Further, Apple filed for patents on several technologies that were developed during the process (Vogelstein, 2008). Technologies were also acquired from suppliers that were specialized in specific aspects of the iPhone. ARM Holdings--a key chip supplier--was important in providing a chip that was designed for the specific purpose. In addition, Apple also worked closely with Cingular wireless to adapt the data network to meet the needs of the users (Vogelstein, 2008). Finally, the firm engaged in constructing an "app store" to integrate a network of application developers that created software that enabled customers to choose the phone's features to fit their needs, allowing some customizability (FierceDeveloper, 2011). The iPhone case illustrates how innovation efforts can be both internal and external.
Next, competing phones to the iPhone are mobile phones that are based on the Android operating system. The Android operating system was bought by Google from a start-up (Bloomberg, 2005). Unlike the iPhone development efforts that were internal to the firm (both Hardware and iOS--the software), Google released the Android operating system to the open handset alliance (OHA), early in the process. The 01-IA members ensured the compatibility between hardware and software. The Android-based phone initiative targeted "three axes; toward the mobile phone industry (i.e., manufacturers, operators, vendors), toward the users, and toward the application suppliers" (Remneland-Wikhamn et al., 2011, p. 215). The individual smartphone makers played an important part in developing the variants of the operating system early in the process to adapt the Android operating system to suit their hardware. Based on these examples, we see that while both Android-based smartphones and the iPhone were open to outside innovation, they differed significantly in how they utilized the capabilities of their network partners in developing the product.
In this example, Apple and Google pursued varying degrees of open innovation. Specifically, Apple had a lower degree of open innovation (in the development of the core hardware and software) compared with Google that made available the Android operating system to the 01.1A and allowed smartphone manufacturers to customize the software. Despite the contrasting styles, a common thread in these examples is that each of these firms created an "ecosystem" of supply network partners that contributed to their innovation efforts. They, however, differed in the degree and the stage in which external suppliers were integrated into their innovation "ecosystem," and the relative mix of internal (closed) and external (open) focus of their innovation efforts.
The word "ecosystem" is connotative of adaptation, dynamic change, and an open system that is constantly interacting with its environment, learning, and adapting in complex ways. This ecosystem can be thought of as constantly evolving, organizational subunits (or ecosystem partners) that are loosely defined and are constantly engaging with each other and with external entities (such as suppliers) (cf., Dhanarag & Parkhe, 2006). The principal point is that interactions among the ecosystem partners may vary in the degree of integration sought depending on the stages of the value chain. Pure open environments, for example, open source software development, may not be centrally planned by a single entity that "strategizes" all aspects of the development effort with ecosystem partners. For example, the smartphone manufacturers that work with the Android operating system, despite having a similar kernel, have enough flexibility to modify the interfaces and parts of the software as they deem fit. The smartphones were all different, but they were derived from the same operating system. Thus, Google's approach to open innovation, compared with Apple's, was less managed internally in the Android initiative.
A Competing Values Framework-Based Model of Ambidexterity in Innovation
The examples in the previous section illustrate how firms can vary in the degree to which they utilize open innovation and in the contributions from supply network partners. Each example underscores the importance of the supply network in facilitating innovation by the focal firm. Beyond Apple and Google, other firms in the auto industry such as Toyota, BMW, Mercedes Benz, Ford, and GM are increasingly engaging with their suppliers in order to pursue both product and process innovation efforts (cf., Choi & Hong, 2002; Dyer, 1996). However, we lack a comprehensive understanding of the relative mix of open and closed innovation efforts that lead to overall innovation success for the firm. We propose that the perspectives of the CVF (Quinn & Rohrbaugh, 1983) and ambidexterity (Gibson & Birkinshaw, 2004) might be useful in investigating the simultaneous pursuit of open and dosed innovation by firms.
The CVF is a seminal organizational effectiveness framework proposed by Quinn and Rohrbaugh (1983) to assess the effectiveness of organizational processes given the seemingly opposite requirements that managers often face. The CVF is a useful tool to demonstrate the key tensions between open innovation and dosed innovation approaches. The ideas pertaining to the CVF are shown in Figure 5. For a detailed discussion of the CVF, we refer the reader to Quinn and Rohrbaugh (1983).
The CVF enables us to better understand the competing demands in pursuing open innovation and dosed innovation simultaneously. We consider two opposite quadrants that appear to have trade-offs in managing the innovation process (see Figure 5). While the innovation processes within firms require flexibility to modify and change products, processes and technologies, the firm also needs to maintain control over innovations and its appropriability. The Internal--External (horizontal) axis in Figure 5 shows the tension between the internal and external dimensions of innovation. The external competitive positioning relates to the importance of innovation activities with respect to the needs of the firm's market posture and relates to its performance and customer satisfaction. In this context, the firm would need to interact with suppliers, customers, and other stakeholders and align itself to open innovation ideals to be able to capture market facing ideas and technologies, a point noted by Chesbrough (2006). The internal dimension focuses on the role of appropriability and control to make the innovation process efficient. The internal dimension also brings to focus the role of capability development. This can help the firm achieve its long-term innovation goals (Bettis, Bradley, & Hamel, 1992).
The Flexibility--Control (vertical) axis in Figure 5 shows the tension in the innovation process to simultaneously seek flexibility and control. By flexibility, we mean the degree of leeway the organization has in seeking innovation inputs from outside of the firm and changing the process to suit evolving situations. It is possible that in such situations, the organization needs to modify its approach to sourcing innovation through different contract structures. In this context, supplier relationships and integration become critically important. In contrast, organizations also want effective controls in managing the innovation process in order to have productive and appropriable R&D investments. Such controls can be both formal and informal. The idea that internally developed innovations might be fully appropriable for the firm is critical in this regard. It is possible that such a view dictates that suppliers may not be involved at all stages.
Drawing from these two axes, it may be said that closed innovation articulates the need for the firm to have an "internal-" and "control-" oriented focus that seeks to ensure efficiencies in the innovation process, control over new technology development and knowledge gains, and focus on innovation outcomes. Such a view might also adopt a conservative approach to protecting intellectual property. In the closed innovation context, the adaptation of the CVF is seen in the need for internal control, where the firm seeks to improve its innovation processes from idea embedding to launch and commercialization of products to maximize the value to the firm. In addition, control is also useful as firms seek to protect the technology and knowledge pertaining to the technology from being imitated (see Quadrant 3 in Figure 5, pertaining to a closed innovation environment). These characteristics reflect the typical R&D environments of the Bell Labs, Merck, Pfizer, Ford, and GM in their earlier days when the firms were vertically integrated and pursued both R&D and manufacturing within the firm.
In contrast, open innovation articulates the need for the firm to have an "external-" and "flexibility-" oriented approach to innovation to integrate suppliers, customers, and other ecosystem partners, and leverage external knowledge communities in order to be responsive to the customers and markets. Thus, the open innovation approach requires extensive knowledge exchange with suppliers, customers, and ecosystem partners. In addition, it requires building a better understanding of how partner knowledge complements the focal firm's knowledge domains. We note that organizations often must decide on the degree of open and closed innovation they want to pursue.
Overall, depending on the decisions made, the firm will occupy a distinctly different position along the diagonal shown in Figure 5. Internal organizational culture, resources allocated to innovation, and the level of involvement and integration with the supply network are directly dependent on where the firm chooses to be on the diagonal. We believe that in managing the competing demands between external focus and flexibility that relates to the open innovation environment, and internal focus and efficiency that relates to the closed innovation environment, organizations need to be ambidextrous in managing both. The ambidexterity notion is appropriate in this scenario as organizations need to pursue both "open" and "closed" innovation objectives simultaneously (cf., Gibson & Birkinshaw, 2004). Ambidexterity is often referred to as the alignment of business needs in order to create transactional efficiency on the one hand and adaptability to market requirements on the other (Duncan, 1976; Gibson & Birkinshaw, 2004).
Thus, in pursuing high value innovations that can impact the firm's long-term success, organizations need to pursue R&D processes that are tightly controlled internally, yet integrate with the supply network to produce superior customer value and market performance for the firm. Ambidexterity differs from trade-offs in that it emphasizes the fulfillment of two disparate (and occasionally competing) ends simultaneously rather than forcing a selection between two alternatives (Eisenhardt & Martin, 2000; Raisch & Birkinshaw, 2008). In this context, future research should focus on the strategic choice that firms make and how to effectively manage the pursuit of various degrees of open and closed innovations. In particular, investigation needs to be conducted on how ambidextrous firms might create innovations that have superior appropriability of financial value stemming from innovations and might even have lower break-even points than nonambidextrous firms.
We present a graphical illustration of this idea in Figure 6 and offer brief argument for why ambidextrous firms might have superior performance. For the purposes of this illustration, we label the curves in Figure 6 as the value--time curve. The curve indicates a trajectory of investments and returns that a firm can experience from innovation activities. In the exploration phase (as discussed in Figure 2), all innovation activities incur expenditure without any tangible returns as the organization strives to create marketable innovations. In the exploitation phase, the firms commercialize innovative products and start earning positive returns on their investment. The strategy that the firm pursues in managing the innovation process and the degree to which the firm pursues open or closed innovation can influence the break-even point of innovation projects and the returns from innovation investments.
The trajectory labeled "faster value capture" (curve 1) results in the firm concluding the exploration phases quicker than the trajectory labeled "slower value capture" (curve 2). Thus, the scenario in curve 1 incurs lower expenditure in the exploration phase and the "inflection point" is farther to the left compared with the curve labeled "slower value capture." Curve 1 might be a result of the firm being ambidextrous in implementing and executing both open and closed innovation processes in the early phases of the product development process. Such reduction in time can be a result of effective supplier integration, early supplier involvement, exploiting supplier knowledge, and superior supplier relations management in the organizations. Further, this could also be a result of quicker assessment of false positives in the innovation process as noted by Chesbrough (2006). These could be indicators of an effective open innovation process. Therefore, a firm that is ambidextrous in leveraging both open and closed innovation might have superior financial returns compared with a firm that does not leverage both open and closed innovation, and relies on own innovations solely.
CONCLUSION AND RESEARCH OPPORTUNITIES
In this section, we summarize some opportunities on supply network--enabled innovation that stem from our frameworks presented in Figures 1 and 5. We conceptualize both frameworks presented in Figures 1 and 5 at the level of a firm. Alternatively, these frameworks might also be applied at the disaggregated level of a specific innovation.
The model in Figure 1 brings forth the ability of the organization to integrate suppliers in the process of innovation (supplier integration) and alignment with respect to the execution and awareness of its innovation strategy (strategy integration). The proposed model in Figure 1 also emphasizes the importance of organizational issues (innovation culture, network attributes, and absorptive capacity) in addition to strategy integration and supplier integration. These organizational issues might be critical controls to both exploration and exploitation success. To explore innovations that are enabled by the supply network, it would be necessary to examine all three aspects. The proposed framework can guide future research on this topic. Salient control variables to focus on would include environmental dynamism and the degree of competition in the product market environment.
The model in Figure 5 presents a related issue of how an organization needs to balance the seemingly opposite goals of control and flexibility, and internal and external orientation of their innovation efforts. These efforts also have a close bearing on the nature of supplier integration pursued and the degree of strategy integration within the organization. We propose that ambidextrous organizations can realize superior benefits in terms of better financial returns and superior time to market of innovations from their investments. We believe that both of these frameworks are conducive to empirical testing and validation.
The purpose of this article was to offer some perspectives on how organizations can merge their innovation efforts with that of their suppliers to gain superior innovation and financial performance. As organizations increasingly become specialized and rely on suppliers for activities where they are not specialized, we believe that the issues outlined in the article pertaining to aligning internal strategy and suppliers will be critical to the overall innovation efforts of the firm. Further, becoming specialized not only increases the burden on a firm's R&D efforts to be productive, but relying on suppliers and the simultaneous pursuit of both open and closed innovation efforts are critical to organization-wide innovation efforts.
The purpose of this article was not to review or critique current literature on innovation but to present some new, albeit untested ideas to the research community based on interactions with practitioners in major multinational firms. Thus, we restricted ourselves from proposing new theories and certainly the article falls well short of proposing a theory of leveraging the supply network for furthering innovation. Having said that, we pursued the suggestions of Skilton (2011) and Rindova (2011) in explicating conceptual definitions where we believed greater clarity was necessary and also identified the clear gaps in the literature and proposed relationships that we believe have not been investigated in the literature thus far. Finally, we left out some factors such as firm size, industry, and R&D intensity among others that are common in a typical study on innovation. We acknowledge that these may be important, however, omit them due to their obvious nature from the article. The intention of omitting these variables is not to underemphasize these, but rather to allow us to focus on the core frameworks and new testable ideas that appear to be a gap in the current literature. We hope that this article can generate keen interest in exploring the connection between supply chain management and innovation, bridging the two streams of research.
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(1.) Figure drawn from Chesbrough, H.W. Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business Press, 2006.
(2.) Name withheld due to confidentiality.
RAM NARASIMHAN AND SRIRAM NARAYANAN
Michigan State University
Ram Narasimhan (Ph.D., University of Minnesota) is a University Distinguished Professor, and the John H. McConnell Endowed Professor, in the Department of Supply Chain Management in the Eli Broad College of Business at Michigan State University in East Lansing, Michigan. His primary research interests are buyer-supplier relationships, supply chain strategy, innovation and supply networks. Dr. Narasimhan has published articles in many important outlets, including Management Science, the Journal of Operations Management, Decision Sciences and the Production Operations Management Journal. He serves as a Senior Editor for the Production and Operations Management Journal, and is an Associate Editor for the Journal of Operations Management and Decision Sciences Journal. He has been awarded the Distinguished Operations Management Scholar award by the Academy of Management, and is a Fellow and Past President of the Decision Sciences Institute.
Sriram Narayanan (Ph.D., University of North Carolina-Chapel Hill) is an assistant professor in the Department of Supply Chain Management in the Eli Broad College of Business at Michigan State University in East Lansing, Michigan. He also holds an MBA and an undergraduate degree in mechanical engineering. Dr. Narayanan's primary research interests are in managing sourcing relationships, and in managing productivity and innovation in knowledge-intensive manufacturing and service supply chains. His research is informed by experience working for automotive and software firms. His research has been published or is forthcoming in outlets that include Management Science, the Strategic Management Journal, Production and Operations Management, the Journal of Operations Management and Decision Sciences. Dr. Narayanan serves as a Senior Editor for the Production and Operations Management Journal.
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|Author:||Narasimhan, Ram; Narayanan, Sriram|
|Publication:||Journal of Supply Chain Management|
|Date:||Oct 1, 2013|
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