Perspectives on Supply Network–Enabled Innovations

• Author: Ram Narasimhan,Sriram Narayanan
• Date: 01 October 2013
• DOI: http://doi.org/10.1111/jscm.12026
• Published date: 01 October 2013

PERSPECTIVES ON SUPPLY NETWORK–ENABLED

INNOVATIONS

RAM NARASIMHAN AND SRIRAM NARAYANAN

Michigan State University

As organizations become increasingly specialized, their ability to engage

the supply network in innovation efforts is becoming critical to their

success. In addition, it is imperative for organizations to align internal

research and development strategies with knowledge available in the sup-

ply network in order to gain superior innovation performance. In this arti-

cle, we present some perspectives on supply network–enabled innovation

and discuss two frameworks that integrate a firm’s internal knowledge

with that of its supply network to achieve innovation objectives. The

inter-related frameworks discussed are anchored in the absorptive capacity

and ambidexterity theories. They explicate how firms can effectively align

internal innovation activities and knowledge available in the supply net-

work to gain superior innovation outcomes.

Keywords: innovation; supply network; absorptive capacity; ambidexterity

INTRODUCTION

Recently, an increasing number of academic and

practitioner articles in supply chain management have

stressed the importance of leveraging supplier capabil-

ities for innovation performance (e.g., Choi & Krause,

2006; Henke & Zhang, 2010; Ketchen & Hult, 2007;

Koufteros, Edwin Cheng, & Lai, 2007; Van Echtelt,

Wynstra, Van Weele, & Duysters, 2008). In knowl-

edge-intensive industries such as computers, electron-

ics, 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; Stur-

geon, 2002). Firms like Hewlett-Packard and IBM

have outsourced large parts of their manufacturing

operations to contract manufacturers such as Solec-

tron 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 ori-

ginal equipment manufacturers (OEMs) (Sturgeon &

Florida, 2004).

In these knowledge-intensive industries, value crea-

tion 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; M€

oller & 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 can-

not 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 net-

work. 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 inte-

grate 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), respec-

tively. Absorptive capacity is defined as the firm’s

“ability to recognize the value of new external

October 2013 27

information, assimilate it, and apply it to commercial

ends” (Cohen & Levinthal, 1990, p. 128). Ambidexter-

ity 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 cur-

rent 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 inno-

vation performance by adopting ideas from the litera-

ture pertaining to ambidexterity and the competing

values framework (CVF). We suggest that highly inno-

vative firms are likely to be ambidextrous in leverag-

ing 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 ser-

vice offerings or new business models, which change

competitive dynamics for which the customers and mar-

kets are willing to pay a premium. Further, value crea-

tion is an important aspect of innovation that

separates it from invention (science). For invention to

be valuable, it must be embedded in a product, ser-

vice offering, or a business model. This definition of

innovation is also neutral to the innovation typology,

that is, product or process innovation, and incremen-

tal 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 innova-

tion enablers. Noteworthy examples of supplier

enabled innovations in different typologies exist.

In the product innovation context, Autoliv, a Swed-

ish 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 cen-

ters have select suppliers embedded in its operations

to further its product innovation efforts (Oliver,

2015). In addition, other firms like Cisco have exten-

sively leveraged their suppliers for furthering their

product innovation efforts (Gassmann, 2006). Simi-

larly, 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 pro-

cess (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, rad-

ical innovations introduce discontinuities in the tech-

nological, 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 sup-

plier integration in specific innovation efforts (e.g.,

Azadegan, Dooley, Carter, & Carter, 2008; Dr€

oge, Jaya-

ram, & 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 addi-

tion 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 impor-

tance 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

Volume 49, Number 4

Journal of Supply Chain Management

28