How Supply Chain Strategy Can Help You Resolve The Innovators’ Conundrum

This is a million dollar question for most companies – start-ups or conglomerates. A lot of time and money is wasted either because the companies do not bother to ask this question in time, or try to answer it in the wrong way.

“What Comes First – Make, or Sell?” – this is a conundrum from millenia – akin to the chicken and egg question. Indeed, this may be the genesis of that famous question. I call this the “Innovators’ Conundrum.

Here is my answer to a similar sounding question on a popular forum.

A Good Story

Let me tell you a story from my book The 5-Star Business Network – Vivek Sood | Global Supply Chain Group :

One of our large corporate clients faced exactly this dilemma when investing in the renewable energies sector.

In simple words, the dilemma was whether or not an entrepreneur with a good idea should go looking for customers or go looking for the ability to build the product/deliver the service.

Innovation can be driven either by demand or supply

Depending on the choice made at this point in time, the two models of innovation will look very different as shown in the figure below:

Alternate models of innovation

There are enough proponents for both types of models. In our work with clients, this conundrum has frequently surfaced and is always argued quite passionately by different senior executives in either of the two camps.

On one hand, there are the proponents of the Reaganomics supply-side theory – arguing ‘if you build it, they will come’. On the other hand are the more traditional thinkers arguing unless we have the customers and services pre-defined, how can we build anything?

Objective analysis of key drivers of demand and supply will show the basis of innovation

In this story, as a way out of this dilemma, we listed the factors on which the decision was dependent. Among the factors were questions related to the certainty of the customer demand, such as:

• Are the real customers properly identified?

• Do the real customers know exactly what they want?

• Have the real customers communicated their demand to the market explicitly?

• How likely are real customers to change their minds?

• How easy is it for real customers to change their preferences?

On the other hand, there were several factors related to the level of innovation itself – whether it was just an incremental innovation or a giant leap. Key questions in this realm were:

• By what factor (multiplier) does this product/service improve the customer life?

• What are the existing means of getting the same value in use?

• What makes the new product better than the existing product?

• What tangible measures can be used to measure the superiority of the new offering?

• Do the real customer really value the new offering as superior as the provider does?

The board agreed that innovation will only succeed if the Supply Chain structure matches the demand and supply drivers

Based on these factors we developed the following matrix to enable answering the question:

Figure: Innovation Drivers and Supply Networks

Red box (Box 1) is the danger zone

In box 1 (red colour) – in a situation where the level of innovation is only incremental and the certainty of customer demand is very low – massive investments are required for customer education as well as for building a viable supply network.

This is because most potential supplier will see the situation as high risk and will only respond to monetary inducements to buy co-operation. A very high percentage of innovative efforts are in this square and, as a result, fail because of lack of deep enough pockets and difficulty of fighting the battle on two fronts simultaneously.

A basic supply chain would be the only possibility in this instance – where the organization has to move on two different fronts to build demand and supply simultaneously. This is shown in figure 8.3 (of the book mentioned above).

The key lesson for the players in the red box is that you need very deep pockets to fight the battle on both fronts – demand and supply.

If you lack that financing ability, try and move up or right – either find a niche of customers with pent-up demand looking for the right product/service by moving up, or move right in the matrix by creating a step change in the users’ lives by creating a product that far surpasses anything else available in the market place in terms of the customer experience.

If you cannot do either of these two things, keep looking for ways to make one of these two moves; or, consider scrapping the idea altogether.

Light Green Box (Box 2) needs more customer intimacy and/or supplier agility

Recall our client case study; the company, in this case, was in box 2 (light green colour) – with massive innovation but uncertain customer demand due to competing technologies promising similar magnitude of innovations.

In such a case, the business suffers from a chicken and egg situation. The customers do not buy because of some uncertainty, perhaps regarding which technology will ultimately win the battle; after all, no one wants to be stuck with a Betamax VCR and find that VHS standard has won the battle.

At the same time, the company is not in a position to invest too much in production capacity unless the customer demand is certain. Most businesses in this type of situation try and work with customers on a conditional basis – promising to build capacity if the orders are placed.

However, customers are not inclined to place orders because of the factors driving uncertainty in their own world. A way out of this situation then is to work with the supply network on a conditional basis – promising and delivering massive returns as the demand materializes.

The key is to find the right suppliers with the superior world-class capability and flexible capacity who are willing and able to understand the situation and work in it.

At the same time, flexible product design and investment in customer education to reduce demand uncertainty and increase buy-in also yield good results.

The need for flexibility, adaptability, ability to hold supply in readiness for the demand that builds up through education, clarity and events results in an adaptive supply chain that looks like alternative number 2 in the round figure above.

The key strategy is to make sure that suppliers and co-developers of technology and production capacity are fully on board with the plan and work alongside your business – as part of your 5 STAR Network.

If you have any doubts about any of the co-developers or suppliers, it is better to continue looking, negotiating and influencing till all the members of the 5 STAR Network are fully on board with you.

Consultants, think tanks, industry organizations, academia, research laboratories, brokers play a critical role in bringing together businesses that could form part of the same 5 STAR Network.

They play an even more important role in keeping the network humming smoothly, ironing out any wrinkles in the relationships. Such an adaptive supply chain is shown in Figure 8.4 of the book.

We have already seen how, in such an adaptive model, several organizations work together in an adaptive network to think and solve problems of their common customer/s.

Our client, an entrepreneur with massive innovation, used this model to work alongside some of the largest and best heavy machinery and engineering corporations in the world in order to bring their technology to the market successfully.

This was also a good example of the Fire-Aim-Ready (FAR) Innovation, but we will use yet another case example – of a much more ubiquitous product, an iPhone – later in this chapter to illustrate that effect.

Dark Green Box (Box 3) needs more supplier intimacy and/or customer flexibility

In box 3 (dark green) above the situation is exactly the reverse. Imagine a pharmaceutical company trying to find a cure for cancer or a number of other old age infirmities.

As the population ages, the demand is already present and growing. However, on the supply side of the equation, the research and development are being carried out in the laboratories of large pharmaceutical companies and their collaborating partners in academia, scientific establishments, consultancies and other organizations.

The patent system, to some extent, restricts the collaboration – barring this anomaly every company would be keen to collaborate much more openly to gain part of the returns of a first mover advantage in a blockbuster product.

However, in any scenario, an adaptive supply chain similar to the figure above will result in far quicker and more effective innovation at a much lower cost. In fact, that is the reason for collaboration, despite the patent laws.

Successful strategies in this scenario will hold demand in Supply Chains till supply eventuates. At the same time, the business will make massive R & D investments to build further product innovation and sell limited quantities to early adopters under limited conditions – which is indeed the case in the pharmaceutical industries.

We will not discuss the box 4 (yellow box) in this article because such a scenario, where demand is highly certain and the level of innovation is mammoth, is rarely encountered in real life. Such opportunities are snapped up in a jiffy.

All innovation must have an effective business network

We have seen how the super-networked businesses use their 5 STAR Business networks to build adaptive supply chains and gain a massive advantage in the field of innovation. But this does not happen only in the fields of pharmaceuticals or high technology.

Apple, Amazon, Inditex and many other case studies dispersed throughout this book demonstrate clearly how super-networked businesses innovate better than the rest of the businesses in their industry.

Consider the case of Apple once more. Whether it is iPads or Apple TV, the company has never shied from firing first and then taking aim towards the target.

For example, the much maligned and a total flop Apple Newton, released around 1995, served as the key platform for the eventual success of iPads. Just because the technology or the public was not ready for the product, Apple did not shy away from testing, learning, improving, testing again, learning more and eventually succeeding.

As it succeeded with other products and learned the lessons (get the iTunes and iPod ready before launching iPhone) it has had less number of flops along the way.

Eventually, Apple will be ready with a unique, highly personalized and anticipated experience for each customer – which is the holy grail of the modern era. Most successful companies have followed similar Fire-Aim-Ready (FAR) trajectory to innovation, and examples abound.

Your Company’s Innovation

If you have questions about your own company’s innovation strategy, send me an email on info@globalscgroup.com or take our diagnostic survey. The results are always enlightening for senior executives, as they always bring up some blind spots. Covering these spots will save you a lot of heartache, time and money.

I write about The Supply Chain CEOs, The 5-STAR Business Networks and Unchain Your Corporations. My website is at http://viveksood.com

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Vivek Sood

I write about "The Supply Chain CEOs", "The 5-STAR Business Networks", and, how to "Unchain Your Corporation". In my work, I help create extraordinary corporate results using several 'unique' supply chain methodologies. Contact me for interesting, high impact projects, or, to get access to my IP for creating transformations using these methodologies.

  • Helen says:

    Such an attention-grabbing article Vivek. I believe innovation management is significant because it is what helps the business remain competitive in the long run by letting it always stay ahead of competitors and have greater profit margins. The inability to realize the importance of innovation management leads to a company being stuck with its obsolete offerings, or at times causes it to go out of business, while its competitors begin to lead the industry by offering new and greater value to customers. Managers can support innovation and maintain its momentum by providing resources in the form of time, money and people. Organizations can promote an innovative idea with market potential by providing a budget for further development and allocating staff to a project team. Leaders can support the innovators by identifying team members who can bring a balanced perspective to the project.

  • Celena says:

    Good article on innovation Vivek. Each day, innovators in the business world create new products, methods, and ideas. They manage to look at problems differently and come up with solutions others cannot, and they provide an endless stream of value to their companies. In fact, innovation just might be the most important component of a successful company. Most importantly, in my view, the goal of innovation is to bring the idea to a productive position; whether this is a profitable product or simply a better way of doing something. It can improve quality, a service, a process or a management model. In short, it is the addition of value, even if there is not a monetary reward. When no monetary reward is achieved, we would assume that innovation is an improvement to an individual, group or society. But the question that really matters is this innovation really useful for the companies and individuals?

  • Jefferson says:

    Demand and supply factors absolutely form the basis of innovation. Supply and demand trends form the basis of modern innovation. If people demand good and are willing to pay more for it, producers will add to the supply. As the supply increases, so will increase the level of innovation. Ideally, markets will reach a point of equilibrium where the supply equals the demand with no excess supply and no shortages for a given price point; at this point, consumer utility, producer profit, and innovation are maximized. There is a direct relationship between demand and supply and innovation and you have rightly pointed it out.

  • Jhon Travis says:

    A very weighty statement you have written in this article as “do the real customers know exactly what they want”? One of the most common assessments I hear during the development process is that customers don’t know what they want until you show it to them. My experience says that no customer actually knows what he wants until we have shown them. There are also many examples of entrepreneurs spending lots of time and money building out their vision, only to find later that no one wanted their product. These companies don’t get press or speak at conferences. You’ve never heard of them. They’ve failed. You may not realize it, but it happens all the time. It’s important to listen to customers; you just need to make sure to ask the right questions.

  • Jason says:

    The psychology of every client is difficult and hence difficult to understand. It is the job of a psychiatrist to read the human mind. Applying a similar perspective to business, do you think a good manager should also be capable of reading the minds of its clients or customers? I think the answer must be yes. If you are capable enough to predict the present and future needs of your real customers only then you can assess the likelihood of customers who could possibly change their minds in the future. Customers change their mind when they see something more attractive offered by any other company at less price of course. So, I think if you assess and predict the mind changing tendency of your real customers, you can also control the level of innovation.

  • Souza says:

    The power of incremental innovation cannot be denied when it comes to discussing the aspect of business innovation. Innovators, business leaders, and experts often focus on creating breakthrough innovations to create new markets and categories for new technologies, products, and services. While this is true, the importance of incremental innovation must not be underestimated either. Its market impact can be immense, even though it might not always be clear or be calculated at launch. The most important aspect of incremental innovation is equilibrium. Incremental innovations encompass relatively modest improvements to existing products and production processes. Moreover, the knowledge and experience gained from incremental innovation often provide the basis for the future development of relatively novel innovations.

  • Felicia says:

    Customer retention matters. Only a few companies rate customer experience as the best tactic for improving customer lifetime value. Consumers will stick with your brand when you offer them value. And customer lifetime value isn’t a static approach. It hinges on multiple variables across every unit of your business and product ranging from sales to customer success and marketing. In order to measure the factors that could be important for improving customer life, a company must focus on nurturing, right-selling, cross-selling, monitoring of customer behaviors, input to strategic decisions, and adjustments to policies. By measuring the impact of a product on customer life one can also measure the increasing and decreasing patterns of innovations.

  • Jaymes J says:

    Good article Vivek. There are two key business opportunities in Product Development. First, you can improve an existing product. Or second, you can create a totally new product. On the one hand, it may be less resource-intense to improve an existing product. You already have a customer base, a brand position and the market is familiar with you and your offerings. On the other hand, you may get more business growth by introducing a new product. Bringing new customers into the fold may pay dividends down the line in cross-selling your products and services. Developing a new product and improving the existing ones, both approaches are earnest approaches. Both have positive and negative impacts.

  • Glenn Kine says:

    In my interpretation, a new product to outperform the existing product must bear the following characteristics.
    Target customer pain
    Outperform the competition
    Discover the details of your customers’ needs
    Build a prototype solution
    Test with customers
    Pick strategy
    If your start-up has any hope of making money by relieving customer pain, it must solve the problem better than the competition. Of course, if you’re lucky and smart, you may get a head start. But success will attract imitators, and customers will switch to those imitators if they do a better job than you at solving their problem. By following these few important points, you can ensure the better performance of your new product as compared to the existing one.

  • Bevensee says:

    Does Supply chain structure match demand and supply? This is a very crucial question that you have incorporated into this article. This question is addressed under the heading of capacity planning where supplies are matched with demands. It’s necessary to match overall portfolio demand with capabilities and capacity supplied by existing teams in the short-term while shaping both the demand and supply sides of the portfolio for the long-term. Matching demand and supply look deeper than just allocating resources to include the interactions between multiple sources of demand and the capabilities of the available teams. The result is more effective value delivery, aligned with overall business strategy by focusing on completing high-priority initiatives. The supply chain must align with demand and supply mechanism.

  • Wilson says:

    As the red box in this article indicates the effects of low customer certainty, I would like to add a few more points here. Demand uncertainty occurs during times when a business or an industry is unable to accurately predict consumer demand for its products or services. This can cause a number of problems for the business, especially in managing orders and stocking levels, with effects magnifying through the supply chain. The causes of demand uncertainty may result from inherent qualities of the business and its customer base, or from external factors. Businesses with a very innovative product or service will face a great deal of demand uncertainty, simply because their uniqueness means that there is no track record from which to draw conclusions about demand.

  • Kassy Laveyne says:

    Innovation management is a broader and generic term that needs to be specified. Innovation plays an important role in an organization’s success. Market leaders derive a significant proportion of their income from new products. The ability of an individual to successfully manage the innovation procedures of an organization, including all decision-making and other activities regarding the formulation and implementation of an innovation strategy, is known as his innovation management skills. Innovation management is critical to having a sustainable business because it enables one to look ahead into the future and come up with new and creative ideas which the competitors would not have thought of. Innovation management skills refer to the ability to successfully introduce something new, changing certain dimensions of a particular business and creating a substantial amount of new value for customers as well as the firm itself. The new value is created usually through the introduction of a new idea, product, or even process by creatively responding to external or internal opportunities identified.

  • Sullivan says:

    Innovation is in everything. People are more inclined towards buying innovative products rather than the obsolete ones. Where everyone is talked much in this reference, no one except you has pointed out the importance of product flexibility. Flexibility is essential to move with the changes that are inevitable during the development cycle as customers change their minds, markets shift, and new technologies arise and fade. Flexible Product Development is a hands-on resource that provides the tools and strategies needed to restore flexibility to any organization and remove the obstacles that stand in the way of responsive new product development. Both product and process flexibility are important to accommodate future needs and changing demands of the customers.

  • Isaac says:

    It is really appreciating that you have spoken about customer education in this article Vivek. Very few companies know the importance of customer education. Customer education is supremely important, and without it, a product will fail to live up to its potential. Customer education refers to a company’s role in providing consumers with the information, skills, and abilities needed to become a more informed buyer. Many companies hesitate to educate customers for many reasons. Many believe that the more knowledgeable a consumer is, the more likely they are to shop around and choose an alternative. But that is not true and I don’t agree with this approach. The effort to enhance customer knowledge is tied directly to trust in the product. When coupled with a positive attitude and outgoing personality from the educating employee, the results are magnified even more.

  • Selberg says:

    Thanks for writing such a comprehensive article Vivek. It is such a precious piece of writing for folks like me who aspire to set up a business in the future. You have discussed every aspect in detail that all the questions popping in my mind were answered. I have learned a lot after reading this article. Innovation is as important for companies and businesses as breath is important for us to live. Survival wholly depends on your spirit of being innovative. The more innovative you are, the more profits would come to you. I would be waiting to read more articles on such topics Vivek. Please keep on writing and help us to know more and more every day.

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