What You Can Learn From Your Customer’s Customer

Working closely with your customers to tweak offerings and even business models is a standard business practice. But some companies gain ideas and insights from their customers’ customers as well.

To improve a medical product for dairy cows, Blue4Green launched a pilot program with a large veterinary practice that works closely with dairy farmers.

Image courtesy of Blue4green.

Innovative companies fund internal research and development to help them gain a future edge in the marketplace. They also work closely with their suppliers in an effort to offer greater functionality and performance for their customers.1 However, some critical new product insights come not from suppliers and customers working together but from the customer’s customers. Although the supplier may have demonstrated the basic commercial viability of its offering, uncertainty can remain about what the best applications are and how to realize potential value. When suppliers and customers cooperate, they can “tweak” the technology. Relatively small changes can lead to big gains in value for the customer’s customers. Recent research on customer-oriented supplier innovation has focused on how suppliers and customers can cooperate to create innovative products and services, with cost savings as the principal goal.2 Other research has taken an outcomes-driven perspective on supply chains, treating innovation as one of many outcomes.3 By contrast, our research focuses on the innovation process involving three participants in the value chain — the supplier, its customer and the customer’s customer — to understand how to achieve outcomes that otherwise would not occur, in a process we call tweaking the supplier’s offering. (See “About the Research.”)

About the Research »

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References

1. J.W. Henke, Jr. and C. Zhang, “Increasing Supplier-Driven Innovation,” MIT Sloan Management Review 51, no. 2 (winter 2010): 41-46; G.P. Pisano and R. Verganti, “Which Kind of Collaboration Is Right for You?” Harvard Business Review 86 no. 3 (December 2008): 78-86; and J.C. Linder, S. Jarvenpaa and T.H. Davenport, “Toward an Innovation Sourcing Strategy,” MIT Sloan Management Review 44, no. 4 (summer 2003): 43-49.

2. Henke and Zhang, “Increasing Supplier-Driven Innovation.” There is another stream of management practice work that focuses on customer-led innovation with suppliers, which is beyond the scope of our work. See, for example, E. von Hippel, interviewed by M. Mangelsdorf, “The User Innovation Revolution,” MIT Sloan Management Review website, http://sloanreview.mit.edu/x/53107, Sept. 21, 2011; and S. Thomke and E. von Hippel, “Customers as Innovators,” Harvard Business Review 80, no. 4 (April 2002): 74-81.

3. S.A. Melnyk, E.W. Davis, R.E. Spekman and J. Sandor, “Outcome-Driven Supply Chains,” MIT Sloan Management Review 51, no. 2 (winter 2010): 33-38.

4. F. Block and M.R. Keller, “Where Do Innovations Come From? Transformations in the US Economy, 1970-2006,” Socio-Economic Review 7 (2009): 459-483.

5. Von Hippel has introduced the concept of “sticky information” to refer to the cost and difficulty of obtaining information needed for technical problem solving from its location, moving that information to another location and then using the information in that location. He makes use of this concept primarily to explore where and how problem solving will be carried out in collaborative innovation between a supplier and customer. See E. von Hippel, “‘Sticky Information’ and the Locus of Problem Solving: Implications for Innovation,” Management Science 40, no. 4 (April 1994): 429-439.

6. O.E. Williamson, “The Economics Institutions of Capitalism” (New York: The Free Press, 1985), 43-67.

7. R.M. Grant, “Toward a Knowledge-Based Theory of the Firm,” Strategic Management Journal 17, Winter Special Issue (winter 1996): 109-122.

8. J.C. Anderson, N. Kumar and J.A. Narus, “Substantiate Value Propositions: Demonstrating and Documenting Superior Value,” chapter 4 in “Value Merchants: Demonstrating and Documenting Superior Value in Business Markets” (Boston: Harvard Business School Press, 2007), 59-79.

9. J.C. Anderson, M. Wouters and W. van Rossum, “Why the Highest Price Isn’t the Best Price,” MIT Sloan Management Review 51, no. 2 (winter 2010): 69-76; and M.H. Bazerman and J.J. Gillespie, “Betting on the Future: The Virtues of Contingent Contracts,” Harvard Business Review 77, no. 5 (September-October 1999): 155-160.

10. The time to bring up and get agreement on documenting the results of successful tweaking is at the beginning of cooperating, rather than after the fact, when one of the businesses may be unwilling to commit to doing it. For more on value case histories, see Anderson, “Value Merchants,” chapt. 4.