At a meeting with one of our clients, we provided their executive team with a short quiz. We gave them the following descriptions of “supplier success stories” by three customers of a supplier in a different industry and asked them to characterize the supplier about which these customers were speaking:

As you know, we’re in a business with short product life cycles. And it’s deadly if the customer looks at the shelf and says “Same. Same. Same.” We had been working with [Supplier] for some time, and they came to us with an idea, something we had never thought of. It caught our attention, and both companies put some design people on it, then did some testing in the marketplace, and then worked together to solve a few manufacturing issues. But the results have been spectacular. This product has already been in the market for more than twice as long as our normal cycles, and it is still going strong. At this point, [Supplier] gets all of our business.

We all had a lot at stake with this new product and were surprised when a performance issue surfaced. We had two suppliers at this point, and expected [Competing Supplier] to say “What can we do to help?” Instead, they said, “We recommend you go back to the drawing boards.” This was communicated at upper management levels first, which really caused havoc with our technical team. Money was on the table and careers were at stake – they just didn’t understand the seriousness of what we needed to have done. One of our engineers talked to [Supplier]. It turned out they had faced a very similar problem with one of their customers in Europe, and they flew in two engineers who spent a month with us and got the problem resolved.

They provided us with one of the greatest surprises of the year. One day, they brought a team into a meeting, demonstrated a new approach, and showed us how we could eliminate a significant amount of materials – which we were buying from them, by the way – and eliminate two steps in the manufacturing process. It has saved us a lot of money and put them in a great competitive position in terms of costs.

The executive team members at this meeting concluded that the supplier being described was a high technology firm, probably supplying the cell phone or computer market. Their descriptions of this supplier brought forward images of laboratories, teams of scientists, and engineers, and a very busy team of patent lawyers. They suggested that this firm was highly differentiated, with products that created a foundation for one-of-a-kind relationships with its customers.

In fact, the company being described was a packaging supplier. Its products were, by the company’s own description, “pretty darn basic” and its unit costs were measured in cents and fractions of cents. While this packaging firm did own a few patents, by and large, its business was a commodity business, with many other firms offering competitive product lines. Nonetheless, as the three examples above suggested, this company’s major customers considered this firm to be an innovator.

Lessons learned from this company and other best-in-class suppliers and the findings from our recent research project[1] provide insights as to how other companies can better use innovation as a tool to fuel growth. While creativity is certainly always an ingredient, our findings suggest that how innovation is managed within complex major customer relationships is an equally important factor.

We have identified several findings about how to achieve success by bringing innovation into major customer relationships. These findings are relevant to business-to-business suppliers – firms that sell to a direct customer who in turn sells to end customers. In many situations, the complexity of these customer chains is further increased by the presence of distributors or other sales channels participating at various stages in the customer chain. The packaging supplier mentioned earlier managed in a very complex environment. They often faced customer chains with five stages in which they sold to distributors who sold to other manufacturers whose products were sold through a variety of Big Box retailers to the end customers.

“Innovation is like ice cream. There are a lot of flavors.”

We have identified three flavors of innovation that are important to major customer relationships in the business-to-business environment. First are innovations that make a contribution to merchandising and marketing for the supplier’s customer. In most circumstances involving success with this type of innovation, the supplier’s customer is selling a branded, differentiated product – and probably getting either a premium price or enjoying a very substantial market share. The brand is competing within the key sales channels through which it reaches end customers. Often, these customer chains involve “really tough end customers” who demand the best. These end customers are always looking for innovation, “something new,” a step-out offering from the manufacturers and their suppliers. The end customers can choose from among many options that compete with the supplier’s customer’s products on an ongoing basis.

The first example above fell within this category. The packaging innovation brought by this supplier to its direct customer was a significant contributor to the merchandising strategy for the product involved. This packaging concept appealed to end customers and it helped the product gain shelf space by “giving retailers something unique to work within its displays.” While the product itself was a good one, the sustained life cycle that it had enjoyed was attributed in no small part to the packaging innovation involved.

The second category of innovation involves initiatives that help the supplier’s customer resolve “technical” challenges. In every industry, there are important technical challenges facing each supplier’s customers. Often, end customer purchase decisions depend upon the manufacturer’s success in meeting these technical challenges, which will be among the ways in which the manufacturer differentiates itself from its competition. Technical challenges can involve virtually any dimension – product safety, performance, reliability, shelf life, etc. – that matters to the end customers.

The second example above fell into this category. The problem faced by the supplier’s customer was one of leakage, with a host of “bad implications” – significant returns and wastage, end customer dissatisfaction, etc. While the cause of this problem involved a change in the chemistry of the product from its previous generation, the solution involved a modest change in the packaging materials and filling process that were used. The solution enabled the firm to launch its new product on time and, after a few minor process changes, at the price point that had been targeted.

The third category of innovation involves concepts for “taking costs out of the system” or otherwise improving the processes and competitiveness of the supplier’s customers. Often, these types of innovations are invisible further along the customer chain, only involving process changes, material substitution, or shifts in the roles and boundaries between the supplier and its direct customer.

This type of innovation was illustrated by the third example above. The supplier, understanding how its customer used its packaging to protect its product, re-engineered its offering to achieve the same level of protection with a more simple packaging solution. As the example noted, doing so reduced the use of packaging materials and, therefore, created a short-term reduction in sales to this customer. In discussions, both this supplier and this customer noted that this innovation was “a great long-term business decision.” In terms of this supplier’s approach to its customer relationship, there was never any question about the appropriateness of surfacing this innovation.

“Not everyone likes the same flavors of ice cream, or of innovation.”

One of the key findings of our research is that innovation needs to be targeted, especially in the context of major customer relationships. Even within a single relationship, there are applications in which the innovation is likely to create value and be rewarded, and applications in which it will not be successful.

The figure below illustrates the four major decision environments[2] within which business-to-business suppliers typically operate. Each circle on the diagram represents one of the individual segments within a large customer relationship. The factors that drive purchase decisions along the customer chain are depicted on the vertical and horizontal axes. On the vertical axis, the supplier’s direct customer’s purchase criteria are reflected, with segments in which purchases are driven by price shown toward the top of this axis and segments in which purchases are driven by other factors (product features, surrounding services, etc.) shown at the bottom of the axis. Similarly, the horizontal axis maps the end customer’s purchase decisions (vis-à-vis the supplier’s direct customer). Towards the right are segments in which purchase decisions are price driven, while towards the left are segments in which product features, services, bran, and other non-price factors dominate purchase decisions.

As this figure suggests, innovation must be matched to customer segments. Some segments are inappropriate targets for innovation, and in other segments, success will depend upon bringing the right flavor of innovation to the customer. Moreover, trying to take any innovation into all segments of a market is a prescription for failure. The idea that might be applauded by, say, those involved with a segment in the lower left quadrant will most likely be rebuffed by those involved with a segment in the upper right quadrant.

The effort to manage innovation by customer segment is further illustrated by a number of examples from Blue Canyon’s IDEABank©, documenting ways in which various firms have achieved success with major customer relationships using innovation as a key tool. The following table provides examples of successful ideas, each matched to these business environments illustrated in the figure above:

We have found that in the context of major customer relationships, while people can be bright and creative, it is organizations that are innovative. It takes the skills of virtually every business function to develop the concepts that are needed to achieve success with innovations in this environment. We frequently observe that best-in-class customer relationship managers carefully map the segments of their major customer and help others in the organization target innovations appropriately.

The three packaging customers whose experiences were described earlier all fell within different business environments. The first situation, involving a contribution to merchandising, was in a lower left quadrant market segment, with the supplier’s customer selling a high-end product. Packaging was only a trivial portion of its cost structure. The second example involved a customer segment in the upper left quadrant. This customer’s purchasing department was very focused on price, but other parts of the firm were focused on the end customers, who were quite demanding in terms of product quality. This supplier’s solution “won the day” because it addressed a leakage problem that would have prevented a successful new product launch. In the third circumstance, the supplier had a long-term relationship with a customer in a very intensely competitive environment. While the supplier had this customer’s business, it recognized the likelihood of competitive challenges and invested in relationships with the customer’s manufacturing team in order to bring forth the cost-saving concept that was described.

Interestingly, none of these three innovations would have appealed to either of the other two customers. Each was relevant only within the context of the customer relationship in which it was so successful – providing a powerful example of the value that comes from knowing the customer well enough to use customer-specific innovations to create value that can be captured to the benefit of the supplier’s shareholders.

“Starting to build a customer relationship with innovation is like starting to build a church with the steeple.”

Over and over, we have learned that innovation is the steeple on the church, the icing on the cake, the punch line to the joke. While the steeple, icing, and punch line may be what are remembered, all three depend fully on the church, the cake, and the set-up of the joke. In the case of major customer relationships, this reality is illustrated by the fact that the contributions of innovation are only likely to be realized in “higher Tier relationships,” in which the supplier has already demonstrated expertise in relationship management and implementation[3].

All three of the examples provided earlier reflected higher Tier relationships involving this supplier and its major customers. The first customer was clearly at the Extended Enterprise Tier, and the other two customers were solidly at the Preferred Suppler Tier, despite the efforts of the second customer’s aggressive purchasing department to enforce dual supplier sourcing. In that case, it was only the relationship between the two engineering groups, which went beyond the purchasing department, which opened the door for this innovative idea. In all three relationships, there was a long and solid history. All three customers viewed this supplier as committed, knowledgeable, and effective in collaboration. All three customers viewed this supplier as reliable, with effective, well-designed processes, and an ability to deliver on-time, in-full, and at high quality levels. Simply stated, this supplier had built the church, baked the cake, and set up the joke.

These examples also showcase innovation skills identified as part of our research on the competencies that drive growth[4]. All three examples reflected Timeliness on the part of the supplier. Timeliness is important, not only to help the customer gain the benefits of contributions and innovations, but also to ensure that the supplier’s ideas are in place early enough to be considered and included within the customer’s plans and processes. In two of the cases, the supplier initiated the concept and gave the customer an opportunity to incorporate it into its plans before they were finalized. In the third case, the supplier was immediately responsive and produced a fast-track solution for the customer. Our research suggests that such timeliness is not an accident. We have learned that those suppliers that happened to be there “at just the right time” are probably those that are with its customers all the time.

This supplier also brought Energy to its major customer relationships – manifested in the search for continued improvement, for win-win opportunities, for ways to reduce costs and enhance productivity. It further showcased this competency by the involvement of numerous functions from within its company – the three examples included involvement from two major geographic regions, design specialists, engineers, manufacturing process experts, and others. In general, Energy is reflected in the degree to which a supplier is proactive in the relationship development.  Along with Creativity itself, we have found that Timeliness and Energy are the two dimensions of the innovation competency most correlated with growth in major customer relationships.

Summary

Breakout growth is a goal sought by essentially every firm, and our experiences clearly point to the fact that many of the firms that have achieved breakout growth have done so through innovations important to its customers. There is no question that innovation can be a powerful force in strengthening major customer relationships and ensuring that they continue on a positive and profitable track. Companies in every industry can be seen by its customers as innovators – if they are willing to put forth the effort to do so.

Our experiences clearly point to the fact that it takes hard work to get into position for breakout growth fueled by innovation. We find that the keys to success involve understanding the many distinct types of innovation that can create value for customers and carefully matching innovation to the customer’s own priorities and business environment. Equally critical is establishing the foundations for successful innovation through competent relationship management and effective implementation. Only when these foundations are in place are the supplier’s innovative ideas likely to reach the right ears and be considered with confidence – and to become the fuel for breakout growth.