Customer Integration in B2B Open Innovation

By: Frank Mattes

Today, almost any B2B firm claims to be “customer-oriented”. However, only few firms have a rigorous and stringent system that integrates the “best” (B2B) customers into its innovation process – where “best” in this context is measured not by volume of sales but by contribution to the firm’s innovation. A lot of insight has been generated on how to engage consumers in the innovation process. There is also a growing body of knowledge about how to innovate openly on the R&D side of the innovation process. But little has been written up so far about how to systematically integrate B2B customers in the firm’s Open Innovation system. innovation-3’s Frank Mattes closes this gap by sharing some insights.

It is now more than a decade since Henry Chesbrough published his groundbreaking book on the “new  imperative for creating and profiting from technology”. A lot of insight has been generated since then about how firms could win the innovation race by leveraging the expertise of a connected world with exponentially growing and globally distributed knowledge.

Probably the largest part of material in this context addresses the question how consumers could be integrated into the innovation process:

• A large number of articles have been published on how firms could “crowdsource” ideas for new products
• Quite a number of publications deal with “crowdfunding” approaches in which firms co-finance innovation and pre-test market acceptance
• There is also extensive material on how firms extract innovation opportunities from conversations in the Social Web

Additionally, a significant amount of material has been published on how external R&D partners could be integrated into the innovation process in order to solve technical and scientific challenges. The questions in this part of Open Innovation are more complex since they comprise strategic dimensions, process and organizational issues, topics that focus on culture change and how to manage networks of solution partners. Furthermore, if one dives deeper into this subject, one finds that also issues like suitable business models, Intellectual Property management, finding new innovators and increasing the firm’s absorptive capacity are necessary conditions for success in R&D-driven Open Innovation (read more information on this subject).

However, up so far there is little material on how to systematically innovate openly with B2B customers. This article closes the gap by providing insight from innovation-3’s project work and from Best Practice examples. It starts with describing the four key roles that B2B customers may have in this context, then addresses the question how the best partners could be found and managed and finally closes with some recommendations about what your firm should do in order to reach the next level in integrating your B2B customers into the innovation process.

“Customer integration” defined

For the sake of simplicity and in order to limit the scope of this article we make three distinctions. These don’t limit the value of the thoughts and insights presented here.

Firstly, “customer” in this context refers to any firm downstream in the industry’s value chain such as existing customers, customers’ customers, leads / not-yet-customers or intermediaries to customers.

Secondly, we look only at active interactions with customers and leave out more passive forms such as market studies, benchmark studies, inquiries, focus groups and others. By “active interactions” we mean interactions that pursue one or more of the following three goals:

• Supporting the innovation strategy
• Generating new product ideas
• Validating and shaping concepts and specification documents

And thirdly, we focus on the fuzzy front-end of the innovation funnel and leave aside customer involvement in the efficient back-end (such as e.g. using selected reference customers for innovation marketing).

Four key roles of the B2B customer

There are four major ways in which leading firms innovate openly with their B2B customers. In every one of these, integration of the B2B customer into the innovation funnel is achieved via a specific role the customer plays.

Trend Insight Enablers

B2B customers in the “Trend Insight Enabler” role contribute to the firm’s innovation strategy by providing – in most cases tacit – insights about the evolution of the business environment, markets, technologies or competitors.

There is enough case evidence that bi-directional interactions, i.e. jointly developing trend-based scenarios, provide value to all parties involved. In most cases these interactions are pre-competitive and not regulated by Intellectual Property provisions (since all parties profit from insights generated in the process) but governed by Non-Disclosure Agreements.

An example from the German chemical industry may illustrate the point. Bayer MaterialScience, the polymer division of the chemical giant Bayer, has installed a “Creative Center” (CC) that operates in the new products / new markets quadrant of the classic Ansoff matrix. Together with large customers, e.g. car manufacturers, the CC develops and refines future market scenarios and roadmaps. From an internal perspective, the CC takes these discussions up to a point where market potentials and potential future technology platforms become so tangible that R&D units are in a position to conduct early-stage feasibility studies.

Lead Users

The adoption rate of innovations in products, services and business models with respect to time can be visualized in a bell-shaped curve. In almost any industry there are customers that pursue a first-mover innovation strategy and are far ahead of the market (i.e. at the very left of the adoption curve). They possess a huge tacit knowledge of innovation potentials and sometimes even develop prototypes on their own to solve their innovation problems.

Eric von Hippel coined the term “Lead Users” for these firms. In his research, von Hippel showed in various case studies that integration of Lead Users can be crucial for speed and effectiveness in innovation management. Von Hippel’s observations are particularly true for firms that pursue a first-mover innovation strategy.

Integrating Lead Users has also the goal of accessing tacit insights – but contrary to the Trend Insight Enabler approach these insights are focused more on new products, services and business models than on general developments and trends.

A prime example for excellence in Lead User integration excellence is HILTI, a technology provider to the global construction industry. A detailed case study can be found here.

Concept Validators

B2B customers in the “Concept Validator” role contribute to the firm’s innovation process by (a) pushing and steering innovation via the concept or (at a later stage in the funnel) via the product specification and by (b) integrating the innovation into the customer’s manufacturing / value chain.

From the customer’s perspective this interaction can be seen as supplier integration. Often the customer is in a system business – such as e.g. airplane / train manufacturing or energy – and hence the level of tacit knowledge exceeds by far the one of a single Lead User. The Concept Validator approach can be found in two forms: In a rather strict / governing form or a more exploratory form.

The first form can be observed for instance in the aerospace industry. When e.g. Airbus and Boeing develop new aircraft models with the carriers (which could be seen as Lead User integration) and break down the innovation challenge into sub-systems and components, the individual innovation partners need to follow strict, pre-defined procedures. An example for this: When PFW, a supplier to Airbus and Boeing, develops new tube systems according to specifications set by these two firms, both the new product and the underlying supply chain processes are subject to formal acceptance by the airplane manufacturers.

The more exploratory form of the “Concept Validator” approach can be found in leading German innovation clusters. In these clusters, a number of firms that cover the whole innovation value chain – from materials via devices and systems to applications – are aligning their innovation efforts in order to ensure that the innovation efforts at every level of the value chain are perfectly aligned. Two examples from the German chemical industry may illustrate the point:

• InnovationLab in the field of Organic Electronics
• Inno.CNT in the field of carbon nanotubes in which firms pool their innovation resources simultaneously in the value chain steps of carbon nanotubes manufacturing, functionalizing, dispersion and applications.

Complementary Expertise Providers

As every open innovator knows usually there is a whole ecosystem of other firms with knowledge in fields that are complementing the firm’s core competence (see also here). This knowledge may comprise

• insights about future trends in a jointly targeted industry coming from a different angle (i.e. firms A and B are coming from different industries but sell both into industry C),
• product related expertise in design, manufacturing and service or
• expertise in areas that turn a product into a meaningful solution for the customer

By innovating with “Complementary Expertise Providers” firms access tacit or explicit knowledge to create innovative solutions. Two examples from leading German firms may illustrate the point:

• SAP is a premier software firm. In the 35 years of its existence, SAP has built up various ecosystems of Complementary Expertise Providers. One example is the SAP Developers Network in which developers, consultants, system integrators and analysts exchange knowledge and experience. Examples for Complementary Expertise Providers that include customers are various Industry Value Networks (in which customers from the relevant industry, partners and SAP develop innovative solutions) and regional User Groups, in which customers, partners, analysts and opinion leaders get insight into SAP’s roadmaps and are able to influence SAP’s innovation focus.
• Altana is a Specialty Chemicals firm with 1.6 billion Euros of annual revenue. Altana built and manages future_bizz which is a cross-industry network aimed at trend monitoring and the generation of new business ideas on the topics of living and working, including some potential customers for Altana’s products.

Graphic 1: Position of B2B customer innovation partners in the fuzzy front-end

How to find the right partners

The quality of customer integration in B2B Open Innovation depends firstly on identifying the best partners. Some ideas on how to do this can be derived by studying business practices of leading firms.

Finding the best Trend Insight Enablers

Analyzing the Social Web for consumer trends and innovation opportunities via specialized service providers and / or via special software is currently receiving a great deal of interest. Interestingly, this approach is not limited to the B2C space. It can be applied in B2B scenarios as well. And even more interesting is the point that – if it is done rightly –a solid base of global Trend Insight Enablers can be produced en passant.

Let’s look at a case study on a large German energy firm (which needs to remain anonymous for confidentiality reasons) to see how this could be done. As you may be aware of, the German government has decided to remove nuclear energy from the mix of energy sources. In order to maintain security of energy supply, a large part of the current contribution of nuclear energy needs to be replaced by renewable energies. Since – in contrast to nuclear energy – the production of renewable energies is not centralized, a massive redesign of energy production and distribution grids is required.

In this context, some pivotal technological decisions are to be made. The energy firm wanted to get more insights into the shape of future “smart grids” and in particular in automated metering in smart grids. Furthermore, we encouraged the energy firm to design the process so that it allowed for identification and meaningful interaction with the global best on the subject.

In an obvious first step own staff, specialized Think Tanks and specialized consulting firms with domain expertise were asked to contribute to the innovation challenge and identify potential Trend Insight Enablers (“Who do you see as a leading expert in this field?”). In step 2, the Web was analyzed for more experts via specific Web tools and Professional Services. A large number of potential Trend Insight Enablers could be found and added to the existing list – which was quite surprising to the energy firm since the assumption was “we know what is out there”.

After qualifying the list of experts and setting up an appropriate framework for deeper discussions (including Non-Disclosure Agreements), a Delphi process with selected Trend Insight Enablers was arranged with the explicit goal to de-average opinions and to identify non-mainstream expert judgments. Out of this step, a number of issues that needed further discussions were isolated that were then discussed via virtual global roundtables and workshops.

Apart from getting more insight into the global diversity of opinions and expert judgments – in particular into those issues where there are substantiated different opinions – the energy firm isolated a number of Trend Insight Enablers that will be engaged in suitable interactions as the innovation topics are pushed though the funnel.

Finding and managing the best Lead users

Having a well-managed database of lead users is a tremendous asset for increasing the effectiveness of your firm’s innovation process. So for instance, a German firm from the optical industry has a database of Lead Users that covers all of its target industries and market segments. For every Lead User, any interaction is evaluated with respective to its innovation contribution and hence the firm has an up-to-date information on the best Lead User for any potential innovation challenge.

If the firm wants to go beyond simply managing the existing base of Lead Users and aims at expanding the base, there are a number of “classical” ways to find the lead users for your firm. Among them are structured interviews with your firm’s sales force, analyzing conferences and trade shows of your customer industries and conducting in-depth interviews with trade associations of your firm’s customers.

Additionally, leading firms have found new ways to identify find new Lead Users via Web-based approaches. One of these ways is to evaluate the interactions on the firm’s customer portal and pinpoint the users that think ahead of the majority and engage in discussions with an innovative character. Another way is listening to the Social Web (as described above) and identifying the opinion leaders that push the innovation envelope.

Finding the best Concept Validators

In a number of industries – such as the automotive or the aerospace industry – there is a natural choice for selecting the Concept Validators: They are the big manufacturers that govern the quality management systems of their supply chains.

However there are many industries in which the firm is not restrained by these kinds of tight managerial systems. In these kind of situations, a suitable Concept Validator would be a (potential) customer that has (a) a high interest in the innovation issue on hand and (b) the power to extend its market share via the innovation (and hence the sales volume of the innovating firm).

There is an interesting twist in the Concept Validator play: In some situations it is more valuable to address customers of the customer since these might have a deeper understanding of the value of the innovation than the immediate customers. This observation is also a key rationale to integrate customer’s customers in cross-industry-/cross-value-chain innovation clusters, at least for the ones mentioned above. An example for this view comes from the German Chemical Industry: A Specialty Chemicals firm which innovated in membranes for lithium-ion batteries. Its immediate customers didn’t see the potential in this technology but an automotive OEM – a customer of the firm’s customer – did.

Finding and managing Complementary Expertise Providers

In extending the base of Complementary Expertise Providers, leading firms follow comparable pathways than the firms that excel in Lead User integration. However, in managing the base of Complementary Expertise Providers, leading firms – primarily the ones from the software industry and from adjacent industries – go beyond this and pay careful attention to the interactions of the providers since there might be an opportunity in platform / business model innovation.

If a firm takes on this strategic perspective, the management of a portfolio of Complementary Expertise Providers is much more than just having a database of partners. It comprises

• setting up a vision,
• crafting a strategy,
• defining governance mechanisms for the whole ecosystem,
• facilitating of internal and partner’s goals,
• orchestrating internal and external innovational efforts,
• continuously attracting relevant capabilities to the platform ecosystem and
• exploiting and sharing the benefits of platform innovation in order to maintain a continuous supply of complementary products and services on the basis of a continuous monitoring of behavior / interactions within the ecosystem.

Graphic 2: Key characteristics of the four roles

 

How to organize for customer integration

Leading firms do not only focus on finding and keeping the best customers for innovation purposes, they also make sure that the management of the corresponding processes is well embedded into the formal organization.

When one looks at the four key roles described above one finds that they differ by position in the innovation funnel and by the nature of their contribution to the firm’s innovation process:

• Trend Insight Enablers are positioned at the very fuzzy front-end of the innovation funnel. Their contribution is of a strategic nature, affecting the whole innovation portfolio.
• Lead Users are positioned inside the fuzzy front-end. Their contribution is highly relevant for the scope and the goals of an individual innovation project.
• Concept Validators can be found anywhere in the fuzzy front-end (i.e. early, when a Concept Validator suggests innovation targets or later, when certain product and process qualities are demanded). Their contribution is highly relevant for scope, non-scope and goals of an individual innovation project.
• From the firm’s innovation perspective, Complementary Expertise Providers are inside the fuzzy front-end due to the fact that their contribution may influence direction and scope of the individual innovation projects.

Consequently, leading firms allocate the management of the corresponding innovation partners at different levels:

• The German consumer giant Henkel has set up a “Strategic Advisory Board” which comprises the relevant Trend Insight Enablers. This Board is managed by the SVP of Technology who is reporting directly to the Board
• B. Braun, a leading German manufacturer of medical products, manages its Trend Insight Enablers by an “Initial Project Evaluation Team” (IPET) reporting to the Board. Its Lead Users and Concept Validators are managed by a “Project Evaluation Board” which reports to the IPET
• SAP manages its Complementary Expertise Providers by a dedicated organizational unit who is headed by a SVP who is reporting directly to the Board

What your firm should do

Integrating B2B customers into the innovation process helps your firm to kill two birds with one stone: It improves effectiveness of the innovation process and it improves customer closeness. As shown in this article, there are emerging Good Practices on how to segment the relevant customers and how to organize for integration of your firm’s B2B customers.

Depending on what your firm has already accomplished in this area, one or more of the following actions might increase your firm’s innovation performance:

• Generally: Increase the rigor of search for new customers that might be integrated into the innovation process (see also a recent article.)
• Assemble a cross-industry / cross-value-chain panel of Trend Insight Enablers and Concept Validators to sharpen your innovation strategy
• Manage your base of Lead Users professionally, using databases and continuous evaluation of the innovation contribution
• Think about how an ecosystem of Complementary Expertise Providers might increase the innovation firing power of your firm and enable a platform leadership strategy
• Define how the various groups should be managed

By Frank Mattes

Image: Customer care from Shutterstock.com