“We are more and more dependent on the capabilities of others, rather than on internal competencies and resources.” This statement is by Luis Allo, a global director of external technology innovation at Johnson & Johnson. It encapsulates the idea that companies can no longer rely solely on their own R&D teams to deliver the next generation of products that ensure they survive and thrive in a competitive marketplace.
The “others” that Allo refers to include existing and potential suppliers, of course. And in many sectors today that means not only familiar, established firms, but also a growing ecosystem of small, innovative and relatively untested startups.
Take automotive, for example. Big carmakers like General Motors and BMW are having to develop new lineups of electric, digitally connected and driverless vehicles while simultaneously being disrupted by ride-sharing business models pioneered by the likes of Uber and Didi Chuxing. Much of the innovative hardware and software required to power this brave new transport world is coming not from the traditional Tier-1 supply base, but from tech startups.
Buying these firms to get your hands on their technology is one option — and there has been plenty of M&A activity in the auto industry, as in others, in recent years. However, this is not always feasible, and in such cases companies must instead engage these startups as supply partners.
Why Startups are Challenging to Deal With
This is a challenge. A recent SCM World survey of 330 supply chain and other professionals found that most believe their organizations are not as effective at tapping supplier ideas and innovations as they need to be. And whereas a third reckon they are “extremely attractive” to suppliers with whom they do a high volume of annual business, only around a fifth think the same is true in the case of startups.
Why might this be the case? The absence of an effective process for assessing supplier proposals and imprecisely defined innovation needs are the two biggest obstacles identified in our study (see chart below). These are certainly relevant for startups, as they are for other suppliers. But talking to executives for a new report highlights a number of other factors too. These include:
- Missing startups in supplier segmentation. Innovation capabilities are not always sufficiently considered when categorizing suppliers into strategic and preferred tiers. At the same time, focusing too heavily on annual spend runs the risk of downplaying the importance of startups and other smaller firms.
- Slow cycle times and decision making. A fast pace of development, testing and decision making is not only what startups expect, it’s also often crucial to their survival as fledgling businesses. Large companies generally work to longer timeframes and have to navigate multiple stakeholders and management layers to get things done.
- Lack of support and guidance. To be successful in working with big corporations, startups need customer-side managers who are willing to invest time and effort to help them understand processes and quality standards, negotiate the bureaucracy and connect with the right people. This high-touch engagement and associated flexibility is often absent.
- Low tolerance of risk. Innovation is a high-risk game, and these risks are magnified when dealing with young and somewhat unproven startups. Being overly risk averse and having a low tolerance for failure hampers the experimentation, unconventional thinking and longer payback periods that characterize startups’ operating models.
- Transactional approach to relationships. Startups feed on collaboration and developing relationship capital with their partners and customers. Corporate procurement and other managers, on the other hand, typically take a much more transactional and arms-length approach to the suppliers and people they do business with.
Finding a More Effective Approach
Getting better at innovating with startups is a task that many leading companies are taking seriously and putting money behind. BMW, for instance, seeks to attract startups into the auto industry through its Startup Garage program, and invests in the most promising ones using i Ventures, a Silicon Valley-based venture capital fund. Snack-food maker Mondelēz International recently added a couple of high-potential startups to its STAR program, a small group of strategic suppliers the company partners with for innovation.
Mobile telecoms operator Vodafone, meanwhile, has created a global innovation center for startups called Tomorrow Street. Opened in 2017 as a 50:50 joint venture with the government of Luxembourg, where its procurement function is headquartered, it houses half a dozen late-stage startups innovating in technologies such as digital security, the Internet of Things and artificial intelligence.
While Vodafone doesn’t take an equity stake in these firms, it works with them for three to five years to find revenue-generating opportunities among its operating companies, partners and customer base. It’s a way of getting Vodafone used to working with startups — some of which could become its strategic suppliers of the future.
Through its annual Arch Summit, the company connects startups with bigger suppliers in the telecoms industry and encourages them to develop joint solutions. This can be an effective way of securing market-leading innovation without having to invest directly in a startup’s business. The core supplier is forced to consider different ideas and technologies while the startup gets access to opportunities and resources it wouldn’t have on its own.
Ultimately, innovating successfully with startups requires corporate managers and bosses to think and operate like entrepreneurs themselves. They must be inquisitive, empower teams to experiment, create a bigger appetite for risk and encourage their people not to be afraid of failure or seemingly impossible challenges.
In other words, like the concept of innovation itself, it’s about eschewing the status quo.
Geraint John, Vice President, Supply Chain Research & Advisory, Gartner