8.1.1 Why Do Companies Integrate External Partners?

Chemical firms are regarded as an important source of innovative products that often trigger the development of innovations in various downstream industries, such as construction, automobile, furniture, or the fast‐moving consumer goods industry. In order to fulfill their customers’ expectations of continuously developing innovative products, chemical firms are forced to search for new ways of improving their capability to innovate. In so doing, they increasingly build on close interactions with external partners. To be more precise, while focusing on their core competencies, many firms outsource these activities to external partners that are beyond their own sphere of expertise. This outsourcing approach becomes common practice even for the firm’s innovation‐related activities. Following such an Open Innovation strategy, firms specifically exploit external resources for innovations to complement limited internal resources. Owing to the increasing diversity and complexity of new technologies it is barely possible to combine all required competencies for the development of successful new products in one single company. Therefore, establishing research and development collaborations with different external partners is indispensable to staying competitive. In order to approach and collaborate with external partners, firms can rely on various initiatives, such as the consumer goods company Henkel, for instance, which successfully refers to “Open Innovation” intermediates (e.g., NineSigma or InnoCentive).¹ In this way, the company gains access to solutions to specific problems through collaborating with researchers, suppliers, or customers from all over the world [1, 2].

Along the value chain, customers and suppliers represent important stakeholder groups with whom chemical firms increasingly engage. For instance, by strengthening interactions with customers, these firms are in a better position to understand their customers’ needs and are able to reduce market uncertainties. Initiatives aimed at gaining a better understanding of customer needs are particularly relevant, since chemical manufacturers often only seem to possess limited knowledge of their customers’ needs. As a recent study among customers of chemical manufacturers shows, only half of the interviewed customers stated that chemical manufacturers have at least a good knowledge of their needs and only one out of five customers indicated that chemical manufacturers hold advanced knowledge of their needs. Furthermore, the fact that collaborations between chemical manufacturers and their customers are primarily triggered by customers underlines the emergence of empowered customers who increasingly seek to initiate close interactions with their suppliers [1, 3].

In addition to collaborations with their customers, chemical manufacturers also rely on their supply base for similar collaborations. Collaborations with suppliers have the greatest influence on the successful generation of innovations. The responsibilities of the suppliers extend from formal and informal consultation concerning technical issues, through to joint development projects, up to the complete takeover of development work. As the example of the consumer goods company Procter & Gamble (P&G), for instance, shows, 50% of the innovations of the global Baby Care business unit are developed by suppliers. Here, companies like BASF take over the development of super absorbents and support P&G in expanding its market position [2].

Taken together, the ongoing pressure to innovate forces companies in the chemical and pharmaceutical industry to integrate external partners more than ever before. The “voice of the customer” as well as the technological competences of suppliers are essential inputs for the successful development of innovations. Therefore, the present chapter sheds some more light on established strategies for both customer and supplier integration.

8.1.2 The Sources of Innovation

When categorizing various sources of innovation, one typically refers to two established and distinct approaches: market pull versus technology push. According to a market pull strategy, firms typically start with identifying unsatisfied needs of their customers or, in other words, firms begin with acquiring information on these needs. In a next step, firms acquire (either internally or externally) complementary solution information in order to adequately respond to the needs of their customers. With a technology push strategy, firms, on the other hand, typically start with acquiring solution information. Apart from relying on internally held solution information, firms can also refer to external partners (e.g., suppliers), which very often also provide a considerable amount of solution information. In a next step, firms aim at combining their newly acquired solution information with existing need information, or, put differently, firms seek appropriate markets comprising needs that will be satisfied by the newly developed solution. Since each of these two complementary business strategies solely focuses on one part of a greater whole, firms are recommended to consider a holistic approach to innovation. Hence, they might refer to a functional perspective of possible innovation sources. Functional innovation sources can be understood as being the explicit origin of an innovation, comprising the following categories: internal value chain,² external value chain (suppliers and customers), private and public universities and research institutions, as well as competitors and related industries [1, 2, 5].

Internal sources for innovation are diverse and not only derive from the new product development function, but also from the purchasing, manufacturing, or marketing and sales function. The resulting innovations, therefore, are not limited to the product domain, but also cover new product processes, new distribution channels, or new value‐adding services. As an example, Air Liquide shifted its focus from technological product innovations to an innovative distribution concept – termed “local customer support” – in the field of industrial gas, which was suffering from declining margins. Searching for new distribution opportunities, Air Liquide established sites at its customers’ locations and increasingly became active in the field of gas supply and safety management. To offer a customized set of services, a team of specialized employees worked on‐site at the customer’s plant [6].

Similar to internal sources of innovation, external sources are diverse and comprise various external partners such as customers, suppliers, competitors, and research institutes. The shifting paradigm of developing all innovations internally towards opening the boundaries of the firm is known as “Open Innovation”. Describing the renunciation from the traditional innovation process, the fundamental principle refers to the disclosure of the previously outward closed innovation process and the exploitation of creative and innovative sources of innovation that are located outside the firm. Here, both up‐ (suppliers) and down‐stream (customers) value chain partners represent very important sources of innovations. The benefits of absorbing external resources and knowledge or the outsourcing of various tasks to external partners with special competencies and expert knowledge are numerous. Apart from significantly shortening innovation cycles, firms can benefit in terms of cost and risk reductions of about 60 to 90%. As a consequence of these promising advantages, the Open Innovation approach has become established in various industries, including research intensive industries (e.g., Bayer, BASF, Evonik, and Merck Serono) as well as the consumer goods industry (e.g., 3 M, Bosch, Henkel, Procter & Gamble, and Siemens) [7, 8].

Both the firm’s customers and suppliers eventually represent two important sources of innovation. The integration of customers and suppliers for the purpose of innovation represents two distinct types of Open Innovation strategy. While customer integration reasonably refers to a market pull strategy, supplier integration refers to a technology push strategy. Suppliers often have better expertise and specialist knowledge about components and raw materials, which can be relevant for new product development of chemical manufacturers. Collaborating with suppliers provides the manufacturer with the suppliers’ technology‐related know‐how, which might lead to substantial changes to the product. If customer integration – as a market pull strategy – however, is proposed, this results in the development of fairly incremental innovations. Apart from the different outcomes that might derive from customer and supplier integration, there are further differences with both integration strategies with regard to their driving factors as well as with the management tools required to transform the integration of the respective partner into beneficial outcomes. However, at this point it is important to mention that the primary focus of this chapter is not to decide which innovation source (i.e., customer or supplier) is more important, but rather to support managers in fully exploiting the benefits provided by both integration strategies. Hence, to support managers in developing and implementing more successful integration strategies, the present chapter seeks to answer the questions of why, when, and how to integrate partners and suppliers into a firm’s creative process [1, 2].

8.2.1 Degree of Collaborative Activities with Customers

8.2.1.3 Customer Co‐creation

In recent years, the notion of customer integration has increasingly been replaced by the notion of “customer co‐creation”. Generally speaking, customer co‐creation can be understood as the firm’s interaction with customers to co‐construct the value for the customer. Hence, compared with listening to the voice of the customer and customer integration, the concept of customer co‐creation more holistically covers the collaborative activities between the firm and customers with the purpose of value creation. Although all three concepts are undoubtedly intertwined, they particularly differ in terms of:

• the degree of shared responsibility for value creation (i.e., power and control over the firm’s value creation process) and
• the degree of firm–customer interactions
  • – frequency of interaction
  • – intensity of interaction and
  • – direction of interaction (one‐way versus two‐way) [1].

As shown in Figures 8.2 and 8.3, customer co‐creation is characterized by a higher degree of firm–customer interactions as well as a higher degree of shared responsibility for value creation. Co‐creative practices, however, might vary with regard to the extent to which firm–customer interactions occur across various stages of the firm’s value creation process (e.g., the front end of innovation, idea realization and development, commercialization, product design, production, and marketing/sales) as well as during the customer’s process of usage (e.g., through after sales services). The most comprehensive approach to customer co‐creation implies interactions that span the firm’s entire value creation process and also incorporates the customer’s process of usage [1].

8.2.2 Up‐ and Down‐sides of Collaborative Activities with Customers

Collaborative activities with customers are associated with various advantages for the focal firm, including the access to new ideas, identification of market trends, increased customer satisfaction, and accelerated time‐to‐market. However, each type of inter‐firm relationship has to be considered as an investment that – depending on the intensity of the collaborative activity – demands different levels of financial‐related (e.g., infrastructure, incentives, hiring of new personnel) and time‐related (e.g., coordination activities, relationship development and maintenance, idea assessment, provision of feedback) resource investments. In addition, collaborative activities with customers do not automatically and with certainty result in the successful introduction of new products or the significant improvement of existing products; a strong focus on the customer base, for instance, bears the risk of only exploring the already explored. However, on the other hand, neglecting the voice of the customer when developing new solutions bears the risk of over‐exploring the undesirable. Thus, before deciding to invest in any collaborative activity with customers, decision makers have to seriously estimate whether the expected benefits outweigh the potential risks and costs associated with the desired activity. Table 8.1 provides an overview of the potential benefits and costs of being engaged in collaborative activities with customers. We will elaborate on these subsequently.

8.2.3 Typologies of Customer Co‐creation

Apart from deciding whether to collaborate with customers or not with the purpose of joint value creation, firms have to decide at which stage of the value creation process these collaborative efforts with customers should be directed. The most comprehensive approach to customer co‐creation spans the firm’s entire value creation process (e.g., the front end of innovation, idea realization and development, commercialization, product design, production, and marketing/sales) and also incorporates the customer’s process of usage (e.g., after sales services). Depending on the specific stage of the value creation process, the concept of customer co‐creation can be classified into seven subcategories: customer co‐ideation, customer co‐development, customer co‐launch, customer co‐design, customer co‐production, customer co‐marketing, and customer co‐usage (see Figure 8.4).

8.2.4 Designing and Assessing Customer Co‐creation Practices

When designing concrete practices for customer co‐creation, firms have to make several choices. Figure 8.5 provides an overview of all decisions that have to be made with regard to the architectural design of customer co‐creation practices. The first decision refers to the intended range of customer co‐creation. As outlined in the previous section, co‐creative activities with customers can either take place at one specific stage of the value creation process or – following the most comprehensive approach of customer co‐creation – across the entire value creation process (front of innovation, idea realization and development, commercialization, product design, production, and marketing/sales) reaching into the customer’s process of usage. To cause these collaborative activities with a customer to occur, firms further have to provide an adequate infrastructure that enables and fosters two‐way communications with their customers. In general, the type of interaction between firms and their customers can comprise the following four characteristics: offline or online as well as direct or indirect. Offline (or face‐to‐face) communication channels, such as personal meetings, interviews, and workshops, are basically appropriate for reaching a selected (small) group of customers and enable the exchange of tacit and in‐depth knowledge, which is difficult to articulate and to codify. Online communication channels, on the other hand, are beneficial for addressing a large group of customers at low costs. In contrast to offline communication channels, they, however, merely allow the exchange of feedback information, suggestions, or complaints. Independent of the concrete type of communication channel, the communication infrastructure has to be centered on the customer, with the purpose of encouraging the customers to actively participate in the firm’s value creation process. The direction of the communication should be bilateral, that is, the communication channels should not only foster the inflow of information to the firm, but should also enable firms to assist their customers in better utilizing their own as well as the resources provided by the firm. In this way, firms can actively support their customers’ processes usage.

Moreover, firms can either directly interact with their customer base through customer co‐creation practices, or indirectly by engaging an independent third party. One of these examples refers to InnoCentive, which can be described as an independent service provider that connects companies facing a specific problem with a global community of scientists, who are able to provide solutions to these specific R&D challenges. Put differently, InnoCentive represents a virtual knowledge broker between two or more parties. Customers of InnoCentive, for instance, are BASF, Novozymes, Dow Chemical, DuPont, Henkel, P&G, Syngenta, Nestlé PURINA, and Evonik Industries. The solver community of InnoCentive consists of more than 300 000 individuals from nearly 200 countries, who have submitted more than 40 000 solutions. For firms that face a specific problem (“seekers”), InnoCentive is a cost‐ and time‐efficient mechanism for tapping into scientific knowledge distributed across the world as well as for connecting with various sources of innovation, including customers, suppliers, and scientists from diverse disciplines [1, 53–56].

In addition, firms may have to define the extent to which customer co‐creation practices become an integral part of their overall business practices. This decision mainly includes the intended duration of customer co‐creation practices (continuous versus selective) as well as the underlying co‐creation substrate (single product versus product group versus entire product mix). In stable markets with a relatively low degree of changing customer needs, a selective pursuit of customer co‐creation practices on a project basis might be sufficient to require customer feedback on the performance of existing products as well as the emergence of new customer needs. In dynamic markets with volatile customer needs, firms benefit more from customer co‐creation practices that are continuously implemented in the firm’s value creation activities. In this way, firms can ensure that they steadily receive direct customer feedback when developing new products and improving their existing product portfolio. Apart from the duration of their customer co‐creation practices, firms also have to decide for which of their products they might make use of customer co‐creation practices. This decision is eventually driven by various factors (e.g., access to customers, degree of complexity, importance, urgency). As a basis for decision making, managers can refer to the various criteria outlined in Box 8.2, “Roster for evaluating the appropriateness of investing in collaborative activities with customers”.

Another degree of freedom refers to the number of customers the firm intends to co‐create value with. Thus, firms might decide to either interact with the entire customer community, a selected group of customers, or each individual customer. In order to holistically benefit from customer co‐creation practices, firms need to engage in personalized interactions with all of their customers and replace the view of the market as an aggregation of customers. Through individually interacting with customers during the firm’s process of value creation (e.g., product design, production, marketing/sales) as well as during the customer’s process of usage (e.g., after sales services), firms are in a better position to consider the needs and expectations of each customer. Customerization techniques (in both B2B and B2C markets) provide firms with new opportunities to actively involve customers in the design, production, as well as marketing of individualized and differentiated products. Instead of interacting with one customer at a time, firms can further interact with a group or network of customers (e.g., online communities, focus groups). Hence, firms not only benefit from individual customer insights but – considering that customers also interact amongst themselves – can also tap into the social dimension of customer knowledge, that is, knowledge that becomes apparent only when shared among a group of customers with shared interests. In all of these cases, firms, however, have to install an adequate infrastructure that enables the efficient and effective engagement in close interactions with customers. The larger the number of customers the firm interacts with, the higher the costs for appropriately coordinating and maintaining these firm–customer relationships [1, 22, 24, 29, 30, 41, 57].

Another core decision refers to the type of customer that becomes involved in customer co‐creation practices. Thus, firms firstly have to decide whether to interact with existing or prospective customers. This decision is primarily based on the firm’s overall (growth) strategy: while firms that seek to either penetrate an existing market (i.e., increasing their market share by incremental product modifications) or to extend their product range by developing new products for an existing market benefit from the collaboration with existing customers, firms that seek to diversify by expanding into new markets benefit more from the incorporation of prospective customers into their value creating activities. Related to these decisions, firms have to decide to include either lead users or ordinary users. The decision might depend on the intended degree of newness of the new products or services to be developed. While lead users are generally preferred when aiming at the development of exploratory innovations, ordinary users should be chosen when the overall purpose of the customer co‐creation practice is to incrementally improve the existing offerings.

In order to assess whether the implemented customer co‐creation practices fulfill the firm’s targets, firms should monitor the performance of their customer co‐creation practices on a regular basis. Figure 8.6 provides an overview of various indicators firms can rely on when assessing the performance impact of their customer co‐creation practices. While performance indicators might differ with regards to the different stages at which customers are involved in the value creation process (reaching from the front end of innovation to the consumption/usage phase), performance indicators also differ with regard to the extent to which the performance implications can be assessed by means of objective measures. Whereas objective measures include the number of generated product ideas, the number of process/product innovations, or the increase in market share, subjective measures include perceived innovativeness, perceived usefulness, or positive word of mouth streaming from the firm’s customer co‐creation practices (see Figure 8.6).

8.2.5 BASF as Best Practice for Providing Customized Solutions

The following case of BASF is to emphasize in particular the relevance of customer co‐creation practices in a B2B setting such as the chemicals industry. BASF – the largest chemical company in the world – generally shows a strong customer‐orientation and is seriously committed to serving its customers with superior value through close interactions with them. According to Kurt Bock, CEO and chairman of the executive board at BASF, in 2013 “[BASF] sold more, worked more closely together with [its] […] customers and enhanced [its] […] portfolio” [59: 20]. BASF’s declared goal is to align its businesses even more closely with its customers’ needs. Through close collaborations, BASF develops customized products as well as functional materials and system solutions jointly with its customers. Customers, however, have various needs and expectations with regard to the way they interact with BASF as suppliers. A proper approach to dealing with those diverse expectations is the definition of various need‐based customer segments and the subsequent derivation of various Customer Interaction Models (CIMs). By means of these CIMs, BASF seeks to ensure that customers’ needs and expectations are effectively addressed in terms of both the form and level of firm–customer interactions. These six CIMs are:

1. trader/transactional supplier (numerous anonymous or shallow buyer–supplier relationships);
2. lean/reliable basics supplier (supply reliability is an important buying factor for customers);
3. product/process innovator (customers are interested in superior performance products/services);
4. value chain integrator (customers open to shifting parts of their own value chain);
5. standard package provider (customers configure their own packages);
6. customized solution provider (customers are willing to partner with supplier to jointly develop solutions) [1, 59–61].

The CIM to be chosen depends on the specific business. In the classical chemical business, BASF primarily offers commodities, namely, basic products from the “Chemicals” segment (e.g., sulfuric acid, plasticizers, caprolactam, propylene). In this cost‐driven business segment, BASF primarily aims at supplying its customers reliably and cost‐effectively. Accordingly, interactions between BASF and its customers are limited to the sole exchange of (standardized) products. Following the CIM “trader/transactional supplier”, BASF may not offer any after sales services nor engage in personalized interactions during sales. In the “Performance Products” segment (e.g., personal care ingredients, food additives, home and personal care items), BASF, on the other hand, offers a wide range of customized products. Here, BASF interacts more closely with its customers and, for instance, also collaborates with its customers in joint projects. Employees of BASF “work closely together with customers from an early stage in order to develop new products or formulations for a specific industry” [59: 50]. Moreover, in the “Functional Materials and Solutions” and “Agricultural Solutions” segments, BASF also offers functionalized materials and solutions (e.g., engineering plastics, concrete additives, automobile and industrial coatings). Since the primary target of these businesses refers to the supply of tailor‐made intelligent solutions that help customers to achieve more value, businesses within these segments require close interactions between BASF and its customers. In these businesses, BASF may follow the CIM “customized solution provider”. Thus, BASF engages in customer‐specific collaborations to fulfill the unmet needs of its customer, who “fairly shares value jointly created” (BASF, 2011, p. 35) [1, 59–61].

The supply of tailor‐made intelligent solutions very often implies that engineers of BASF work alongside its customers and provide on‐site support, for example, during the introduction of a new production system and/or during an ongoing production process. We can refer to BASF Coatings as a best practice, where its customers in the automobile industry are provided with extensive on‐site support. Instead of selling paints to its customers, BASF Coatings follows a “cost per unit approach”, implying that customers are charged per unit of painted car instead of per ton of paint. As a consequence, engineers at BASF Coatings are active at the customer’s plant, working jointly with the engineers of the automobile manufacturer. In this way, BASF Coatings actively supports the value creation process of its customer (customer co‐usage, Figure 8.4). As part of these co‐creation practices, BASF Coatings supports its customers with regard to managing the material flows as well as the coating process, provides technical and analytical services, conducts laboratory analyses, detects and remedies defects, and is responsible for documentation of material consumption and quality data. Thus, BASF Coatings can directly and immediately interact with its customer as soon as any questions or problems arise during the coating process. For example, Achim Harms, former head of the BASF Coatings service team, stated that “[w]hen VW built their new paint shop, we were right at their side with plenty of valuable advice. And in the implementation phase as well, we checked the seals and rubber parts that were used in the new line” (SpecialChem, 2004) [1, 62, 63].

Another example is demonstrated by the collaborative activities between the BMW Group and BASF Coatings during the development of the new coating technology “Integrated Process II” (an example of customer co‐development and customer co‐launch, see Figure 8.4). To successfully complete the joint project at the Mini plant in Oxford, employees of both partners worked closely together. Wolfgang Duschek, head of the joint project between BASF Coatings and BMW Group, stated that “[we] worked with the BMW Group crew for many months, including many weekend and night shifts, in order to make this project successful. It attests to the fact that with the right ideas, perfect teamwork, and great partnership, great success can follow” [64]. The new coating technology had several considerable advantages for the BMW Group, including an increase in production from 200 000 vehicles to 240 000 vehicles per year. Owing to the development of a basecoat that integrates the positive properties of the primer (e.g., stone chip protection, ultraviolet resistance), both partners were able to cut out an entire coating step (primer application and the primer oven) without suffering any loss in terms of quality. The new technology – the result of a joint value creation project between BASF Coatings and one of its customers – eventually led to significant savings in terms of time, materials, as well as energy and labor costs [64–66].

While the previous two examples emphasize the benefits of co‐locating engineers at customers’ plants, BASF also offers manufacturing firms or other industrial operation providers with various opportunities to co‐locate their businesses at one of BASF’s plants. By these means, these firms can directly profit from shared infrastructure, shared utilities, and shared services. Through offering intelligent system solutions and high‐quality products on‐site, BASF actively and directly supports its suppliers, customers, and other co‐location partners in successfully doing business [67].

8.3.1 Emergence of Chemical Supplier‐induced Innovations

Research on supplier integration in the new product development processes disclosed meaningful advantages for manufacturers in terms of reduced development costs, increased time‐to‐market, and improved product qualities. In particular, the development of products that comprise a high degree of complexity requires a more intensive integration of suppliers [68–70]. Hence, suppliers of research intensive industries, such as the chemical industry, play an essential role. The relevance of suppliers in inducing innovations can be ideally shown by various examples in the field of detergents. In a case‐based analysis, the following three classifications of causes that induced changes in detergent formulation were identified: economic, ecological, and technological causes [2].

Economic‐driven changes refer to adaptions in formulations that are supposed to improve the firm’s competitive situation within a specific business. To this end, the newly applied raw materials, and subsequently the adapted end‐product, need to address an additional customer need or preference. The communication of the new value proposition through, for instance, advertisements, should provide justification for the high prices charged and increase the overall sales. One example is the product Persil that contains an integrated softener effect. The “2‐in‐1” product offers two functions (cleaning and softening), which makes the additional use of a softener obsolete and, hence, provides the customer with an added value (i.e., high‐performance products and simple handling) compared with standard products in this category. The development of the “2‐in‐1” product was eventually a result of Henkel’s close collaborations with their raw materials and fragrance suppliers [2, 71].

Another economic‐related cause for changes (more specifically substitutions of raw materials) in formulations refers to economic changes within the raw material market. While demand‐driven shortages in the supply of raw materials can significantly impact the raw material prices, an increase in raw material prices can also stem from structural changes within the industry, such as the reduction of the total number of suppliers associated with the formation of oligopolies or – in an extreme case – the formation of monopolies. This, for instance, could be observed with regard to citric acid producers in the year 2008. Triggered by price dumping of Chinese suppliers, which started with the massive exports of citric acid in the EU in the 1990s, many European suppliers were not able to withstand the strong price pressure from China and, thus, had to discontinue their production in Europe (e.g., Tate & Lyle). The few citric acid producers that survived this price war formed an oligopoly and eventually initiated an investigation at the European Commission into suspicions of dumping. As a result, the European Commission imposed an antidumping duty on imports of citric acid from China (depending on the product of between 42.2 and 49.3%). As a consequence, the prices for citric acid rapidly rose (of both Chinese as well as the European suppliers’ oligopoly), combined with a shortage of the raw material in the European markets. In general, increasing raw material prices, which cannot or only with difficulty can be passed on to the end customer, significantly reduce the margins of the manufacturer. Hence, in many cases the substitution of certain raw materials may remain the only option to offer the product at a competitive price while simultaneously exploiting adequate profit margins. In the search for substitutes, manufacturers might collaborate closely with raw material suppliers, which often provide a consultancy service (e.g., demonstration of alternative raw materials) [2, 72, 73].

Apart from economically driven causes, changes in formulations might be further derived from the manufacturer’s increasing need to respond to ecological and eco‐toxic problems (i.e., “ecology push”⁶). The pressure to respond to such problems might result either from voluntary agreements and self‐commitments (e.g., abandonment of the use of phosphates in detergents) or from legal regulations (detergent regulation, wash and cleaning agents act, REACH⁷). Furthermore, the increasing awareness of environmentally friendly products among customers forces manufacturers to develop solutions that contribute to or – at least – do not harm the environment (“ecology pull”⁸). In addition to these ecological factors, social aspects also represent important decision criteria for the choice of raw materials, such as the selection of certified raw materials (e.g., certified palm kernel oil). In these decisions, manufacturers significantly depend on the knowledge and technological competences of their suppliers. The case of green surfactants, for instance, illustrates that suppliers to the chemical industry contribute significantly to the development of sustainable products. Hence, ecological factors have triggered the technological development of new products, which – as they met unsatisfied customer demands – were successfully introduced into the market [2].

Finally, raw material changes might derive from technological causes that are either initiated by the continuous improvement of existing products or through the development of novel products (“technology push”). Improvements to existing products in the field of detergents are normally related to the primary (removal of dirt) and secondary (prevention of re‐contamination with previously removed dirt) washing effect of detergents. These innovations can be either achieved by substituting old components with new, more efficient components or by adding new components, such as enzymes or color transfer inhibitors. These developments are usually associated with increasing the overall user friendliness of a certain product. One example refers to the hygiene rinser, which substitutes a softener in the last rinse cycle and, thereby, ensures a sterile result for the laundry at temperatures from 15 °C. When developing new formulations, suppliers often significantly contribute to the overall success of the manufacturers’ innovative efforts. For instance, in the case of Perwoll Sport (a mild detergent for special applications such as sport and functional textiles (sportswear)), Henkel developed a new formulation in close collaboration with the fragrance supplier Givaudan and the specialty chemical supplier Evonik, which provided zinc ricinoleate – a substance with a unique odor absorbent effect [2, 76].

Taken together, causes for raw material changes in formulations can be dedicated to the areas of “economy”, “ecology”, and “technology”. If “technology push”/“ecology push” and “market pull”/“ecology pull” are successfully combined, these raw material changes in formulations may eventually result in innovations that might be successfully introduced and adopted in the market (Figure 8.7).

Box 8.5 outlines some of the benefits of supplier integration.

8.3.2 Typologies of Supplier Integration and Roles

The supplier’s contribution to the value creating activities of a manufacturer depends on the extent to which the supplier is integrated into the practices and processes of the manufacturer. For less innovative collaborative projects (e.g., a simple product modification), the supplier will only be weakly integrated into the new product development process. Hence, the supplier only provides independently developed components and, thus, it is not actively integrated into the manufacturer’s development process. When the primary aim of the manufacturer is to develop entirely new products, suppliers should be more intensively involved in the development process in order to actively benefit from the supplier’s technological competence. In general, the following three types of supplier integration exist: “white box”, “grey box”, and “black box” (see Figure 8.8) [77–79].

White‐box integration refers to the form of supplier integration with the lowest level of supplier responsibility. Suppliers are somewhat regarded as external consultants to the firm. Although suppliers participate in discussions about certain specifications and requirements, it is still the firm that is entirely responsible for making the final decision on the specifications and for accomplishing the final development process. Hence, although the firm considers the suppliers’ know‐how and expertise on certain solution‐related topics, the final solutions are developed entirely in‐house without any active contribution from the suppliers [2, 69].

Black‐box and grey‐box supplier integrations constitute supplier integration from a product and process point of view, respectively. Whereas black‐box supplier integration refers to the integration of holistic solutions, such as externally developed parts, components, or subassemblies, into the manufacturer’s new product development process, grey‐box supplier integration refers to collaborative R&D activities in which the supplier’s knowledge is directly incorporated into the manufacturer’s new product development process. In black‐box supplier integration “suppliers carry out product engineering activities on behalf of their customers and even develop components or entire subassemblies” [16: 102]. In grey‐box supplier integration the “supplier’s engineers work alongside the customer’s engineers to jointly design the product so the supplier’s process can be effectively integrated with the design” (Koufteros, Vonderembse, and Jayaram, 2005, p. 102) [1, 2, 16, 77, 80].

Instead of referring to the degree of responsibility for certain development activities that are transferred to suppliers, suppliers might also be classified by means of the overall contribution they make to the manufacturer’s value creating activities. Here, the following three different classifications are made: “solutions provider”, “technology provider”, and “problem finder & solution provider” (see Figure 8.9). While the “solution provider” solely responds to the request from the manufacturer, the “technology provider” proactively offers new technologies. The “problem finder & solution provider” takes a step even further and offers proactively complete solutions for new products of the manufacturer. The last is particularly oriented towards the needs of the end‐consumer [2].

A supplier that acts as a “solution provider” identifies solutions to problems of the manufacturer. Here, the manufacturer takes over the initiating of innovation activities by identifying the needs or rather the problems of consumers through various market research techniques, and subsequently transfers the problem of the consumer into a technological problem. If the manufacturer is not able to solve this technological problem on its own, its supplier supports the manufacturer in developing an adequate solution. Depending on the availability of the required technology for the required solution, the application of existing technologies (e.g., through purchase of a new raw material (“from the shelf”)) or the development of new technologies in the context of “black‐box” or “grey‐box” supplier integration takes place. Depending on the degree of novelty, incremental or radical innovations might be the result of this type of collaboration activity. The supplier, however, needs to possess a specific technological knowledge and a certain understanding of the market. The problems have to be understand and suitable customer‐tailored solutions have to be identified. Taken together, the overall contribution of the supplier in the new product development process can be described as being reactive rather than proactive [2, 81].

As a “technology provider”, the supplier initiates innovations at the manufacturer’s side by engaging intensively in its own research and development activities. Based on the developments of technologies or a raw material, the supplier actively searches for suitable fields of application. In so doing, the new technology is presented to manufacturers with the purpose of initiating downstream innovations. The manufacturer, who typically holds extensive knowledge of the consumer needs, steadily seeks to identify existing or new problems of the consumer and, when developing potential solutions to these problems, considers in particular the newly developed technologies by its suppliers. Thus, an adaption of the suppliers’ newly developed technology might be required, which eventually can be conducted by means of “grey‐box” supplier integration, implying an intensive exchange of technological knowledge by both partners. This type of collaboration, which is characterized by an active commitment and contribution of the supplier in the manufacturer’s value creating activities, might eventually result in the development and introduction of either incremental or radical innovations [2, 81].

Suppliers that act as a “problem finder & solution provider” usually take over a large part of the manufacturer’s innovation activities, such as ideation and development activities. The supplier simultaneously senses recent developments within the primary market (downstream manufacturers) as well as within the secondary market (consumer market). By identifying and combining the needs of both the manufacturer and the consumers, suppliers are in a better position to develop ideas and concepts for new products that are of superior value to the manufacturer. By combining the concepts of “market pull” and “technology push”, suppliers particularly seek to combine both superior technology‐ and solution‐related knowledge in supporting the manufacturer with valuable input for new products. The manufacturer, thus, profits from the supplier’s efforts in new product development and the provision of complete solutions for products that address unsatisfied needs of consumers. The “problem finder & solution provider” follows a multi‐stage marketing approach, which encompasses all kinds of marketing activities that are directed towards its customers’ customers [2].⁹

8.3.3 Supplier Willingness to Be Involved in the New Product Development

In many cases manufacturers are presented as the most powerful organ in any buyer–supplier relationship, while suppliers only take on a subordinate role and are just expected to follow the manufacturers’ strict guidelines. However, the tendency of shifting value‐added activities from manufacturers towards suppliers demonstrates the increasingly important role suppliers have for the manufacturers’ value creating activities. Suppliers can be regarded as an important source of competitive advantage, considering that they are able to generate new solutions and initiate valuable innovations for the manufacturers. While in the past contracting with multiple suppliers had been argued as the opportunity for the manufacturer to become independent of certain sources as well as to reduce the potential risk of shortages in supply, recent decades have shown that firms have increasingly reduced the number of suppliers they are contracting with and, rather, deal with a limited number of qualified suppliers. Inherent with this development, buyer–supplier relationships have become closer and more long‐term oriented. Thus, rather than considering buyer–supplier relationships as being adversarial and solely focusing on the process of exchange, manufacturers increasingly establish a partnership mentality with their suppliers, implying that manufacturers also seek to tap into their suppliers’ intangible resources (e.g., ideas, expertise, and solution‐related knowledge). Thus, since this development might also imply the emergence of a strong demand for the strategically important suppliers, some suppliers may be in the position to more confidently select their collaboration partners [1, 77, 82–84].

8.3.4 Value Creation and Supplier Relationship

A collaborative manufacturer–supplier relationship might only be established and sustained if the (expected) outcome is beneficial for both parties, that is, if the (expected) outcome is of higher value than the value generation with an alternative relationship (“the whole is greater than the sum of its parts”). Thus, to be able to make adequate decisions about which relationships to invest in, firms have to understand and evaluate the value generated within different business relationships. The concept of value creation within business relations is an established concept in the marketing literature and can also be transferred to the supply chain context. Considering the increasing relevance of suppliers as a strategic resource for achieving competitive advantage, profound knowledge about the factors that lead to close relationships with certain suppliers is indeed very important. In so doing, value generation has to be considered from a supplier’s perspective in order to offer suppliers adequate incentives to contribute to the overall success of the relationship [2, 85–87].

Based on social exchange theory, the value of a relationship can be defined by the difference between the benefits and the costs [88]. Here, different facets of value generation have to be taken into account. While most of the existing literature primarily considers economic advantages (e.g., reasonable prices or capacity utilization), other, less obvious, drivers of value generation are often neglected though they are also of great importance (e.g., strategic information exchange or access to important network). Following a supplier’s perspective on value generation within manufacturer–supplier relationships, the functions of business relations are considered as activities and resources provided by the manufacturer. These activities and resources are performed and applied in the context of the specific manufacturer–supplier relationship and are supposed to produce an advantage from the supplier’s perspective [87, 89–92].

A difference can be made between direct and indirect functions of business relations. While direct functions are defined by their immediate effect on the value generation through the manufacturer, indirect functions either have a future impact or have an effect across other partners within the network. Direct functions of the manufacturer–supplier relationship comprise activities and resources of the manufacturers that directly create an advantage for the supplier. These are subdivided into [90, 93, 94]:

• sales function – manufacturers purchase large quantities and thereby ensure the capacity utilization of the supplier;
• profit function – manufacturers generate a value for the supplier by securing the profitability of the relationship through reasonable prices;
• safeguard function – manufacturers also buy in unstable market situations and during crises and, thereby, ensure cost efficiency for suppliers.

Indirect functions, on the other hand, generate a value within a manufacturer–supplier relationship by offering a more long‐term orientated and, thus, strategic advantage for the supplier. They are subdivided into:

• innovation function – manufacturers contribute to the new product development of suppliers;
• reference function – manufacturers serve as positive reference and make the supplier credible to other potential manufacturers;
• information function – manufacturers convey important market and competition information, which is not accessible to the suppliers;
• network function – manufacturers provide access to important organizations and partners from the relevant network.

While the economic cost‐benefit focus might certainly explain to some extent how value is generated in manufacturer–buyer relationships, relational factors such as trust and commitment are of additional importance to ensure a holistic consideration of value generation in business relationships. Successful manufacturer–supplier relationships typically derive from trusting, long‐term oriented associations that are characterized by immediate and close interactions between both parties. As a consequence, many manufacturers reduce their supply base while simultaneously binding strategically important suppliers more strongly. In so doing, evaluating the quality of these relationships (in terms of trust and long‐term orientation) from a supplier’s perspective is of great significance (see Figure 8.10) [95–97].

8.3.5 How Do You Attract the Most Innovative Chemical Suppliers?

To answer this question adequately an empirical study with 94 participants was conducted. The participants were all employees of suppliers for the processing chemical industry in Germany. The suppliers, producing goods for the chemical processing industry, were chosen from the company list of the “Vereinigung der chemischen Industrie” (VCI). The interviewed participants were mainly from the marketing, R&D or sales departments and had maintained contact for at least one year with their B2B contacts within the processing chemical industry, which ensured that the person had sufficient information to participate in the online survey.

Based on this study, the following factors influencing the willingness of a supplier to engage in new product development of a manufacturer are identified. They build important incentives (see Table 8.2), which should be guaranteed by manufacturers to ensure the suppliers’ willingness to participate [2].

1. The engagement in the product development activities of the particular partner is often based on the mutual competences that both partners possess with regard to their relevant technology sectors. Hence, high‐performance partners often come together to establish a collaboration with the purpose of strengthening and expanding their knowledge through an intensive exchange of their experiences. For the manufacturer, this approach implies that – contrary to the strong tendency of outsourcing certain value creating activities to external partners – the manufacturer’s expertise in strategic relevant technology sectors remains within the company and can be further developed. Advanced research and development competences in relevant technology sectors increase the attractiveness of the manufacturer for high‐performance, innovation‐ and technology‐orientated suppliers and thus can positively influence the decision of the supplier to collaborate in the new product development. Furthermore, the development of their own technological competences enables the manufacturer to better absorb knowledge and also to better utilize insights gained from the collaboration. In addition, manufacturers can reduce the technological dependence on their suppliers. For these reasons, the constant enhancement of their own technological competences cannot be neglected [2, 98].
2. Furthermore, the supplier’s evaluation of the benefits of the entire manufacturer relationship based on economic as well as noneconomic criteria can considerably influence the supplier’s decision to collaborate. Thus, direct functions, that is, direct economic contributions by the manufacturer, can have a positive influence on the supplier’s general commitment and increase the supplier’s long‐term commitment to maintain the relationship. The direct functions, however, reveal no influence on the supplier’s engagement in new product development activities. This interesting finding might be explained by the following assumption. The integration of suppliers into the manufacturer’s new product development process might be required for new businesses rather than for established businesses. Since in new businesses the focus is more on potential future earnings, the manufacturer’s current economic contributions might not necessarily have an influence on the supplier’s willingness to engage in the new product development process of the manufacturer. Thus, manufacturers should offer suppliers an incentive that is related to the supplier’s future earnings that will derive from the collaborative development. In so doing, fair and collaborative conditions have to be created [2].
3. With regard to indirect functions (i.e., long‐term orientated advantages of a manufacturer–supplier relationship), the same study discloses a positive influence of manufacturer–supplier relationships on the supplier’s general commitment as well as on the supplier’s engagement in the new product development. A slight influence on the supplier engagement is conveyed by the supplier’s commitment. Thus, when deciding about their engagement in the new product development, suppliers consider the long‐term advantages of the relationship, which, for instance, might result from an open exchange of information with the manufacturer. In accordance with the “Open Innovation” paradigm (see Chapter 5), suppliers seek to achieve competitive advantage through a continuous and open exchange of information and the subsequent acquisition of valuable knowledge. Further, the manufacturer can act as a network promoter, becoming responsible for the connection with the supplier within the relevant network. Here, increasing competition among entire networks replaces the predominant competition among single companies. Thus, getting access to strong competitive networks is becoming an important factor for success in the chemical industry. To increase their own attractiveness and, through these means, the supplier’s willingness to become integrated into new product development, manufacturers need to possess strategic information as well as access to a strategic relevant network. Manufacturers subsequently have to share this information with suppliers and offer them the opportunity to participate in the manufacturer’s network [2, 99].
4. The empirical analysis further confirms a strong influence of the trust factor that the supplier shows towards the manufacturer. From the manufacturers’ perspective, these findings imply that the supplier’s long‐term interest to maintain the manufacturer–supplier relationship can be influenced through the design of a trusting collaborative culture. However, particularly in relationships between manufacturers and suppliers, the trusting collaboration is often threatened by price negotiations and opportunistic behavior of the partners. Thus, to foster long‐term collaboration, both partners should define mutual targets that represent satisfactory results for both partners. To foster the emergence of trust, manufacturers not only have to positively reward the trust granted by the supplier, but in return they also have to proactively offer a significant level of trust to their suppliers. Further, the compliance with agreements, an open treatment of problems, as well as the strict consideration of the interests of the partner have to be ensured to strengthen a trusting climate between both partners. Moreover, inter‐organizational trust is always based on the personal relationships between the employees of the companies. Thus, employees, who are involved in close interactions with the representatives of the supplier company and take over the responsibility for managing the relationship, play an essential part in building and shaping strong relationships with suppliers. They act as a relationship promoter and can strongly influence the quality of the relationship. From the manufacturers’ perspective, it is preferable to position qualified employees in this area of responsibility. They should function as direct contact partners and take over the maintenance of the relationship with a certain continuity. Furthermore, empirical evidence is provided that commitment completely mediates the relationship between trust and supplier engagement. This finding illustrates the central role of commitment in manufacturer–supplier relationships. Only if suppliers show a certain degree of commitment will a trusting relationship affect the supplier’s engagement in the manufacturer’s new product development activities [2, 100].
5. The influence of the suppliers’ dependency can differ significantly regarding the specific dependency situation and its causes. On the one hand, a specific dependency situation can enforce the formation of a collaborative relationship. On the other hand, the dependency and the resulting disadvantages can harm a collaboration through opportunistic and non‐collaborative behavior of the partner, and thus lead to the termination of the relationship. In general, if manufacturers are in a more powerful position than their suppliers, they should seek to avoid any opportunistic behavior, since such a behavior might reduce the level of trust and harm the durability of the manufacturer–supplier relationship [2, 101–103].
6. The commitment of the supplier represents a central influential factor on the supplier’s engagement in the manufacturer’s new product development activities. It not only has a direct influence, but further strengthens the effects of other factors. Thus, commitment represents the key factor for successful supplier integration and can be considered as a control mechanism: if the supplier’s commitment is guaranteed, suppliers might be more willing to engage in the manufacturers’ new product development activities that are characterized by high risk. In addition, a supplier’s commitment can complement the control mechanisms that are established in a relationship or can even partially replace inefficient and bureaucratic control processes implied by contractual regulations. Hence, the supplier’s commitment is based on the recognized advantages of the relationship and the resulting intention of the manufacturer to retain the manufacturer–supplier relationship. This positive attitude forms the basis for successful collaborations between manufacturers and suppliers [2].

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