A theory of supplier network-based innovation value

Highlights

• This paper provides a network-based explanation for how buying firms can extract innovation value from their suppliers’ value networks.

• This study develops propositions concerning how different types of structural equivalence, a social network concept, between the buyer’s and supplier’s value networks can lead to different types of supplier innovation value.

• The theory also explains how a supplier’s ties with a buying firm’s competitors can pose both opportunity and risk to buyer innovation.

Abstract

To understand how a supplier helps a buying company create value through innovations, studies have focused on a supplier's internal resources or its relationship with a buying company. Building upon this body of literature, we develop a theory of supplier network-based innovation value in this conceptual paper. This theory explains how a supplier's upstream and downstream value network can be a source of competitive advantage for a buying company. Specifically, it proposes that the levels and types of supplier innovation value is contingent on the configuration of a dual-ego value network, characterized by the locus and degree of buyer-supplier structural equivalence. This theory also explains how a supplier's ties with a buying firm's competitors can pose both opportunity and risk to buying company innovation. This theory contributes to the literature by showing when “seemingly undesirable” suppliers, due to a lack of technical capability or strong relationship with a buying company, might still be valuable to a buying company's innovation.

Introduction

Buying firms increasingly rely on the competencies and resources of their suppliers to better innovate (Calvi, 2012, Narasimhan and Narayanan, 2013). Suppliers can create value for customers by providing or bringing awareness of creative solutions that satisfy customers’ needs (Johnsen, 2009, Kim et al., 2014a). In a recent survey, 83% of responding companies either had or are planning to have formal supplier innovation programs in place so as to capture valuable ideas and information from suppliers (Jennings, 2015). Given the limited relational resources that a firm has, it is important to know which suppliers have more potential to provide innovation value (Schiele, 2006, Smals and Smits, 2012, Tracey and Neuhaus, 2013, Wynstra et al., 2003).

The resource-based view (RBV) has been used to suggest that a supplier's innovation value comes from its internal firm resources (Sjoerdsma and van Weele, 2015). Extending this RBV perspective to a dyadic context, the relational view suggests that a supplier could be valuable due to its particular type of relationship with the buying firm (Dyer and Singh, 1998). In the natural RBV model (Hart, 1995), a supplier could provide value due to its access to natural, physical resources such as water or land. A network-based RBV perspective argues that both shared and non-shared resources in alliance networks can produce competitive advantages for alliance partners (Lavie, 2006). In sum, these studies suggest that when searching for innovation partners, buying firms to look for suppliers who are technically capable, who are similar to them, and with whom they have strong relationships.

However, as recent research indicates, suppliers with whom the buying firm has a weak-tie relationship may be valid or even preferred sources for innovative ideas (Kim and Choi, 2015). A network embeddedness perspective suggests that economic transactions are influenced by other social ties that the exchange parties possess (Uzzi, 1997). Because inter-firm interactions are embedded in the broader inter-organizational networks (Choi and Kim, 2008, Rowley et al., 2000), it is important to go beyond a single node or a dyad and adopt a network perspective for studying innovation (Arlbjørn and Paulraj, 2013, Arlbjørn et al., 2014, Narasimhan and Narayanan, 2013). A network perspective suggests that innovation value can be created by the supplier's value network, composed by its downstream demand network and its upstream supply network. As the saying goes, you don’t just marry your partner, you marry their family too.

Therefore, this study attempts to answer one research question: How does a supplier's value network influence a buying company's innovation? To answer this question, we develop a theory of supplier network-based innovation value, which proposes a supplier's network as an innovation resource for a buying company. The theory is developed in a context of a dual-ego network, where a supplier and a buying company are the two egos with ties to their customers and suppliers. In this case, we are able to (1) consider supplier ties both within and outside a buying firm's supply network, and (2) focus on the interrelationships between the buying company and supplier value networks (Bellamy et al., 2014, Gao et al., 2015, Yan et al., 2014). In this dual-ego network context, we develop a two by two typology of supplier innovation value, which differentiate suppliers by both levels and types of innovation value to a buying company.

Theoretically, this paper contributes to the literature in several ways. First, our theory contributes to the inter-organizational innovation literature by defining and categorizing supplier innovation value, a concept that is not well understood. Second, in a dual-ego network context, we identify buyer-supplier structural equivalence as a factor, in addition to firm- and dyad-level factors, that affects the supplier's innovation value. Finally, our theory contributes to the interorganizational value creation literature by explaining how buyer-supplier structural equivalence could be associated with different types of innovation value that a supplier could contribute to a buying company (Ulaga, 2003, Walter et al., 2001). Managerially, our theory suggests that, when selecting suppliers for innovation, a buying company need to evaluate a supplier's relationships with other organizations, besides considering supplier internal resources and its relationship with the supplier. When developing suppliers, a buying firm may also consider incentivizing a supplier to establish new ties, and/or prune, graft and close existing ties to increase supplier innovation value (Hernandez et al., forthcoming). Understanding that suppliers could differ both quantitatively and qualitatively in innovation value, a buying company needs to ensure a match between supplier innovation value and its innovation needs in order to maximize value creation through supplier involvement in innovation.

The paper is organized as follows. In the next section, we review literature concerning how a firm's ego network influences its own innovation performance. Then, we present a couple of real-world examples, which lead to our definition of supplier innovation value and also motivate a network view of supplier innovation value. We then develop propositions explaining why a supplier's value network can be a source of sustained competitive innovation advantage for a buying firm's innovation. Next we develop propositions concerning that different types of buying company innovation are likely to emerge depending upon different locus and degrees of buyer-supplier structural equivalence. We also develop propositions to explain how a supplier's ties with a buying firm's competitors can pose both opportunity and risk. Finally, we conclude the paper with discussion of theoretical and practical implications, limitations and future research opportunities.