Future R&D Strategies in Food & Drinks: Evolution from Orthodox Approaches to Open Innovation Models
Scripp Business Insights, March 2010, Pages: 123
R&D is a key driver of sales growth in the CPG industry, but returns from investments in R&D and innovation have been falling. This has led to further cuts to R&D budgets, making breakthrough innovations (which typically have higher returns than incremental innovations) even less likely, leading to lower returns still.
This downward spiral in R&D investment is not the only problem. A rigid adherence to orthodox approaches towards innovation, which once served the industry well, are now holding back innovation as they lead to large numbers of undifferentiated innovations hitting the shelves of retailers.
However, major changes are afoot. The advent of open innovation seems to offer a magic bullet solution; it can both improve innovation and simultaneously reduce costs. Certainly the larger, global, players have been quickest of the mark in adopting open innovation approaches, and smaller companies risk being left behind. But open innovation itself is only part of the puzzle – it needs to fit in with a coherent set of innovation strategies and approaches in order for it to work in the long term.
The multitude of approaches available also makes deciding upon innovation strategy (and surprisingly this basic step is often not given enough attention), approaches and processes increasingly difficult. This report examines what the latest strategies and approaches are, what is required in order to execute them effectively and crucially assesses the areas where companies need to tailor approaches to fit their own company’s needs and drive future success.
Key features of this report
- Review and assessment of the strategic innovation options that CPG companies should examine. Crucially, this analysis also covers the need to develop a coherent innovation strategy across categories and platforms and for alignment with overall corporate strategy.
- Failings with current CPG innovation approaches and how these are holding back innovation are examined.
- The various types of innovation approaches and the keys to unlocking their potential are analysed.
- Analysis of open innovation and its potential benefits for the CPG industry is provided. Crucially the steps required in order to effectively approach open innovation are covered.
- A framework for managing innovation pipelines is developed which allows it to be seen if an innovation portfolio contains enough of the right types of innovations in the pipeline in order to secure a flow of innovative products in not just the short-term, but also the medium and long-term.
Scope of this report
- Evaluate all the strategic options available to a CPG company in order to start the processes of deciding upon how to update innovation strategy to lay the basis for future growth.
- Understand the crucial actions and approaches required in order to execute strategic decisions effectively – from updating corporate cultures and skills sets to establishing more effective innovation processes.
- Identify flaws in current innovation practices and understand why these are holding back product innovation. Use this to be able to select only the best, most useful practices for use in the future.
Key Market Issues
- Innovation budgets are under pressure as a result of current innovation approaches resulting in lower returns than before. Companies need to innovate to maintain their sales, but new approaches are required in order to achieve the gains sought.
- Opening up innovation teams and practices to people external to the company (open innovation) is a hot new topic. Yet most firms are only in the early stages of their open innovation programs and need help in optimizing their approaches.
- Many companies can improve their innovation practices and approaches by incorporating, where appropriate, best practices found in other firms. Yet to do this effectively they must first analyze exactly what their overall innovation strategies are and how these fit with overall corporate strategy.
Key findings from this report
- Orthodox approaches to innovation in CPG companies are leading to most new launches being incremental innovations which are poorly differentiated from other products in the market.
- The CPG industry invests relatively little (as a percentage of sales) in R&D compared to many other industries. This is despite breakthrough innovations (which typically require greater levels of investment than incremental innovations) offering higher returns.
- Breakthrough innovations accounted for just 1.5% of all product launches over the last three years.
- A changing innovation environment is creating many challenges to innovation. One major change is the incoming Health Claims Regulation in Europe which will both increase the cost of healthy product innovation and challenge current innovation practices.
Key questions answered
- What are the latest strategies in product innovation and which are likely to offer the best returns for my company in the future?
- What are the pitfalls to avoid when making use of open innovation? What are the best practice approaches to emulate in order to maximize the chance of success?
- What are the flaws in current R&D practices and how should they be addressed?
- How can I manage my overall product development pipelines strategically in order to ensure that innovation activity is optimal for my company?
- What are the latest best practice approaches towards innovation in the CPG industry and which should I seek to apply to my business?
Future R&D Strategies in Food & Drinks
Executive summary
The need to reassess R&D
Improving R&D strategy
Food and drinks: Performance and innovation practices
Case studies
Chapter 1 The need to reassess R&D
Summary
Historic R&D approaches are failing
Innovation is the “backbone” of a FMCG company
Innovation during a recession is vital
R&D budgets in FMCG companies have been cut
There is a downward spiral in innovation budgets
R&D and general innovation face numerous other challenges
Ingrained approaches are holding back FMCG innovation
“Fast following” is an easier route
Selecting an R&D strategy and approach is complex
Innovation should vary on a category by category basis
Variation should not cancel out an overall strategy
New challenges to current R&D practices
Product lifecycle management issues
Product lifecycle management in practice
Time to market for new products is shrinking
New innovation strategies and processes
Adoption of open innovation is in its infancy, especially for smaller companies
The food sector is leading in the adoption of open innovation
Health claims regulation
Accounting for regulation will become embedded in the innovation process
R&D operations can learn from the pharmaceutical industry
Health claims regulation will increase the cost of “healthy” innovations
Consumer uptake of new products
Uptake of new products is currently decreasing, at least in the US
Flaws in current R&D approaches
A failure to meet consumers’ needs effectively
Extreme cost reduction in R&D
British food and drinks producers are low R&D investors
A similar pattern applies to the FMCG industry globally
R&D processes and organizational structures
The lack effective processes and team structures
Conclusions and outlook
Chapter 2 Improving R&D strategy
Summary
The need to define innovation strategy
Defining basic innovation strategy is often overlooked
Deciding on the type of innovation
Breakthrough innovations sell better
Most FMCG companies do not actively pursue breakthroughs
Open or “closed” innovation?
Open innovation is much more than being open to the idea
The danger of over-relying on open innovation
Open innovation can tangibly improve R&D
Defining open innovation
Using inflows and outflows of knowledge to accelerate innovation
Open innovation replaces “hub and spoke” innovation structures
New structures can result in new business approaches
The benefits of open innovation
Case study 1: Using open innovation to create major new products
Open Innovation: collaboration
Collaboration with retailers can be highly successful
The rationale is clear, but uptake has been slow
Collaboration should focus on specific opportunities
Relationships and structures must allow effective working practices
Supplier collaboration is also important
Kraft’s supplier approach highlights how practices can be enhanced
Open innovation: consumer-led approaches
What are consumer-led approaches?
Consumer-led approaches are not the same as using consumer research
Types of consumer involvement
Effectively utilizing consumer-led approaches
Making consumer-led involvement a reality is possible
Consumer-led approaches and supply chain challenges
Smaller volumes and SKU proliferation are obstacles to overcome
Second supply chains for consumer-created products are realistic
Benefits of consumer-led innovation
Making new innovation processes work
The basics: Strategy alignment and engaging employees
Becoming the partner of choice for open innovation
Being the preferred partner is a powerful position to be in
Structural improvements
Removing “roadblocks” is key, but they vary with company size
Cross-functional teams are fundamental to success
Procedural improvements and decreasing time-to-launch
Re-examining stage-gating to make decisions more effective
Enhancing information, especially by “hyper-communicating”
Product innovation as a part of overall product lifecycle management
Using old techniques, like “teardowns” more effectively
Improving and consistently using innovation metrics
Adopting strategic pipeline management
Coordination of activities is crucial
Other strategic options
“Buying in” innovation
Numerous other options bolster improvements
Outsourcing innovation processes
Outsourcing part process is not the same as “open innovation”
Conclusions
There is a gap between views and how companies approach innovation
Chapter 3 Food and drinks: performance and innovation practices
Summary
Introduction
R & D and FMCG company performance
The link between R&D and performance
A complex relationship between R&D investment and sales growth
Food and drinks: R&D strategy and approach
Drivers of R&D
Focusing on competitive pressures could diminish breakthrough innovations
Natural products and ingredients are vital
Substantiated health claims will be an important product feature
Sources of innovation
Most companies still carry out the majority of innovation work inhouse
Outsourcing is about accessing expertise, not about cutting costs
Structures
Regional structures are regarded as offering the best returns
Regions
Asia-Pacific will become an important innovation hub
Food and drinks: Product launch analysis
The number of true “innovations”
There are very few breakthroughs despite their importance
Innovative formulations account for the majority of product breakthroughs
By region
New product launch patterns challenge views about regions’ innovativeness
By company
Some companies have maintained launch activity, while others have cut back
By claim
A clear focus on health
Conclusions
Companies that have cut innovation need to have launched fewer, better, products
Chapter 4 Case studies
Summary
Introduction
Case study 2: P&G is FMCG’s leader in open innovation
Origins of P&G’s approach
Setting the agenda for open innovation
Using innovation networks effectively
P&G uses several proprietary networks
Open networks are also important
Results of the program
Making it work: Key factors
Fast, rigorous screening is a major factor for success
Sharing risks and rewards is vital in becoming the “partner of choice”
Product example: Pringle’s Prints
Time-to-market and cost were reduced by using an open innovation approach
Case study 3: General Mills’ smoothing processes
Origins of G-WIN
General Mills has focused on facilitating connections
G-WIN processes are linked to its innovation strategy
Setting the agenda for innovation
Unmet consumer needs provide the foundation
Enabling connected innovation
Structuring to achieve connected innovation
Simplifying the process of articulating needs
Results of the program
Product example: Progresso Light Soup
One of the main insights came from the yogurt division
Case study 4: Kraft’s renewed focus on innovation
Origins of open innovation at Kraft
Approach to open innovation
A cultural change was required
Business processes have been updated
New tools have been developed to aid innovation efforts
Product example: Bagel-fuls
Case study 5: Danone’s focus on “blockbusters”
Origins of Danone’s approach
Danone’s “blockbuster” approach is reflected in its structures and processes
Structuring to nurture breakthrough innovations
Structural changes have led to a greater focus on breakthroughs
Supplier collaboration is selective
Danone altered its procurement operations
Making it work: Key factors
Research practices fit with wider operations and strategies
Case study 6: DSM is an outstanding innovator
Origins of DSM’s approach
DSM began with an ambitious plan to become “intrinsically innovative”
R&D budgets were also increased
Setting the agenda for open innovation
Trends form the starting point for innovation processes and thinking
Results of the program
DSM achieved results quickly
The focus on tracking innovation makes the process more manageable
Making it work: Key factors
Improved structures and processes were fundamental building blocks of success
Regular sanity-checks (stage-gates) are employed
DSM ensured it opened up its innovation practices
Developing new tools to aid innovation processes has been very important
Product examples
Innovations in nutrition and personal care
Chapter 5 Future outlook
A re-focus on innovation efforts
Innovation approaches will come under greater scrutiny
Innovators will have competitive advantage
Maintaining innovation will be a winning strategy
Characteristics of success will emerge
The best innovators will share common characteristics
Best practices will be adapted
Leaders will adapt the “best in class” innovation practices
Chapter 6 Appendix
Primary research methodology
Product Launch Analysis
Industry opinion survey
Index
References
List of Figures
Figure 1.1: R&D expenditure as a proportion of sales by sector in the leading 850 UK companies with R&D activities, 2003-2007
Figure 1.2: Global R&D expenditure as a percentage of sales by sector, 2008
Figure 2.3: Importance of different types of innovation for food and drinks NPD both now and in the next five years
Figure 2.4: Example schematic of a “hub and spoke” and a fully connected open innovation approach
Figure 2.5: NIKEiD: An example of consumers designing their own products
Figure 2.6: A framework for the strategic management of product development pipelines
Figure 2.7: Industry opinion survey: Importance of sources of innovation
Figure 3.8: Four year growth in R&D investment against four year growth in sales for global food, beverage and personal goods companies, 2003/04 – 2007/08
Figure 3.9: Industry Opinion Survey: Importance of business environment factors as drivers of R&D expenditure in the next five years
Figure 3.10: Industry opinion survey: Importance of product types and ingredients as drivers of R&D expenditure in the next five years
Figure 3.11: Industry opinion survey: Importance of product features as drivers of R&D expenditure in the last and next five years
Figure 3.12: Industry opinion survey: Where does the majority of innovation take place within your company?
Figure 3.13: Industry opinion survey: Importance of various sources of innovation
Figure 3.14: Industry opinion survey: Opinions about various statements about outsourcing R&D
Figure 3.15: Industry opinion survey: Which structures offer the greatest return on investment on R&D expenditure?
Figure 3.16: Industry opinion survey: Innovation ratings of regions now and in five years time
Figure 3.17: Share of breakthrough food and drinks innovations by innovation type, 2007 - 2009
Figure 3.18: Share of global food and drinks product launches, by region, 2007-2009
Figure 3.19: Number of new food and drinks product launches by leading companies, 2007-2009
Figure 3.20: Heat Grid Analysis: Share of claims made by leading manufacturers for their own products, by claim type, 2007-2009
Figure 4.21: Kraft’s alliance framework for open innovation
List of Tables
Table 1.1: R&D value and growth (%); sales and profits growth (%), 2006-2007
Table 6.2: To what extent do you agree/disagree with the following statements in regard to outsourcing R&D?
Table 6.3: Rank in order which region will be the most innovative in R&D in the food and drinks industry in the next five years?
Table 6.4: Rate which R&D organizational structure you believe offers the highest return on investment (ROI)?
Table 6.5: Rate how important each of the following are as a source of innovation?
Table 6.6: Rate how important the following have been as drivers of R&D expenditure in the last five years?
Table 6.7: Major food and drinks manufacturers R&D spend ($m), 2005-2009
- Danone
- DSM
- General Mills
- Kraft
- P&G
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