Restructing the innovation web
Today’s customers want tailored solutions to their problems and needs. For the food industry, traditionally good at mass production, this is easier said than done. The question is how to turn customer data into profit.
Elsevier Food International Vol.7, Number 4, November 2007
Vincent Hentzepeter
Many companies spend fortunes on marketing, buying market share rather than selling products consumers really want. It shows the sector’s struggle to transform a product-based strategy into a consumer demand based approach. It was Unilever that kept on pushing Slim Fast weight control products, while the market was in fact asking for low carb. It did not work. And now the multinational is considering selling this brand that failed to yield profit. When speaking about failing innovation processes, Unilever is not an exception. It is high time to restructure the innovation project, as a recent, yet to be published A.T. Kearny report (Creating the Future in Food) suggests. The key word here is sharing innovation with other parties and breaking up the innovation chain in competence modules, because even a food company cannot be world class in all capabilities.
Copy and paste
The food sector is famously known for its copy and paste culture.
Line-extensions, me-too products and reintroductions dominate the shelves. This does not come as a surprise. Breakthrough innovations in the true sense of the word are extremely difficult to accomplish in this mature sector and pose high financial risks, as longterm investments in R&D are no guarantee for high cash flows. One of the problems is that in the light of the shortened life cycle, returns on food innovations can be disappointing.
Moreover, food producers face the scrutiny of shareholders if products fail to render success.
Given the current poor performance of the food stock market, companies are increasingly put under pressure to speed up their introduction rate. The added value of many of these socalled ‘quick wins’ is, however, questionable. What are really needed are innovative products that address customers’ needs, which at the same time have a relatively short time to market in order to keep up with consumer trends.
“Honestly, the innovation level has to be higher,” says Nirmalya Kumar, professor of marketing at London Business School and author of the book Marketing as Strategy (Understanding the CEO’s agenda for driving growth and innovation’). “They work very hard on it but it is a mature industry, and that makes innovation more challenging than in sectors still in their early life cycle stage. Note therefore that innovation in the food industry is incremental rather than radical. Even for a company like Starbucks - I think I heard this lecture about their successes about 25 times.
But realise this, one success must be balanced against the hundreds of radical failures that one does not hear about.”
Most foodstuffs are commodities. Here people are not waiting for major innovations but sometimes they work out well, especially smart products for the masses.
Kumar: “Sara lee came with the Senseo-coffee machine; a radical innovation. But this is not easy because consumers are not looking for dramatically different solutions in food.
Exceptions are innovations in the functional food sector and in the field of ready-meal solutions. Here you see at this moment most opportunities for innovation. Consumers are looking for meal solutions because they are time compressed and want to eat healthily at the same time. Trying to innovate in both areas is exactly what many companies try to do.”
However, also here, the sky is certainly not the limit. The target audience for these kinds of products remains limited. “The challenge for solution providers is that not everybody wants to pay for them. The UK is most advanced in this respect, especially in food packaging for two persons that offers a full meal solution. You see all producers moving towards this kind of added value. But realise that both in organic and in healthy meal solutions the volume is limited finally. Only a small segment in the society can afford this. Not more than 20 per cent of the population is probably willing to pay for such solutions, I would say. And for the other 80 per cent, it is a daily brutal battle in the food industry and likely to stay that way.”
Building the customerfocused organisation
• Do we have a customer-focused strategy?
• Do our processes operationalise the strategy
• Do we organise customer needs?
• Do we have a customer-focused culture?
• Do we invest in market competences?
• Do we allocate adequate resources formarketing?
Source: Nirmalya Kumar, ‘Marketing as Strategy (Understanding the CEO’s agenda for driving growth andinnovation’)
R&D-companies
Offering food solutions in an increasingly consolidating and competitive market, with shorter life cycles and a need for higher returns on investments, asks for a new vision on how to organise the innovation process. Companies that want to stay ahead of competition will have to consider which are core R&D activities and which ones are not. By gaining access to knowledge and technologies that are not available in house, companies increase their innovative power while at the same time speeding up the innovation process. Analogous to what has happened in the high tech and biotech sector and increasingly happens in the pharmaceutical field, future product development in food can be streamlined by a modular approach in which each of the parties involved takes part in the innovation process. As a consequence, highly specialised R&D companies have emerged in the life sciences sector. These (exclusively) licence their innovations to pharmaceutical companies whose primary concern is how to scale up the production process and commercialise new medicines.
The R&D supplier industry in the food sector is still in its infancy but may grow to pharmaceutical proportions in the next decade.
Today, innovation partners can be found in food research companies and the ingredient and packaging suppliers. However, these initiatives are not yet really taking off. Most producers are reluctant to share information with other parties. It remains a hot potato, as long as the entire R&D and production process is regarded as vital and therefore crucial for the company’s future.
Portfolio management
However, scepticism does not prevail in all companies. Heineken, Sara Lee, Interbrew Ambev, Procter & Gamble and Kraft are examples of food producers that have to some extent opened up their companies to other parties. Slowly but surely, outsourcing certain parts of the product development process is becoming more accepted.
A gradual process that is inevitable in the end.
“R&D in food becomes more like innovation portfolio management,” says Alexander Belderok, principal at A.T. Kearney’s Amsterdam office. “It guides resources, say money, towards the relevant areas of R&D and ensures that the total requirement is obtained in the most optimal way: acquiring generic R&D and keeping exclusive the really crucial R&D.
This fundamentally changes the notion that R&D is a limited resource and projects have to be matched with capacity. If there is an opportunity, R&D will be assembled. And if capacity is producing generic innovation, it should be considered for outsourcing.”
Belderok stresses it will not become a simple choice between in- or outsourcing R&D. The decision tree will be very complicated. “This requires probably a much more centralised perspective as no R&D sub-department is going to terminate itself if its producing “generic” innovation which can be obtained more cost effectively in the market. The R&D process will be even more connected to the business, as stringent prioritisation will be required to decide on crucial parts of the R&D process – in house and exclusive if possible- and the more generic R&D which has to be obtained in the most cost effective way without incurring risks.”
Global innovation network
Assembling R&D and gaining access to the best knowledge available in the market is exactly what Procter & Gamble (P&G) has been striving for, since the multi-category captain implemented a new organisational programme to manage innovation. ‘Creating a global innovation network to better serve consumers’ is P&G’s corporate slogan for this enlightened approach.
Instead of R&D, the company speaks about ‘Connect and Develop’, words that better express P&G’s determination to anchor ‘creativity and innovation’ within its entire organisation.
The strategy was formulated and made public in November 2002 and has brought a fresh wind in all divisions of the company. The aim of C+D is to be the absolute best at spotting, developing and leveraging relationships with best-in-class partners in every part of the business. CEO Alan Lafley summarised this mission, when he revealed the plans last year, as follows: “Our vision is simple. We want P&G to be known as the company that collaborates - inside and out - better than any other company in the world. Connecting with the world’s most inspired minds. Developing products that improve consumers’ lives.”
Open-door policy
What’s new about the C+D-approach is the strong focus on ready-togo innovation. This is more than spotting breakthrough developments anywhere in the world, acquiring and reapplying them to its brands and rapidly introducing them to the consumer. It also includes a global innovation network to all individuals, institutes and companies that think they might mean something for the multinational’s long-term success. Fields of interest are product, packaging, technologies and commercial opportunities. Ted Zitell, McMillan-Doolittle partner affiliate at Toronto, thinks P&G’s first man did a great job when he implemented such fundamental changes in the way innovation was perceived, practised and structured in this huge company.
“Today Procter & Gamble is a good example of a company that has made a change by introducing an open-door policy. They buy either a well-known company like Schwarzkopf and extend this strong hair care brand or use their own brand umbrella as a strategy for product development. In this way they use the power of their brands to leverage innovation for consumers. The company has made a cultural change and understands when and where consumers use their product and where they purchase it,” says Zitell.
Today P&G managers look at brands as selling solutions. “Of course, the primary objective of product development is still to increase sales and market share but they look at it as a corporate strategy to meet consumer demand and profit from their brand asset,” adds Zitell
It has also given P&G a frontrunner position in the food market. Zitell: “Look at their sales, their numbers are fantastic as well as the work in categories they operate in. Unilever will have to respond. The question is how they will manage to deliver the wow, when you, think of their slow innovation process and all this test marketing. It can take them two years to get a new product on the market, that’s far too long. I think P&G-CEO Alan Lafley has unleashed something here. Yes, this change can be attributed to him. That is quite a performance for a large company like P&G that invented brand management in the 1920s and was the first to advertise. They are a difficult ship to turn in the sea. But they did it, realising in time the world around them had changed.”
Consumer experience
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Heineken linked up with key partners that enabled it to come up with an innovative draught beer system launched early this year. |
This is exactly why Sara Lee’s Senseo coffee concept is more than a bunch of one or two person coffee pads in a package. The pads are part of a total coffee concept: offering any consumer a constant high-quality cup of coffee in a well-designed, monkey-proof machine with the right aesthetics in a fast and convenient way.
However, offering added value did not come easy. Before Philips became a partner, technical bottlenecks frustrated the innovation process that coffee company Douwe Egberts had initiated. Philips made the technology work and this finally brought the success.
Heineken went through a similar process and in March this year launched a draught beer system for home consumption. A four-year project with the purpose to bring the out-of-home draught beer experience into the living room, just like Sara Lee, Heineken Beer Systems had to look for partners to solve technical innovation challenges. It meant quite a change in the way new product development had to be organised at Heineken. Quintijn Innikel, business manager at Heineken Beer Systems: “Instead of knowing everything about our products, we had to depend on others who were equally specialised in their field. But we recognised early that we had to find partners to make this project work. Krupps, for example, has a lot of knowledge in making consumer products. Getting hold of this extra knowledge ourselves, would take a lot of time and investments in an area that would never be our core business.” During the project, Innikel never feared that valuable research information would spill over, a general concern among F&B-companies that involve outsiders in their innovation process.
“We took our time to find the right partners. From that moment on ‘secrecy’ was never a key issue. Of course you have to be clear about this through secrecy agreements but the trick of course is to align your mutual goals. For them it should be just as exciting and profitable as for us. Once you have reached that point, secrecy is not a big deal anymore. It is real co operation and therefore you have to trust each other.”
Success factor
Krupps was the biggest but not the only partner. “To create this product we took advantage of many smaller companies with specific knowledge. For example, the inner liner is a high-tech material that keeps out all the oxygen and keeps the carbon dioxide inside.
Our suppliers helped us to produce the keg which is made of a special plastic that has been tested in the car industry, well recyclable and high-impact resistant,” says Innikel.
Whether the beer tender will bring the expected success remains to be seen. Initial sales are promising, but competition has not sat still. This summer, Interbrew Ambev announced the launch of its own system for the home market, called PerfectDraft. For this project InBev partnered with Philips. From now on two giant brewers will have to share the revenues of the new market for home-produced draught beer.
However, for the time being it is not the returns on investment but the valuable experience of partnering that counts, says Inniken. “It takes a step to realise that you need other partners to help you realise a certain goal. We are very glad we took that step and learned a lot. Make sure that you orchestrate, make sure that all that contribute to the project have the same target, that is the success factor.”
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