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Future R&D Strategies in Food & Drinks
Evolution from Orthodox Approaches to Open Innovation Models

  • Publication Date:March 2010
  • Publisher:Business Insights
  • Product Type: Report
  • Pages:123

Future R&D Strategies in Food & Drinks Evolution from Orthodox Approaches to Open Innovation Models

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?
  • 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
    • 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
    • Primary research methodology
    • Product Launch Analysis
    • Industry opinion survey
    • 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
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