Future R&D Strategies in Food & Drinks: Evolution from orthodox approaches to open innovation models

Date: March 22, 2010
Pages: 123
US$ 2,875.00
Publisher: Business Insights
Report type: Strategic Report
Delivery: E-mail Delivery (PDF), Hard Copy Mail Delivery, CD-ROM Mail Delivery
ID: FDF694B6473EN

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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?

  • Future R&D Strategies in Food & Drinks
    Executive summary 12
    The need to reassess R&D 12
    Improving R&D strategy 13
    Food and drinks: Performance and innovation practices 14
    Case studies 15


    Summary 18
    Historic R&D approaches are failing 19
    Innovation is the “backbone” of a FMCG company 19
    Innovation during a recession is vital 19
    R&D budgets in FMCG companies have been cut 20
    There is a downward spiral in innovation budgets 20
    R&D and general innovation face numerous other challenges 21
    Ingrained approaches are holding back FMCG innovation 21
    “Fast following” is an easier route 22
    Selecting an R&D strategy and approach is complex 22
    Innovation should vary on a category by category basis 23
    Variation should not cancel out an overall strategy 24
    New challenges to current R&D practices 25
    Product lifecycle management issues 25
    Product lifecycle management in practice 25
    Time to market for new products is shrinking 25
    New innovation strategies and processes 26
    Adoption of open innovation is in its infancy, especially for smaller companies 26
    The food sector is leading in the adoption of open innovation 27
    Health claims regulation 27
    Accounting for regulation will become embedded in the innovation process 27
    R&D operations can learn from the pharmaceutical industry 27
    Health claims regulation will increase the cost of “healthy” innovations 28
    Consumer uptake of new products 28
    Uptake of new products is currently decreasing, at least in the US 28
    Flaws in current R&D approaches 29
    A failure to meet consumers’ needs effectively 29
    Extreme cost reduction in R&D 30
    British food and drinks producers are low R&D investors 30
    A similar pattern applies to the FMCG industry globally 32
    R&D processes and organizational structures 33
    The lack effective processes and team structures 33
    Conclusions and outlook 33


    Summary 36
    The need to define innovation strategy 37
    Defining basic innovation strategy is often overlooked 37
    Deciding on the type of innovation 37
    Breakthrough innovations sell better 37
    Most FMCG companies do not actively pursue breakthroughs 39
    Open or “closed” innovation? 39
    Open innovation is much more than being open to the idea 39
    The danger of over-relying on open innovation 40
    Open innovation can tangibly improve R&D 41
    Defining open innovation 41
    Using inflows and outflows of knowledge to accelerate innovation 41
    Open innovation replaces “hub and spoke” innovation structures 41
    New structures can result in new business approaches 42
    The benefits of open innovation 43
    Case study 1: Using open innovation to create major new products 43
    Open Innovation: collaboration 44
    Collaboration with retailers can be highly successful 44
    The rationale is clear, but uptake has been slow 44
    Collaboration should focus on specific opportunities 44
    Relationships and structures must allow effective working practices 45
    Supplier collaboration is also important 46
    Kraft’s supplier approach highlights how practices can be enhanced 46
    Open innovation: consumer-led approaches 47
    What are consumer-led approaches? 47
    Consumer-led approaches are not the same as using consumer research 47
    Types of consumer involvement 48
    Effectively utilizing consumer-led approaches 48
    Making consumer-led involvement a reality is possible 48
    Consumer-led approaches and supply chain challenges 49
    Smaller volumes and SKU proliferation are obstacles to overcome 49
    Second supply chains for consumer-created products are realistic 49
    Benefits of consumer-led innovation 50
    Making new innovation processes work 51
    The basics: Strategy alignment and engaging employees 51
    Becoming the partner of choice for open innovation 51
    Being the preferred partner is a powerful position to be in 51
    Structural improvements 52
    Removing “roadblocks” is key, but they vary with company size 52
    Cross-functional teams are fundamental to success 53
    Procedural improvements and decreasing time-to-launch 53
    Re-examining stage-gating to make decisions more effective 53
    Enhancing information, especially by “hyper-communicating” 54
    Product innovation as a part of overall product lifecycle management 54
    Using old techniques, like “teardowns” more effectively 55
    Improving and consistently using innovation metrics 56
    Adopting strategic pipeline management 57
    Coordination of activities is crucial 57
    Other strategic options 59
    “Buying in” innovation 59
    Numerous other options bolster improvements 59
    Outsourcing innovation processes 60
    Outsourcing part process is not the same as “open innovation” 60
    Conclusions 61
    There is a gap between views and how companies approach innovation 61


    Summary 64
    Introduction 65
    R & D and FMCG company performance 65
    The link between R&D and performance 65
    A complex relationship between R&D investment and sales growth 66
    Food and drinks: R&D strategy and approach 68
    Drivers of R&D 68
    Focusing on competitive pressures could diminish breakthrough innovations 68
    Natural products and ingredients are vital 69
    Substantiated health claims will be an important product feature 70
    Sources of innovation 71
    Most companies still carry out the majority of innovation work inhouse 71
    Outsourcing is about accessing expertise, not about cutting costs 73
    Structures 74
    Regional structures are regarded as offering the best returns 74
    Regions 75
    Asia-Pacific will become an important innovation hub 75
    Food and drinks: Product launch analysis 76
    The number of true “innovations” 77
    There are very few breakthroughs despite their importance 77
    Innovative formulations account for the majority of product breakthroughs 77
    By region 78
    New product launch patterns challenge views about regions’ innovativeness 78
    By company 79
    Some companies have maintained launch activity, while others have cut back 79
    By claim 80
    A clear focus on health 80
    Conclusions 82
    Companies that have cut innovation need to have launched fewer, better, products 82


    Summary 84
    Introduction 85
    Case study 2: P&G is FMCG’s leader in open innovation 86
    Origins of P&G's approach 86
    Setting the agenda for open innovation 87
    Using innovation networks effectively 88
    P&G uses several proprietary networks 88
    Open networks are also important 89
    Results of the program 90
    Making it work: Key factors 90
    Fast, rigorous screening is a major factor for success 90
    Sharing risks and rewards is vital in becoming the “partner of choice” 91
    Product example: Pringle’s Prints 91
    Time-to-market and cost were reduced by using an open innovation approach 91
    Case study 3: General Mills’ smoothing processes 92
    Origins of G-WIN 92
    General Mills has focused on facilitating connections 92
    G-WIN processes are linked to its innovation strategy 93
    Setting the agenda for innovation 94
    Unmet consumer needs provide the foundation 94
    Enabling connected innovation 94
    Structuring to achieve connected innovation 94
    Simplifying the process of articulating needs 95
    Results of the program 95
    Product example: Progresso Light Soup 96
    One of the main insights came from the yogurt division 96
    Case study 4: Kraft’s renewed focus on innovation 98
    Origins of open innovation at Kraft 98
    Approach to open innovation 99
    A cultural change was required 99
    Business processes have been updated 99
    New tools have been developed to aid innovation efforts 100
    Product example: Bagel-fuls 101
    Case study 5: Danone’s focus on “blockbusters” 103
    Origins of Danone’s approach 103
    Danone’s “blockbuster” approach is reflected in its structures and processes 103
    Structuring to nurture breakthrough innovations 104
    Structural changes have led to a greater focus on breakthroughs 104
    Supplier collaboration is selective 105
    Danone altered its procurement operations 105
    Making it work: Key factors 106
    Research practices fit with wider operations and strategies 106
    Case study 6: DSM is an outstanding innovator 106
    Origins of DSM’s approach 106
    DSM began with an ambitious plan to become “intrinsically innovative” 106
    R&D budgets were also increased 107
    Setting the agenda for open innovation 107
    Trends form the starting point for innovation processes and thinking 107
    Results of the program 108
    DSM achieved results quickly 108
    The focus on tracking innovation makes the process more manageable 108
    Making it work: Key factors 109
    Improved structures and processes were fundamental building blocks of success 109
    Regular sanity-checks (stage-gates) are employed 109
    DSM ensured it opened up its innovation practices 110
    Developing new tools to aid innovation processes has been very important 111
    Product examples 112
    Innovations in nutrition and personal care 112


    A re-focus on innovation efforts 114
    Innovation approaches will come under greater scrutiny 114
    Innovators will have competitive advantage 115
    Maintaining innovation will be a winning strategy 115
    Characteristics of success will emerge 115
    The best innovators will share common characteristics 115
    Best practices will be adapted 116
    Leaders will adapt the “best in class” innovation practices 116


    Primary research methodology 118
    Product Launch Analysis 118
    Industry opinion survey 118
    Index 122
    References 123


    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 31
    Figure 1.2: Global R&D expenditure as a percentage of sales by sector, 2008 32
    Figure 2.3: Importance of different types of innovation for food and drinks NPD both now and in the next five years 38
    Figure 2.4: Example schematic of a “hub and spoke” and a fully connected open innovation approach 42
    Figure 2.5: NIKEiD: An example of consumers designing their own products 50
    Figure 2.6: A framework for the strategic management of product development pipelines 59
    Figure 2.7: Industry opinion survey: Importance of sources of innovation 60
    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 67
    Figure 3.9: Industry Opinion Survey: Importance of business environment factors as drivers of R&D expenditure in the next five years 69
    Figure 3.10: Industry opinion survey: Importance of product types and ingredients as drivers of R&D expenditure in the next five years 70
    Figure 3.11: Industry opinion survey: Importance of product features as drivers of R&D expenditure in the last and next five years 71
    Figure 3.12: Industry opinion survey: Where does the majority of innovation take place within your company? 72
    Figure 3.13: Industry opinion survey: Importance of various sources of innovation 73
    Figure 3.14: Industry opinion survey: Opinions about various statements about outsourcing R&D 74
    Figure 3.15: Industry opinion survey: Which structures offer the greatest return on investment on R&D expenditure? 75
    Figure 3.16: Industry opinion survey: Innovation ratings of regions now and in five years time 76
    Figure 3.17: Share of breakthrough food and drinks innovations by innovation type, 2007 - 2009 78
    Figure 3.18: Share of global food and drinks product launches, by region, 2007-2009 79
    Figure 3.19: Number of new food and drinks product launches by leading companies, 2007-2009 80
    Figure 3.20: Heat Grid Analysis: Share of claims made by leading manufacturers for their own products, by claim type, 2007-2009 81
    Figure 4.21: Kraft’s alliance framework for open innovation 100


    Table 1.1: R&D value and growth (%); sales and profits growth (%), 2006-2007 31
    Table 6.2: To what extent do you agree/disagree with the following statements in regard to outsourcing R&D? 119
    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? 119
    Table 6.4: Rate which R&D organizational structure you believe offers the highest return on investment (ROI)? 120
    Table 6.5: Rate how important each of the following are as a source of innovation? 120
    Table 6.6: Rate how important the following have been as drivers of R&D expenditure in the last five years? 120
    Table 6.7: Major food and drinks manufacturers R&D spend ($m), 2005-2009 121

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