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

NEW YORK, Nov. 8, 2010 /PRNewswire/ -- Reportlinker.com announces that a new market research report is available in its catalogue:

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

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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?

Companies mentioned

Danone, DSM, General Mills, Kraft, P&G

Table of Contents

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

Chapter 1 The need to reassess R&D 18

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

Chapter 2 Improving R&D strategy 36

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

Chapter 3 Food and drinks: performance and innovation practices 64

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

Chapter 4 Case studies 84

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

Chapter 5 Future outlook 114

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

Chapter 6 Appendix 118

Primary research methodology 118

Product Launch Analysis 118

Industry opinion survey 118

Index 122

References 123

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 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

List of Tables

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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