AGILE INNOVATION FOR THE FOOD INDUSTRY

Report prepared by the Purdue Agile Strategy Lab in collaboration with the Whistler Center for Carbohydrate Research

December 2017

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Table of Contents

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This report provides an overview of how companies in the food industry, by adapting a new set of disciplines and frameworks can significantly improve the productivity of their innovation system.

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BackgroundA brief introduction to the innovation challenges facing the food industry

The Growth GameHow large food companies are losing the growth game

Agile InnovationIntroduction to agile innovation, a discipline developed at Purdue over the last 12 years

The OpportunityAn explanation of how companies in the food industry can design and guide their innovation ecosystems

ReferencesCitations to articles used in this document

BACKGROUND

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Early Experiments with Open Innovation

Large, established food companies face a difficult challenge: How to accelerate top line growth with rapidly evolving markets.

Traditionally, the food industry has been characterized as a mature, slow growth industry with low research intensity and incremental innovation (Costa & Jongen, 2006; Bigliardi, & Galati, 2013).

Beginning over a decade ago, the food innovation landscape began to shift. To accelerate their innovation performance, some food companies began experimenting with open innovation models (Sarka & Costa, 2008; Bigliardi & Galati, 2013; Martinez et.al., 2014; Miglietta et.al., 2017).

Open innovation promises to accelerate innovation by linking and leveraging both internal and external resources (Chesbrough, 2006). These open innovation practices first appeared in the software, electronics, telecommunications, biotechnology and pharmaceutical industries. They eventually spread to the food industry (Saguy, 2016).

The graphic representation of open innovation reflects the perspective of the individual firm: How does innovation change when the boundaries of the firm become porous?

Source: Chesbrough, H. et. al., eds., (2006) Open Innovation: Researching a New Paradigm.

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Early Experiments with Open Innovation

Experiments in the food industry have included a number of different models designed to take advantage of the promise of open innovation.

So, for example, Nestlé has experimented with the “Sharing is Winning” model (Trailer, et.al., 2011). Other firms have experimented with different models, such as “Connect and Develop”; the “Food-Machinery Framework”; The “Living-Lab” model; the “Want-Find-Get-Manage” model; and the “Value Cocreation” model.

Given the complexity of trying to implement these models, it is not surprising that food industry experiments with open innovation have been relatively modest, and that food companies prefer to engage in partnerships of actors with which they are already familiar (Bigliardi & Galati, 2016).

There is not much research to evaluate which approach leads to higher innovation performance, and none of these models have scaled significantly. Nevertheless, the main trend appears to be toward increasingly open innovation processes (Miglietta et.al., 2017).

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The Challenges of Open Innovation

The difficulty, of course, comes in determining how to implement open innovation. The process opens the door to new complexities.

Finding new growth opportunities through open innovation is not easy. Designing an open innovation process poses significant organizational challenges. Established businesses are often hampered by outdated mindsets, legacy business models, restrictive intellectual property rules, and other corporate rigidities.

Beyond that, the open innovation process itself creates challenges due to the unequal bargaining power among participants. Smaller companies are wary that larger companies will abuse their relationship. Issues of governance — who decides? — creates significant challenges. Balancing open participation with management direction presents still more problems.

Seeing these difficulties, Purdue began exploring how research universities could become effective intermediaries in an open innovation process. Purdue began the search fro a disciplined, replicable process that can extend beyond any single organization.

THE GROWTH GAME

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Smaller firms are innovating faster

Large food companies are facing strong headwinds, and these open innovation experiments have not had much impact on industry performance.

As one recent review puts it: “Large food manufacturers are losing the growth game”. Over the past few years, revenue growth for the largest 25 food manufacturers has barely increased. In contrast, smaller companies have grown 6 to 8 times faster. From 2012 to 2015, overall market growth was 3.4%.

The top 25 food manufacturers had a compound annual growth rate of only 1.8%. Meanwhile medium and small companies saw their sales grow with a compound annual growth rate of 11% to 15%. As a result, the market share of the largest 25 manufacturer slipped from 66% to 63% (A.T. Kearney, 2016).

Clearly, the market landscape is shifting, and larger companies are struggling to keep up. Changes in consumer core values, amplified by social media, provide new pathways to growth that smaller companies are following. Consumers are less interested in packaged or diet foods and are more interested in healthy foods that promote well-being. These products are natural, organic, locally sourced, and vitamin rich. Increasingly, consumers are looking to innovative, small brands to meet these needs.

In other words, in addressing this market shift, smaller firms have the wind at their back. Changes in e-commerce and retail channels make it easier for these companies to gain distribution without paying exorbitant slotting fees. Digital marketing and retailers that are friendly to start-up companies have dramatically lowered distribution costs. These shifts have placed even more pressure on traditional brands. In the face of these revenue pressures, large companies have kept their marketing budgets high, while constraining their R&D budgets.

According to a report by the early – stage investor group, CircleUp, larger food companies invest less than 2% of the revenues in research and development compared to 15% of revenues for marketing. With smaller companies the situation is reversed. They invest 13% of their revenues in research and development and only 2% in marketing (McGInnis, 2017). In other words, according to CircleUP, these large companies spend six times more marketing and advertising all products than they do on innovating for new products. Their analysis goes further. With large company investments in innovation, only 39% goes to actual new products. The other 61% goes to incremental changes in existing products like product extensions, new recipes and new packaging. Clearly, large food companies are struggling with innovation.

The top 25 food manufacturers in the United States have grown 1.8% compared to 11 – 15% growth for the smaller companies.

Source: A.T. Kearney (2016)

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Capturing growth through acquisition

To respond, large companies are establishing venture-capital funds to invest in startups.

Through acquisition, they hope to learn from smaller companies how to be more entrepreneurial and innovative. (Gasparro, 2017). Consider:

• Kellogg Co. acquired Chicago-based RXBar, a fast-growing protein bar company only four years old, for $600 million.

• Chicago-based Conagra Brands, maker of Orville Redenbacher’s and other brands, said it would buy the maker of Angie’s Boomchickapop ready-to-eat popcorn for $250 million. 

• Campbell Soup Co. announced it would buy Pacific Foods for $700 million in cash. Founded in 1987, the company is known for its organic soups and broths.

• Atlanta-based Flowers Foods, the nation’s second-largest bakery and owner of the Wonder Bread brand, acquired Oregon-based Dave’s Killer Bread for $275 million.

Acquisitions provide a convenient pathway to growth. But are there other innovation approaches that are worth trying? Can big company innovation processes become more agile and productive?

Acquisitions provide one path to growth. But are there others? Can big company innovation processes become more agile and productive?

AGILE INNOVATION

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The Purdue Agile Innovation Opportunity

Are there other pathways to growth for large food companies? We believe there are. At Purdue, we have found a way for companies to design and guide their own innovation ecosystems to lift their core businesses with a simple, lightweight process.

Over the past twelve years, we have incubated and market-tested a new approach to strategy, designed specifically for open, loosely connected networks. The process accelerates complex collaborations by following a protocol of simple rules. Following the discipline, companies can form sophisticated collaborations quickly and move toward measurable outcomes. The process makes adjustments quickly as circumstances change.

Based on the ideas of agile software development and open source software development, this new strategy discipline, called Strategic Doing, opens the door to new innovation opportunities for both larger and smaller companies. The Whistler Center is partnering with the Purdue Agile Strategy Lab to provide this new innovation service to member companies of the Whistler Center.

The European Commission’s Open Innovation Strategy and Policy Group refers to the next stage of open innovation as Open Innovation 2.0. Focused on the development of innovation ecosystems, the Group has promoted the metaphor of a cellular structure to capture an innovation ecosystem. This metaphor is not very poetical or actionable, however. The Purdue Agile innovation approaches leverages Purdue’s work in agile strategy with Fraunhofer IAO’s expertise in technology and innovation management.

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Proof Point: Lockheed and Condition-Based Maintenance for the Navy

In an early test of this approach with Lockheed Martin, the Agile

Strategy Lab developed a network of over 20 smaller high-technology companies to assist Lockheed Martin in addressing a complex

technology challenge for the U.S. Navy.

The Navy presented the Purdue Agile Strategy Lab with the challenge. Could we help Lockheed develop a technology roadmap for the deployment of condition-based maintenance across the Navy fleet? (Condition-based maintenance is a system of predictive maintenance, using sensors to predict when equipment needs repair.) Quickly, Lockheed understood that it did not have a window on some of the key advanced technologies needed for a condition based maintenance deployment: sensors, augmented reality, machine learning, and predictive analytics. Lockheed turned to Purdue and its partner, the New Jersey Innovation Institute, to identify leading-edge high technology companies to fill these gaps. Over the course of four workshops over six months, the Purdue Agile Strategy team guided the formation of a new innovation ecosystem to address the Navy’s challenge to Lockheed. Todd Tangert, a Combat Systems Architect at Lockheed commented that this process “allows a business to quickly identify an interested ecosystem of smaller businesses to solve the defined customer problem.” Mark Scotland, CEO of 4.0 Analytics, a smaller company involved in the Lockheed process, called Strategic Doing “the most clear and concise open innovation process I’ve seen.”

Purdue’s process “allows a business to quickly identify an interested ecosystem of smaller businesses to solve the defined customer problem.”

Todd Tangert, Combat Systems Architect, Lockheed

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Welcome to Agile Innovation

Open innovation has evolved in the past decade. From a singular focus on an innovation problem, advanced forms of open innovation now focus on designing and guiding innovation ecosystems.

Anticipating this shift over a decade ago, Purdue began working on new approaches to strategy and innovation in open, loosely connected networks. in 2013, Purdue formed a partnership with Fraunhofer IAO. The Fraunhofer partnership integrates some of the latest innovation in technology management tools into a new agile innovation discipline.

The Purdue approach is based on the concept of innovation ecosystems and business platforms (Gawer & Cusumano, 2014). By designing a business platform and a simple strategy process, we are able to form complex innovation ecosystems quickly. These ecosystems are customized for the particular competitive challenge that a company faces.

Organization A Organization B Organization C The Purdue approach to agile innovation relies on platforms.The strategic conversations on the platform are artfully designed to test hypotheses and build trust. The conversations take place within 2 to 3 hour workshops.

Strategic Doing is “the most clear and concise open innovation process I’ve seen.”

Mark ScotlandCEO

4.0 Analytics

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Collaborations and trust are quick to form

This approach to agile innovation is designed to form collaborations quickly, launch experiments and move ideas into action.

Through a disciplined process of following simple rules, complex collaborations form. They move toward measurable outcomes and make adjustments as circumstances and opportunities shift.

Conversation shifts.-- Collaborations begin to form with conversations among companies that share a similar “competitive space”. Participants begin testing ideas about colabrotion.

Network forms.-- As focused conversations continue, common interests emerge. These shared interests drive conversations to deeper detail. Connections among !rms become stronger.

Strategic agenda emerges.-- Members of the emerging network begin to focus on strategic opportunities. These opportunities emerge as !rms “link and leverage” their assets.

Anchor investments made.-- As the collaborations form, members develop a strategic agenda: a portfolio of investments to strengthen themselves through collaboration.

Networks continue to invest, adapt and expand.-- Connections within the network become more dense and spontaneous. New shared investments build out the collaboration.

Time

Level of Network

Development

Conversation shifts

Network forms

Strategic agenda emerges

Anchor investments made

Networks continue to invest, adapt, expand

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THE BUSINESS OPPORTUNITY

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The Business Opportunity: Piloting a new approach to innovation

The food industry can significantly speed innovation by transforming existing innovation practices. Companies how have the opportunity to go beyond Open Innovation to design their own innovation ecosystems with Agile Innovation.

Interested companies can work with a team from the Whistler Center and the Purdue Agile Strategy Lab to design a pilot project to test this new approach to open innovation. Typically, the design process involves a core team from the company and from Purdue.

This core team will design the pilot project in terms of project scope, time frames, budget, specification of the process, and deliverables. The agile strategy discipline can be easily taught, so the process can be scaled.

The process starts by framing an innovation opportunity. So, for example, in Lockheed’s are, we began with the challenge: “Imagine that Lockheed and its partners developed a technology roadmap for Condition-Based Maintenance across the Navy fleet. What would that look like?”

We then designed a series of workshops to both attract and engage these companies. Unlike the popular approach of an innovation challenge or crowdsourcing, the Purdue Agile Innovation process is more intentional and managed.

We conduct a series of workshops to design a strategy for collaboration. At the end of each workshop we have a version of the strategy. Subsequent workshops refine the strategy. Much like agile software development, the strategy improves with each iteration.

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The Foundations of Agile Innovation

Innovation in open, loosely connected networks requires a new generation of management tools and frameworks.

Markets are increasingly defined by collaborative strategies undertaken by multiple parties.

Recognizing the challenge that both companies and universities would be facing with these challenges, the Purdue Agile Strategy Lab began working with Fraunhofer IAO in 2013. Based in Stuttgart, Germany, Fraunhofer IAO is a global leader in developing new tools and frameworks to manage technology development and innovation.

Purdue has become a global leader in advancing new approaches to strategy in open, loosely connected networks.

Agile Innovation represents a marriage of the strengths of Purdue and Fraunhofer. .

The development of agile innovation has emerged from a partnership between the Purdue Agile Strategy Lab and Fraunhofer IAO, The Lab has become an international leader in the development of new disciplines of agile strategy, designed for networks. We are now expanding the Purdue-Fraunhofer partnership to the Whistler Center for Carbohydrate Research.

Fraunhofer IAO, based in Stuttgart, Germany, has developed a range of powerful tools for technology and innovation management. They include TechnologyRadar and MarketExplorer, two platforms that leverage smart data.

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The Rationale: Part 1 Agile Innovation enables companies to design and manage their own innovation ecosystems with trusted partners. Here is why this opportunity is important.

Traditional brands face growing risks. Traditional stage-gate innovation processes do not address the big risks that large companies face with their brands. Companies no longer have ample R&D budgets to manage these risks, and these risks may appear too quickly for companies to respond in time by following traditional product development processes. Further, traditional stage-gate processes are not designed to manage the risks associates with an open innovation process.

A new innovation process must be more open and adaptive. To make the innovation process more productive, it must become more agile, open and flexible. A new innovation process must also balance and integrate the rigor of scientific research with a process that is agile and open. Simply pushing employees to innovate faster with existing budget constraints leads to growing levels of frustrations.

A new process must engage high performing employees. Addressing the growing pressure to innovate involves designing a new process to engage top talent within the company. The agile strategy process developed at Purdue can be easily taught and transferred within the company. Without a change in direction, high performing employees, facing with an increasingly frustrating work environment, will leave for smaller more innovative companies.

A new innovation process must be faster. The traditional internal innovation process does not keep up with the speed of market developments. Product development cycles need to be shorter. Moving to faster cycle times with smaller budgets will require retraining to innovate with a more agile methodology. This methodology must be clear and consistent both inside the company and across company partners.

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The Rationale: Part 2 Here are additional reasons why this opportunity to test Agile Innovation is important to the food industry.

A new innovation process must also manage risks through rigorous experimentation. Unlike smaller companies with less recognized brands, failure caries higher costs in damage to an established brand. To manage risk, traditional linear stage gate processes can be replaced with an iterative process characterized by fast cycle experimentation (Thomke 2003; Thomke & Manzi, 2014).

A new innovation process must be customized to the needs of the company. Each company has a different set of innovation incentives and imperatives, a different culture, a different set of external partners, a different set of constraints. No new innovation process can fit without a high level of customization. The existing open innovation models do not allow for this level of customization.

A new innovation process can easily leverage the resources of a research university. Companies can improve the productivity and speed of innovation by leveraging the extensive research infrastructure of universities (Saguay, 2011). Up until now, companies have been missing a stable, concise process to manage these collaborations. With its work in agile strategy, Purdue has solved this problem.

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Next Steps To introduce Agile Innovation to your company, we recommend

designing a pilot project. The process starts with a series of design meetings, each no more than one hour.

These design meetings focus on the following issues:

• What is the innovation challenge for the pilot? It’s best to pick a challenge that internal processes have not been able to address.

• How do we frame this innovation challenge into an opportunity that will attract outside parties? What is the value proposition for their participation?

• How will we engage these outside parties and how restrictive should we be? What are the ground rules and logistics for the agile innovation workshops?

• What is the design of the first workshop? What is the schedule for subsequent workshops?

After the design meetings are satisfactorily concluded, we will execute an agreement to launch the initial pilot workshops. Your company has no commitments until after the design phase is complete.

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Design sessions

Workshop

Implementation of an agile innovation pilot consists of three to four design sessions followed by three to four workshops. In between workshops, participants are pursuing individual projects to refine the innovation strategy.

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Contact Information The next step is up to you. If this approach to innovation looks potentially valuable to your company, contact us to discuss designing a pilot project.

Companies interested in discussing the design of a pilot project should contact Bruce Hamaker, Director, Whistler Center for Carbohydrate Research (hamakerb@purdue.edu) or Ed Morrison, Director, Purdue Agile Strategy Lab (edmorrison@purdue.edu).

The Whistler Center for Carbohydrate Research is a component of the Department of Food Science in the Purdue College of Agriculture. The web site is: www.whistlercenter.purdue.edu

The Purdue Agile Strategy Lab is a component of the School for Engineering Technology within the Purdue Polytechnic Institute. The Lab web site is: www.agilestrategylab.org

Ed MorrisonDirector, Purdue Agile Strategy Labedmorrison@purdue.edu

Bruce Hamaker Director, Whistler Center for Carbohydrate Researchhamaker@purduce.edu

REFERENCES

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References Bigliardi, B., & Galati, F. (2013). Models of adoption of open innovation within the food industry. Trends in Food Science and Technology. http://doi.org/10.1016/j.tifs.2012.11.001

Bigliardi, B., & Galati, F. (2016). Open Innovation and Incorporation Between Academia and Food Industry. In Innovation Strategies in the Food Industry: Tools for Implementation. http://doi.org/10.1016/B978-0-12-803751-5.00002-7

Chesbrough, H. W. (2006). Open innovation: The new imperative for creating and profiting from technology. Harvard Business Press.

Gasparro, A. (2017). Big food looks to startups for ideas, innovation. (2017, Feb 17). Dow Jones Institutional News Retrieved from https://search-proquest-com.ezproxy.lib.purdue.edu/docview/1918082067?accountid=13360

Gawer, A., & Cusumano, M. A. (2014). Industry platforms and ecosystem innovation. Journal of Product Innovation Management, 31(3), 417–433. http://doi.org/10.1111/jpim.12105

Huston, L., Sakkab, N., 2006. Connect and develop: inside Procter and Gamble’s new model for innovation. Harvard Business Review 84, 58–66.

Manzini, R., Lazzarotti, V., & Pellegrini, L. (2017). How to Remain as Closed as Possible in the Open Innovation Era: The Case of Lindt & Sprüngli. Long Range Planning. http://doi.org/10.1016/j.lrp.2015.12.011

Martinez, M. G., Lazzarotti, V., Manzini, R., & García, M. S. (2014). Open innovation strategies in the food and drink industry: determinants and impact on innovation performance. International Journal of Technology Management. http://doi.org/10.1504/IJTM.2014.064588

McGinnes, M. (2017). Report: Small Brands Beat Big CPGs in Innovation. Retrieved November 1, 2017, from https://www.projectnosh.com/news/2017/report-small-brands-beat-big-cpgs-innovation

Miglietta, N., Battisti, E., & Campanella, F. (2017). British Food Journal Value maximization and open innovation in food and beverage industry: evidence from US market. British Food Journal British Food Journal Iss British Food Journal, 119(11), 2477–2492. Retrieved from https://doi.org/10.1108/BFJ-04-2017-0213

Saguy, S. (2011). Paradigm shifts in academia and the food industry required to meet innovation challenges. Trends in Food Science and Technology. http://doi.org/10.1016/j.tifs.2011.04.003

Saguy, S., & Sirotinskaya, V. (2016). Open Innovation Opportunities Focusing on Food SMEs. In Innovation Strategies in the Food Industry: Tools for Implementation. http://doi.org/10.1016/B978-0-12-803751-5.00003-9

Saguy, S., & Cohen, E. (2016). Food engineering: Attitudes and future outlook. Journal of Food Engineering. http://doi.org/10.1016/j.jfoodeng.2016.01.009

Saguy, S. (2016). Challenges and opportunities in food engineering: Modeling, virtualization, open innovation and social responsibility. In Journal of Food Engineering. http://doi.org/10.1016/j.jfoodeng.2015.07.012

Sarkar, S., & Costa, A. (2008). Dynamics of open innovation in the food industry. Trends in Food Science & Technology. http://doi.org/10.1016/j.tifs.2008.09.006Thomke, S. H. (2003). Experimentation matters: unlocking the potential of new technologies for innovation. Harvard Business Press.

Thomke, S., & Manzi, J. (2014). The discipline of business experimentation. Harvard Business Review, 92(12), 70 – 79.

Traitler, H., Watzke, H. J., & Saguy, I. S. (2011). Reinventing R&D in an Open Innovation Ecosystem. Journal of Food Science. http://doi.org/10.1111/j.1750-3841.2010.01998.x