Closed innovation is the name given to this model by Harvard Business School professor Henry Chesbrough. His 2003 book, Open Innovation, traces the changing business climate and philosophy regarding product innovation over the past century. In a world where the only constant is change, how that change occurs becomes an issue of great importance to everybody with a business interest, including food processors.
According to Chesbrough, the process of bringing new ideas to market is undergoing what science historian Thomas Kuhn describes as a paradigm shift from the old model of closed innovation to new open innovation. In the old model, successful innovation required complete control. Companies generated new ideas and then developed, built, marketed, distributed, financed and supported the resulting products on their own.
This “self-reliant” model was characterized by a “virtuous circle.” Investment in R&D led to many breakthrough discoveries that enabled companies to bring new products to market and realize more sales and higher margins, which permitted reinvestment in more internal R&D, which led to further breakthroughs.
In this model, which had generated innovation for decades, internal R&D was viewed as a strategic asset, a barrier to competition in many industries because rival companies needed the resources to invest in their own labs. But evolution proceeds from a change in climate. For many reasons, the closed innovation model evolved.
In 1980, Congress passed the Bayh-Dole Act, which allowed researchers to patent inventions developed with government funds. The effect was to make research more available as national labs became open for commercial applications. Add to this the influence of the Internet and open innovation was on its way.
Opening the model
The open innovation paradigm, unlike the virtuous circle, expressed the need to work with people both inside and outside the company. It recognized that external R&D can create significant value, while internal R&D is needed to claim some of that value. You don’t have to originate the research to profit from it.
Erosion of the closed innovation model and movement towards a more open innovation paradigm meant that sharing expertise was now a wise move. Application of this model to the food industry means firms can and should use external ideas as well as internal ideas to advance their technology.
The risks and pressures in creating a new product or extending a successful product line have increased greatly in the last few years, according to Alan Reid, senior vice president for U.S. manufacturing and ingredient marketing at Dairy Management Inc., Rosemont, Ill. DMI is a not-for-profit organization that leads and manages the American Dairy Assn., the National Dairy Council and the U.S. Dairy Export Council and works to increase demand for U.S. dairy products and ingredients on behalf of America’s dairy producers.
“Expectations for sales are increasing for new products and for line extensions, but the success rate is not. This tends to favor fewer creative products and more sequels,” says Reid.
“It’s expensive to launch entirely new products, and that means opportunity left on the table,” he continues. “A third party can help manage risks, introduce new thinking, supply needed data, provide insight and inject the energy necessary to make the new ideas successful.
“The best practice for new product development is a cooperative approach. Research and development, sales, marketing, production, operations, finance and procurement are different functions that may not always coordinate efficiently. The purpose of the third party is to make certain these departments talk to each other effectively. The third party may provide seminars with different presentations ranging from consumer trends to potential health claims to product development to help assure the most efficient cross-functional team,” adds Reid.
Dairy does a good job delivering product value. But to make greatest use of its potential, the in-house research and development team must have specialized resources that only state-of-the-art dairy science can provide. At DMI, the specific expertise is readily at hand.
In order to stay ahead of trends and provide expertise that may not be available at the company, DMI funds centers for dairy research like The North Carolina State University Sensory Service Center. One need only look at the booming yogurt category to see evidence of the application of this expertise.
Connecting to the network
At NineSigma, Cleveland, the approach is something clients call “insourcing innovation,” rather than outsourcing product development. “Typically companies need enhanced research and development capability. NineSigma’s role is to help the client put together a team based on their needs, which from one client to another can vary extensively,” says Paul Stiros, CEO of NineSigma.
Note to Plant Ops … and Packaging
Just as the management and/or R&D team must carefully consider outsourcing product development, so must they consider outsourcing manufacturing. Contract manufacturing and packaging can help food processors improve operational efficiency, shorten time to market and improve cost control.
NineSigma acts as kind of a sophisticated matchmaker with a network of more than 1.7 million entities that include industrial associations, inventor associations and food institutes, just to name a few categories.
“We start with a statement or request for proposal (RFP), which is distributed to members. Each RFP constitutes a unique search for those entities in the database, anywhere in the world, including global industrial companies, university or national labs, or other entities in the science and technology ecosystem. The purpose of this first RFP is to define a subnetwork of 1,000 to 10,000 entities that can provide the client the needed expertise and capability,” explains Stiros.
The openness of the process does not mean that the client’s core idea is exposed. Competitive information still remains private. NineSigma deals with the need for privacy by scrubbing the client’s problem and translating it into a nonconfidential statement of technology.
Stiros provides an interesting and instructive example of how technology links can work. A client needed the ability to microwave food evenly, with a precision not generally seen in food applications. So without divulging the details of the product that required it, the idea was scrubbed to a technological problem. The responder was a company that had solved the problem of using microwave capability to thaw frozen blood for battlefield applications. Here imprecision was not tolerable.
Stiros’ entrance to the company was equally interesting. It began when he was a customer of NineSigma. A chemical engineer, Stiros was involved in a challenging chemical engineering problem: how to make cotton shirts resistant to wrinkles. No one had developed a solution to this problem, and out of frustration, Stiros hired NineSigma. The need was scrubbed and presented as a surface phenomena problem. NineSigma connected Stiros with a university professor who had solved a similar surface problem on semiconductor wafers. Who would have imagined a relationship between the semiconductor industry and wrinkled shirts?
And so it was a little like the story of Victor Kiam who liked Remington shavers so much he bought the company. Stiros became NineSigma’s CEO.
Making use of the byproducts
An example of product development that arose from this open innovation model goes by the name of Vinifera for Life, a flour additive made with grape skins and seeds. Rich in natural antioxidants, notably the resveratrol common to wine, the pomace is also a source of essential fatty acids omega-3 and omega-6, along with iron and fiber. The dried, ground product finds creative applications in anything from breads to pastas to smoothies.
The flour product was the brainchild of Chef Mark Walpole, who’s now president of Vinifera for Life Canada. “The Guelph Food Technology Centre (GFTC) was instrumental in Vinifera for Life’s development,” says John Michaelides, director of research and technology at GFTC in Guelph, Ontario. “GFTC created the process needed for this unique product. It’s produced from the by-products of the wine industry and can be used in upscale baked goods such as artisan breads. The end products can be marketed based on the variety of the grapes that the skins come from. Products like Cabernet Sauvignon or Ice Wine breads are soon to arrive in upscale shelves,” says Michaelides.
“Bringing an idea to the market is an exciting, complex and often risky process, requiring additional expertise, space, time, and equipment,” he continues. “Whether you are an entrepreneur or an established manufacturer of food products, the process of developing and successfully marketing new food products needs to be carefully considered. Outsourcing all or a portion of the process required for product development can help manage the extra resources needed to bring a new product to store shelves.”
Michaelides defines the considerations critical to both product development and the establishment of a need for the new product:
- Continuous supply and availability of the ingredients: Many ingredients may be seasonally available on a commercial basis, for instance, fresh fruits and vegetables. In that case, production in a short season must supply customers for the whole year. Good examples of seasonal limitations are condiments or pickles.
- Cost of the ingredients: How will they affect the competitiveness of the product in the market?
- Justification of the product: Is the product so superior that it will justify the increased cost, and can that cost be recovered by the selling price? Does the product fit in an upscale market?
- Production: Is the process of production compatible with the current equipment in the facility, or is the additional equipment or new technology needed affordable?
Scaling up: Once a lab-scale prototype is produced, scale-up using pilot plant equipment if possible must be done before plant or co-packer trials. Adjustments to formulation and process can be done at this stage, saving possibly thousands of dollars for plant trials.
- Co-packing: Will a co-packer be used? If so, formula identity protection must be considered.
- Regulatory restraints: Are there any regulatory constrains in getting the product in the market (both domestic and export)?
- Meeting customer demand: If the product is mainstream, can it supply a large customer’s demand given present processing equipment and facility?
- Shelf life: What is the product’s shelf life?
- Ingredient safety: When manufacturing new ingredients, is this ingredient a “novel ingredient,” as defined by Health Canada? If so, its safety and efficacy must be determined.
“If your product appears viable, you need to start thinking about what you will need to create the product. During your evaluation, be proactive. Consider the [above] factors and then establish whether you have the resources to address that particular issue or whether additional resources will be needed. This exercise will help you determine where in the process you will need to partner with an outside organization for assistance,” says Michaelides.
“Outsourcing is not only helpful when managing your resources, but can also bring new thinking to your project,” he adds. “Applying technologies or knowledge from other categories can create new efficiencies and novel products.” It can also bring to light possible pitfalls in the process and ultimately save your organization money.