1 STEP Arbeidsnotat / Working Paper ISSN A Thor Egil Braadland Innovation in the Norwegian food system Thor Egil Braadland STEP-gruppen Storgaten 1 N-0155 Oslo Norway Working Paper prepared for the RISE project, financed by the EU commission s TSER programme, and Norwegian Research Council Oslo, Sept. 00
2 Redaktør for seriene: Editor for the series: Dr. Philos. Finn Ørstavik ( ) Stiftelsen STEP 1999 Henvendelser om tillatelse til oversettelse, kopiering eller annen mangfoldiggjøring av hele eller deler av denne publikasjonen skal rettes til: Applications for permission to translate, copy or in other ways reproduce all or parts of this publication should be made to: STEP, Storgaten 1, N-0155 Oslo
3 Preface This report is one of three publications by the same author on innovation, knowledge and processes of change in the Norwegian food system. The full list of publications is as follows: The Norwegian food clusters an overview (STEP working paper A-04-00) Innovation in the Norwegian food system (STEP working paper A-05-00) R&D in the Norwegian food system (STEP working paper A-06-00) The reports are written for the EU-financed project RISE (Research and Technology Organisations in the Service Economy) under the TSER program, and for the Norwegian Research Council. Proejct manager has been Dr. Mike Hales, CENTRIM (UK). Norwegian project coordinator has been Johan Hauknes, STEP Group. The author iii
5 Summary This paper concerns innovation in the Norwegian food system. The paper seeks to investigate three interrelated questions: What is innovation in the food system, how does food companies innovate and what policy is better aimed at stimulating innovation in food companies? There are basically two ways of understanding innovation processes; innovation as a linear process with R&D as major driver, and innovation as an interactive process where multiple sources found important drivers together. We use this paper to argue that the food industry is a good example of an activity where innovation is interactive instead of linear, and that innovation policies should take this result into consideration when designing food industry innovation policies. We argue that important innovation sources in addition to R&D are consumer signals and machinery suppliers. Innovation surveys normally distinguish between product and process innovations as the two major indicators of business development. We argue in this paper that in an industry where business development also stems from improving markets for existing products (through branding), the industry comes out comparatively less innovative than other industries where product and process changes are more important to competitiveness. Understanding innovation as major attempt to improve business would include branding as an innovative activity. The food industry is one of the industries where size still matters. In Norway, the share of employees working in the largest companies has been slightly increasing during the 90s, and small food companies are in average larger than other small companies (less than 50 employees). However, food companies are also more flexible than other industries, measured in share of innovation costs used to market surveillance. We argue that the dominant reason why companies use market surveillance expenditures is to change production according to what these results show. The analytic result is that food companies both carries signs of scale-intensity and flexibility, which is in line with the perspective of Toyotism, or flexible mass-production. v
7 Content PREFACE... III SUMMARY...V CONTENT... VII INNOVATION IN THE NORWEGIAN FOOD SYSTEM... 1 The Norwegian food system... 1 Innovation in the food industry... 3 How do food companies innovate?...4 Formal and informal innovations...8 Barriers to innovation...9 Conclusion: A new conception of innovation?...10 Three important sources to innovation Suppliers of machinery and equipment...11 Research and development (R&D)...15 Consumer relations...19 Summary and policy implications LITERATURE...23 Interviewed persons/companies/location/date Map over Norway, with counties and largest cities, surrounding waters and countries...27 vii
9 Innovation in the Norwegian food system The Norwegian food system The size of the Norwegian food activities is quite remarkable. Food production centres around the Norwegian food processing industry 1, but also include upstream activities like fishing, fish farming, shipyards and agriculture, and downstream activities like retail, hotels and restaurants. Total cluster employment is about persons 2, or about 9 percent of total Norwegian employment. The food processing industry is a central part of the cluster, and is the largest industry in Norway today - measured in both gross product and employment. With approximately employees, this is the largest manufacturing industry in Norway on a two-digit NACE-level. The food industry alone represents as much as 21 percent of all Norwegian manufacturing value added 3, and it stands for the fifth highest value added per employee among all Norwegian manufacturing industries - higher than industries like electrical and optical instruments, machinery and equipment and printing and publishing 4. In terms of employment, the food industry alone represents about 19 percent of Norwegian manufacturing employment (Table 1) 5. Table 1: The Norwegian food industry, main figures and share of mfg activities, Source: Statistics Norway, ukens statistikk, 35, 1998 (NACE 15) 6. Companies Employment GVP Value added Number/amount mill NOK mill NOK Share of Norwegian mfg 16 % 19 % 25 % 21 % Two types of innovation processes Joseph Schumpeter was one of the first writers to relate economic development to technological change and innovation. Schumpeter published his main works in the 1920s. What Schumpeter basically argued was that economies evolves 1 NACE 15; manufacturing of food and beverages 2 Employees with main occupation in food related activities. In addition come persons working part time in for example agriculture or fishing. Source: Haukes (1999). 3 Statistics Norway (1998), Ukens Statistikk, 35 4 Statistics Norway (1998), ibid. 5 For a more detailed presentation of the Norwegian food system, see Braadland (2000), The Norwegian food system an overview, STEP working paper, Oslo 6 Include only companies with 20 or more employees NOK = 122,46 (Nov 1999) 1
10 2 STEP Working Paper A-05/2000 qualitatively, and that new technologies and industries emerge and gradually destroy old production system in what he termed a process of creative destruction. In the 1940s, Vannevar Bush followed up on Schumpeter, claiming that the major engine behind innovation and change was research and development (R&D) efforts (Figure 1) 8. Figure 1: The linear model of innovation R&D Innovating company The fact that innovation drives the economy has regained attention, in particular the last two decades. The dominant work putting this perspective on the policy agenda in the 90s was the OECD publication Technology and the Economy - the key relationships, (OECD 1992), marking a shift in the perspective on how economic development was to be understood, and which policy implications to be drawn. One of the central outcomes of this work was to bury the Bush model the linear approach - of innovation. The linear innovation model defends a perspective that economic progress is a result of commersialisation of succesfull R&D efforts. The problem with the model is that it indirectly argues that the more money one spends on R&D, the more innovation and economic development is gained. Empirical evidence showed, however, that the relationship was not that simple. The striking example was US and Europe in the 1970s. In spite of increases in R&D efforts in both the US and Europe, Japan was the country that could show to the most rapid growth in the economy 9. The major outcome of this rethinking was a more complex understanding of the innovation process. The linear model was gradually replaced with a so-called interactive model of innovation. The interactivity notion stems from the perspective that not only R&D, but also factors as external knowledge suppliers, organisational corpus of scientific and technological knowledge, marketing, design, testing and distribution 10 can be important factors to innovation. 8 Bush, V. (1945) 9 OECD (1992), 10 OECD (1992), ibid. p. 25
11 Figure 2: Example of an interactive innovation model Suppliers Design R&D Innovating company Colleges and universities Consulting services Customers/ consumers Competitors The interactive innovation model carries three basic differences from the linear model. I) it is interactive, i.e. the different units in the system have the important ability and power to influence choices and strategies within the other units, and vice versa, II) it is multidirectional, i.e. there are no mono-directional influence from one unit to another - like from R&D to economic development in the linear model - and III) there are variations in unit strengths and influence between the units across different production systems; some innovation sources are more important than others across varying sectors or different types of innovating companies. The basic idea of the interactive innovation model is hence a relativistic one; there are more factors - and often more important factors - behind economic renewal than R&D inputs. As we shall see, this is true not at least for the Norwegian food industry. Innovation in the food industry Reducing R&D activities to only one of several inputs to industrial innovation has implications for how we understand complexity and advanceness in innovation processes. And it has direct implications on how we perceive and measure innovation efforts 11, because level of R&D used in innovation processes is not any more proportional to how advanced innovations are. The food industry is an example of an industry where direct R&D expenditures have never been dominant innovation expenditures as share of for example turnover. Still, compared to other industries, the food Norwegian industry is fairly innovative. The fact that R&D is not dominantly important to food innova- 11 Keith, Tore etc (IDEA).
12 4 STEP Working Paper A-05/2000 tion at the same time as food companies do innovate, leads us towards the fact food companies have other important sources to innovation. As we shall see, other important sources to innovation are consumer and consumer relations and machinery suppliers. How do food companies innovate? The common approach product and process innovations... It is common to distinguish between two archetypes of innovation; product innovation, i.e. introducing new or improved products; and process innovation, i.e. introducing new or improved way of doing things. A change in product would typically be a new type of mustard, a new brand of beer or a new pizza, or a totally new product like Ox; a milk-based drink with peculiar tastes aimed at adolsents, manufactured a while by the largest Norwegian dairy company TINE (more about Ox later). 12 A change of process would typically be to implement new machinery, like the recent activities at the Ringnes Gjelleråsen brewery north of Oslo. In Ringnes, as an overall trend in production of beverages, emphasis is put on automatification. Production of soft drinks has been profoundly automated the last decade, with German mechanical machines and Japanese robots gradually taking over manual tasks, like lifting, loading, moving and storing loads of bottles. At Ringnes is just about to finish a completely new plant, after moving from inner Oslo. The storage room at the new plant is immense. It includes several hundred 13 meter high shelves filled with a seemingly chaotic mixture of loads of empty bottles ready for cleaning and refill, and loads of beverage bottles ready to leave the factory. The storage room is completely automated, and a computer keeps perfect track of which are tour and which are return bottles, bringing bottles to and from the conveyor belt. The computer is making sure that the right kind of bottles is brought from the shelves and put at the right conveyor belt; either leading to the cleaning machines or to one of the 20 truck ramps further down the hall. One computer and two computer controllers now run what was earlier performed by 15 factory floor truck drivers. 12 One major trend in product development is the increased emphasis on prepared meals (Christensen at al, op.cit.). The basic reason behind this development is competition from restaurants. People spend generally more time at restaurants than before, as a result of a combination of increased welfare, less spare time and increasingly continental eating habits. Fjordland is a typical food producing company illustrating this point. Fjordland was established as a co-operation between TINE, Gilde/Norsk Kjøtt, Prior and Hoff in 1994, and had 50 employees in 1999 and an annual turnover on 335 million NOKs. Fjordland produces prepared meals like Fjordland Biff Stroganoff with rice, Meatballs with mashed peas and potatoes and Indian Carry Chicken with rice. The four owners have traditionally been producers of separate products, like milk and milk products (TINE), meat products (Norsk Kjøtt), eggs (Prior) and fried potatoes (Hoff); together they are capable of producing products that are in line with recent consumption trends.
13 A particular feature of innovation in the food industry is the fact that product and process innovations in the food industry are often interdependent activities. The CIS Survey (1997) showed that Norwegian food companies rarely performed product innovations without performing process innovation at the same time. The dominant share of innovating companies reported that they had performed both process and product innovation the last three years. Very few companies reported that they had performed product innovation only. This indicates that when food companies start producing a new product, they predominantly have to undertake major investments in equipment and machinery. It could also indicate that when food companies perform product innovation, the innovations are rather radical and need a whole new set-up of the production line. This perspective is also argued for in Christensen at al (1996), stating that the food industry has been strong in introducing radical innovations the last two decades, and that Norwegian food companies in particular has been radical innovators in the 90s. There are in other words a seemingly strong complimentarity between product and process innovation in the food industry much stronger than in other industries. On this background, it is interesting to look closer at how food companies actually perform in terms of product and process innovations. A major critisism towards the Norwegian food industry has namely been the ability to renewal, as a result of lack of competition in central fields of the industry. Already since the mid 1800s, Norwegian farmers in mid- and eastern Norway 13 have had large influence on public policy, both directly through party representation and indirectly through large pressure groups. However, as 80s and 90s increased focus on liberalism, trade and international competitivism, the way of arranging the food production system has been highly critisised. As a result of what might be describes as a succesful result (seen from the view of the food producers), they are often critisised, however. Neoclassical economicst and liberal mercantilist claim that the particular mix of sheltering and public and interventionism reckognising large parts of Norwegian food production on the one hand and strong, farmer-controlled co-operatives on the other are factors that have been bad for efficiency, competitiveness and a healthy, economic development. A hypothesis is therefor that the innovation frequency in food companies is much lower than most other industries. However, in a Norwegian all-industry survey from 1997, 45 percent of the food companies said they had performed an innovation the last three years (Figure 3). Average share of innovative companies for Norway as a whole is 46,2 percent. The food industry is in other words neither particularly more innovative nor particularly less innovative than other Norwegian industries, in average. The share of food companies performing innovation is higher than what we find in textiles, metal goods and graphical industries (35 percent of them reported to be innovative) and production of transport equipment (44 percent). The share is lower than industries like metals, pulp and paper and machines and equipment (appr. 60 percent). 13 See Appendix for map
14 6 STEP Working Paper A-05/2000 Figure 3: Norwegian industries and share of companies reporting innovative activities, source: Community Innovation Survey Norway, 1997, STEP Group / Statistics Norway, N= Chemicals Electronics, instruments Machines and equipment Pulp and paper Electrical machinery Metals Rubber, mineral products Other production, recycling Food and beverages Transportation Metal goods Textiles, leather, wood prod. Graphical Average = 46,2 percent It seems that some of the critics towards the food system is based on wrong empirical evidence, as the food industry is not less innovative than other industries. In addition to this, there are two points that such critics often forget. but also organisational innovations Firstly, food production is often a scale-intensive activity 15, and processes that development of large units can be seen as an innovation efforts in themselves. A good example of this is TINE, the close-to-monopoly Norwegian dairy cooperative. Although TINE is large in a Norwegian context and faces little or no competition, the company keeps promoting new products, like new youghurts, new milk and milk-drinks, new cheeses etc. TINE has also performed major process innovations. The company has over a decade reduced its number of plants while maintaing the same production and even diversified production. It seems therefor to simple to argue that size in itself is of major concern. Building of large food units also echoes development we see in Europe 16 and US 17. and branding Secondly, critics tend to ignore that innovation in food companies can often be, in sharp contrast to other industries, to maintain or develop market share for already established products, a phenomenon termed branding. There is in other 14 Share of companies in sample reporting innovation. In this sample, large firms are better represented than small firms. Since the probability of being innovative increases with firm size, the actual /weigthened innovation share is a little lower for all industries than presented in the figure. Average weightened share for all industries is appr. 40 percent, in the individual industries the share is between 3-10 percent less than presented in the figure. For the food industry, the difference is about minus five percent. 15 Pavitt 16 EU Panorama of European Industry Fortune top (http://www.fortune.com)
15 words a contrast between the regular notion of innovation on the one hand (new or improved product) and what is regarded as business development in the food industry on the other (maintaining success for established brand or product). The notion of branding is of particular focus for food companies, and we suggest that branding must be included if we want to understand business development for this kind of companies. The basic idea behind branding is that customers will be more apt to consume products they already trust, products they know (or think they know) or at least have heard of. Branding stems out of the phenomenon that food manufacturing basically is about factories turning raw materials into manufactured foodstuff. Marxists would claim that moving the tradition and culture of household food preparation from homes inside production halls located on giant company plants is a sign of entfremdung - what used to be gathered, caught and prepared at home by individuals is increasingly processed, manufactured, automated, packed, transported and marketed behind the gates of plants belonging to big multinational companies. The idea that people now eat products processed by people they don t know and companies they never go inside creates a kind of distance to the food product. To overcome this level of distance, infamiliarity and uncertainty, branding is used to make consumers more comfortable with the product. Branding is mostly done through regular commercials (television, radios, journals, newspapers), but also through distributing product samples (like small attachments to journals or newspapers) or by sponsoring activities, like sporting activities or music concerts. We find branding in most consumer-oriented industries, not only the food industry. Typical examples are Swatch watches, Bosch car batteries and window wipers, Hundai cars and Nokia mobile telephones. However, branding is more important to the food industry than most other industries. Not necessarily because the threshold of trying new products are higher per se for food products than for other consumer goods (we know that the share of Norwegians eating non-traditional dinner are slightly decreasing 18 ). But because eating and drinking is a process of putting manufactured items into in your mouth and swallow it. This requires a high degree of consumer trust in the products or the producing company. Branding is a way of creating this trust. International food brands are particularly important for beverages, like Carlsberg, Heineken, Tuborg, Coca Cola and Nestlé. In Norway, there exist a wide array of brand names that most people would recognise. These brands can analytically be divided in two. One the one hand there are product brands, like Farris (Ringnes sparkling mineral water), M (Freia s chocolate) and Grandiosa (Stabburet s Pizza). On the other, there are portfolio brands / company brands, like Freia, Nora (jams and juices produced in Norway by Stabburet), Eldorado (a wide array of imported canned fruits and vegetables, in addition to juices, soft drinks and jams produced in Norway), Gilde (Norsk Kjøtt s meat products) and TINE (milk and a wide array of butter and cheeses). Several of these names, like TINE, Gilde and Eldorado, are all relatively new names, established as pure 18 Stræte (op.cit.)
16 8 STEP Working Paper A-05/2000 marketing brands for companies that go back a long time. TINE 19, for example, is the marketing name for what used to be called Norske Meierier, Gilde is the marketing name for meat products from companies organised as Norsk Kjøtt, and Eldorado is NorgesGruppen s private label. To sum up, a basic difference between food manufacturing and other manufacturing is that innovation (interpreted as major business effort ) may very often be to keep a product exactly the way it is, focussing on maintaining or increasing the product s market share by familiarising the product to consumers. As branding as phenomenon is not captured in regular innovation surveys, food companies come up less innovative then what one should believe them to be. Interpreting innovation as a major effort to increase or maintain business or profits, branding would surely be one such important factor. In addition to the fact that food companies are innovative in these two ways that is not captured by regular innovation surveys (size and branding), there are also other innovations taking place. A central area of change the last decades has for example been the profound improvements and changes in transport 20. These changes have dominantly taken three forms. Firstly, there have been gradual improvements in trucks and cooling systems, which have increased the potential for extending the transport routes for food (or a toning down of physical space), if you like. Secondly, there has been a development in logistics activities. This change has taken two forms. Firstly, there has been an increased division of labour between the people in charge of logistics on the one hand and the truck drivers on the other. And, related to this, there has been an increase in professionalisation of the logistics people and the technology they use, in for example turns of the shape of satellite based control systems which are opening up for more economic flow of goods 21. The third development has been the retail chains gradually taking over transport services through their vertical integration with wholesale (more about this in Braadland (2000) op.cit). Formal and informal innovations Another way of distingusihing different types of innovations is to divide them by how they emerge; from strictly informal to strictly formal. There are basically three types of food companies; small family-owned companies, corporate companies and companies belonging to a co-operative 22. The difference between formal and informal innovations seems basically to vary with company size. Large companies, both the corporate controlled and the companies belonging to a cooperative structure tend to formalise product development through use of market divisions, research divisions, external and internal market analysts and external research suppliers. The TINE development of a new milk-based drink called Ox, mentioned above, illustrates the formal way of developing new prod- 19 [tee:ne] 20 Ørstavik, F. (1998), Innovation regimes and trajectories in goods transport, STEPreport R , STEP Group, Oslo 21 Ibid,p. 22 Onsager, K. and Berit Aasen (1995)
17 ucts. In the process, TINE involved their market division and research division, in addition to external knowledge suppliers like trend analysts, market pollers and web designers. This is an indication not only of a formalisation of the innovation process; it is also a sign of a highly professionalised innovation process. The same applies for product development in Maarud, a major snack provider, owned by Freia / Kraft General Foods. When Maarud develops new products, it is in close co-operation with their Nordic sister companies of the food innovation process, using test and development laboratories and staff, sometimes involving several hundred variations of product taste to find the right one. In Ringnes, product development takes place in the company s product development department in Gjelleråsen, involving a range of persons, mainly chemists and market analysts. Product development in Fjordland, owned by large cooperatives, is taking place in the owners R&D laboratories, in addition to cooperation with market agencies and scientific knowledge suppliers like Matforsk and Norconserv 23. At the other end of the scale, we find small companies with rather informal innovation processes. Majonæsfabrikken is an artisan factory with 14 employees, located at the heart of Oslo, producing mostly private-label, high quality majonese salads for supermarkets in the Oslo-region. Both father and son work in production. The company sometimes develops new products by copying their competitors salads. If they see a new type of salad from the competitors (like major majonese salad producers Denja or Mills) in the grocery shop, they buy it, determine the ingredients by smelling and tasting the salad. Then they decide whether to go for it or not, based on how they find the product. Barriers to innovation Quantitative industry-studies of barriers of innovation are important to understand how the industry innovates, and which factors companies consider as important hampering factors to renewal and innovation. In an all-industry survey from 1997, Norwegian companies were asked to respond if any of nine given factors ever had been a hampering factor to innovation activities during 1994 to Food companies separated from most other industries by emphasising i) organisational relations, ii) lack of market information, iii) too strict standards and regulations and iv) market failure for new products and processes 24 as factors being important barriers to innovation. The industry did not separate markedly from other industries in factors like lack of qualified personnel, lack of technological information or too high innovation costs. i) Organisational barriers to innovation. This picture harmonises with what we have seen so far. Large companies dominate the food industry. We know that large companies are often marked by embedded organisational resistance to change, but according to the survey, it may seem that food companies are more 23 Sources: Interviews with TINES market director, and various homepages. 24 Nås et al (1999), Innovasjon i norsk næringsliv, STEP report R-04-99???
18 10 STEP Working Paper A-05/2000 often regarded as intrinsicly resistant to organisational change than large companies in other industries are. ii) Too strict standards and regulation. In the barriers survey, public regulations is also often regarded as a barrier to innovation. This answer may be an echo of regulations on consumer security and demands on purity, nutrition etc. (see Braadland (2000)) iii) Market failure. The very fact that food production is a consumer-oriented industry is also reflected in the fact that market failure is frequently reported as a barrier to new food products (and processes). The very fact that market failure is a profound hindrance to innovation in the food industry is in itself an interesting observation. It namely underscores our suggested interpretation of the food industry as an innovative industry, but that the problem is more that new products have trouble in finding new markets fast enough. Interviews in the food industry have shown that some claim that this is a problem caused by the increasingly dominating standardised, low-cost retail chains. Others claim that the problem is related to conservative consumers and their willingness to try new and altered products. Market failure for new products goes together with the last barrier, namely iv) Market information. Lack of market information does, together with market failure, underline the fact that food companies have both a very dependent relation and a very vulnerable relation to consumers and customers (retail chains). Food companies express that there are potential for product innovation, but that such development demand a better knowledge of what the consumers actually want. Conclusion: A new innovation concept? We have shown that although innovation seems more rare in the food industry than in many other Norwegian industries, the food industry is still innovative in its own terms. In a perspective where innovation is understood as new products or processes, and less as major effort to maintain or increase profitability, 25 many details on food industrial dynamics are lost. The key lies in the concept of branding. How important branding is, is documented in a research survey from 1993 among food produing companies. At that time, Norway was preparing for a EU membership referendum. The food industry managed, through their long tradition of strong political influence, to get financial aid to perform strategic investments in preparation for increased competition. The companies were free to use the grants the way they felt were necessary, with a clausal on 50 percent self-financing. The only criterion was that the support was used strategically, aimed at increasing competitiveness. The interesting result was that very few food companies used the strategic means to develop new products. When asked what was the decisive factor behind their investments, they collectively ranked highest these four factors; i) product quality, ii) quality and hygiene in the production process, iii) customer relations and iv) ensure quality on raw materials. Of 24 indicators, developing new products was ranked second least important 25 Hauknes and Braadland (1999), op.cit.