Open Innovation in the Food Industry: An Evidence Based Guide

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1 Open Innovation in the Food Industry: An Evidence Based Guide S.W.F. Omta, F.T.J.M. Fortuin & N.C. Dijkman

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3 Open Innovation in the Food Industry: An Evidence Based Guide Prof. dr S.W.F. Omta Dr F.T.J.M. Fortuin N.C. Dijkman, MSc Wageningen University and Research Centre Food Valley NL Manager Sustainability ABN. AMRO

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5 Colophon 2014 Food Valley NL Authors: Cover design: Printing: Prof. dr S.W.F. Omta (Wageningen University and Research Centre) Dr. F.T.J.M. Fortuin (Food Valley NL) N.C. Dijkman, MSc (Manager Sustainability ABN. AMRO) Roland Klefoth (Food Valley NL) GVO drukkers & vormgevers B.V. All rights reserved. Nothing from this publication may be reproduced, stored in a computerized system or published in any form or in any manner, including electronic, mechanical, reprographic or photographic, without prior written permission from the publisher, Food Valley NL, P.O. Box 294, NL-6700 AG Wageningen, The Netherlands. ISBN First published, 2014

6 Table of Contents Preface... 9 Introduction Open innovation Open innovation in the food industry Partners in open innovation Critical failure factors for open innovation Defining problems and establishing objectives Lay the proper groundwork and change course in time Make roadmaps A new perspective: looking ahead Partner selection Think beyond your own interests Look beyond technology Drafting a collaboration agreement Agree on terms Getting a handle on risks: it is possible Implementation of the open innovation project When fear gets the upper hand Invest in trust Connect cultures Communicate often and extensively Expose conflicts Monitoring, finalisation and evaluation What role does cost play? Increasing complexity, rising costs Management and coordination needed Conditions for effective innovation Critical factors for open innovation in the food sector Critical failure factors Low rational commitment and free riding Low team cohesion Innovation insecurity Lack of hierarchy Critical success factors Contractual protection from distrust... 32

7 Bogus solution Double agendas in public-private partnerships complex projects in focus Impossible demands? Varying outcomes Costs and knowledge Network stability as primary indicator Impact of formal agreements Striking differences Clarity is more important than a 'big stick' Necessary incentives Experience helps A formalised structure is also important for SMEs Recipes in jeopardy Striving for balance Competencies make all the difference Top-down solutions Open innovation in food and high-tech SMEs The seed sector is highly innovative Similarities with high-tech sectors Description of participating companies Personnel involved in innovation Turnover and patent applications Profitability and market introductions For a correct interpretation Contact between R&D and marketing Go or no go Reward policy Performance indicators and lessons learned Successful open innovation projects Satisfied partners Importance of product development Contact moments Personnel exchange Contractual agreements Unsuccessful open innovation projects Conclusions Why is collaboration of such significance for innovation?... 47

8 Factors to consider when collaborating in an open innovation project First of all: critical self-analysis Careful selection of partners Are clients suitable partners? One partner or more? Create trust Keep the project from becoming a goal in itself Leaking of essential information An ounce of prevention is worth a pound of cure Learning experiences for innovative SMEs in the food sector Acknowledgements References About NetGrow... 58

9 Preface Innovation is essential to success in the food sector. Since most food firms don t have the competencies nor the capital needed to innovate on their own, they need to find partners to join forces in open innovation collaborations. However, Small and Medium Sized Enterprises (SMEs) in the food sector often face difficulties in establishing a strategic and efficient network. Understanding how food SMEs use their networks and how food networks can become more supportive to food SMEs for open innovation was the first objective of the EU 7th Framework NetGrow project. How important this is was demonstrated by a finding of one of the NetGrow surveys among over 250 food SMEs in 6 EU countries, in which a clear correlation was found between openness of food firms in terms of diversity of interactions with other actors and the firms innovation performance (in terms of new products and processes introduced). The second objective of the NetGrow project was to develop based on the insights gainedan evidence based toolbox with guidelines for open innovation for food SMEs. This toolbox provides an overview of food networks in the 9 countries that participated in the NetGrow project and contains tools that assist in selecting and exploiting the network that best fits the company's needs (Fortuin and Omta, 2014). The present report provides guidance for the next step: using the links of your network to engage in open innovation alliances. It contains guidelines on how to start, conduct, and successfully complete open innovation projects. It is based on the insights gained during the NetGrow project combined with empirical evidence from research on open innovation within and outside the food sector. It provides answers to questions like how to select partners? What are the dos and don ts for collaboration in open innovation trajectories? And which projects are suitable to 9

10 be carried out in an open innovation setting, which projects could better be executed in-house? Parts of this report were published in ' Samenwerken voor Open Innovatie: Kunst of kunde?' (Omta et al., 2011). 10

11 I ntroduction The European food industry operates in a turbulent market, characterised by global competition, and fast changing demands for sustainability of production and transparency of chain processes. Consumers demand healthier, locally produced products and put high pressure on animal welfare. Competition in the food industry is also more intense than ever, and manufacturers must be continually alert in order to remain relevant for distribution channels. It is evident that the European food industry has to adapt to these fast changing circumstances and that its innovativeness has to be enhanced. An additional obstacle for innovation in the food industry is the difficulty of ensuring intellectual property rights; though it is doubtful whether this is still a problem. Up through the late 1990s, when a secret recipe was the most important form of protection (as it often still is today), such patents were only seen sporadically. A recent example of how this has changed is the more than 800 patents upon which Nestlé depends to protect its Nespresso coffee-making system, including the capsules and the necessary technology. During the research for this report, an R&D director from a medium-sized multinational in the food sector emphasised the great and still increasing import of patenting (see also figure 4): Especially in the last three years, the patenting of products and processes has expanded so rapidly that this can be called the biggest development in the past decade. In her dissertation (2011), Janssen demonstrates that there are indeed cases of radical innovation in the food sector. She counts, for example: Five technical breakthroughs (including Fridéale and Valess) Four trend-breaking innovations (e.g., Breaker and Knorr Vie) Three breakthrough innovations (Becel pro-activ spread, Senseo and Optimel control). Although nearly everyone associates it with products, innovation is a much broader term. Furthermore, Kühne shows in her dissertation (2011) that innovations, in particular those involving processes, are becoming more frequent in the traditional, artisanal food sectors such as Italian cheeses and hams, Belgian beer and Hungarian sausages. Introduction 11

12 All of this revolves around the combination of product, process, market and organisational innovation, with the goal of restructuring market-directed internal business processes and chain processes. Take the wine industry. In their Handbook of Innovation in the Food and Drink Industry (2008), Mitelka and Goertzen count 28 viticulture innovations, from crops to harvest and from organisation to marketing. Even the mere existence of this handbook demonstrates how important innovation has become in the food sector. And this importance is on the rise. Open innovation Innovation is becoming increasingly complex, and often also more expensive. These factors make it impossible, or nearly so, for individual businesses to develop and introduce new products and processes independently. Innovation has become an unavoidable interplay of various parties who combine their knowledge and turn problems into design requirements. This is how they create opportunities. In the past several years, the term open innovation introduced by Chesborough (2003) has thus become a key concept. This term characterises the shift to a system in which chain partners, knowledge institutions, governmental bodies and even competitors work together to develop new products and processes quickly and effectively. Figure 1: Open innovation us Chesbrough (2003) in adaptation by Garcia Introduction 12

13 Figure 1 shows that in open innovation the boundaries of a firm become, as it were, blurred. Ideas and technologies are not only developed internally, but also originate outside the company. The firm licenses in and, if necessary, also licenses its own knowledge out to companies that can use it to create more value. Spinout companies put products on the market at some distance on the basis of technologies they do not consider core technologies. At the same time they buy products from other firms in order to complement their product portfolio beyond their core competencies. Actually, open innovation works like a lever. An individual business only has to do part of the work itself; other firms do the rest. This generates income and accelerates the innovation process. And yet open innovation project participants are left with plenty of managerial issues: above all, how an organisation can profit the most from others expertise while still retaining enough potential value itself. It is hence a balancing act. On the one hand, businesses want to be open and make use of others know-how. On the other hand, they need to protect themselves in order to prevent competitors from running off with their profitmaking expertise. This is a constant source of tension. In order to maximise the leverage and minimise the risks, businesses must find partners with complementary knowledge and skills. Preferably, partners with a comparable organisational culture, for example in terms of decision-making and planning. Fortuin (2007) demonstrates that there are big cultural differences between firms that tend to have long gaps between various product generations and those in which this time is short. Examples of the former are firms in aircraft construction, pharmaceuticals and the food sector (especially seed improvement). In consumer electronics, mobile telephony and the computer industry, on the other hand, one product generation comes on the heels of another. With innovation, time perspective is essential. An open innovation project is called an innovative alliance when a firm collaborates with just one partner. When there are several partners, it is a network collaboration. The first of the two forms is the most common, most likely because of its advantages: innovative alliances are easier to manage and make it easier to reach agreement about property rights. However, there can be a downside: as there are fewer participants with diverse backgrounds, creativity may be diminished and some competencies may be lacking. Introduction 13

14 Traditional collaboration usually looks like a regular project, with a defined goal, start date and endpoint. In contrast, the collaboration of chain partners in open innovation projects continues beyond the end of the project. When competitors work together, this is usually in the form of pre-competitive collaboration projects, after which the original innovation partners resume their competitive roles. In practice, open innovation processes are difficult to manage effectively, especially if they involve a network of partners. It is an art or a science to ensure that collaboration does not get bogged down in endless consultation and compromise seeking. At the same time, open innovation is not only about collaboration. When there is a high degree of specialisation, a firm can limit the complexity of the innovation process by outsourcing part of the process to specialised organisations or knowledge institutions. This does, however, place high demands on the firm in terms of absorptive capacity: the firm s ability to acquire new knowledge or expertise and to put it to use to set up innovative activities in order to respond actively to a constantly changing environment. This is also demanding for personnel, who must be able to understand complex technological innovations and integrate them into business processes. In addition, there is a need for specialised alliance or network managers capable of managing an extensive internal and external network, as in open innovation projects. A recent large-scale empirical study in Europe by Ebersberger et al. (2011) shows that in general open innovation has a positive impact on the innovative potential of a business. Open innovation incorporates several dimensions: taking a broad view of developments, collaborating concretely in a process, and seeking external knowledge (external innovation expenditure 1 ). This might include making use of contract R&D, sourcing expertise tied into machines or components, or establishing licences or patents. If a firm is focused solely on this search for external know-how, the collaboration will actually have a negative impact. A business must know what it is and what it is capable of, and must experience the 1 External innovation expenditure involves arm s length contracting related to the procurement of technology embodied in machinery and components, the purchase of problem-solving capabilities through contract R&D, or the acquisition of technology and capabilities in the form of patents or licences. External innovation expenditure is, for example, less contingent on a firm s internal capabilities or absorptive capacity than search and screening activities or collaboration for innovation. Introduction 14

15 why of knowledge development. Enough attention must be devoted to creating and maintaining its own absorptive capacity. Ebersberger says: First, make sure your own competencies are satisfactory. Only then will the lever begin to work, and can you profit from open innovation. Open innovation in the food industry Open innovation is becoming increasingly important in the food sector. According to Sarkar and Costa (2008), there is rapid growth in the number of open innovation projects. One explanation is that more than 90% of the sector consists of SMEs, which are generally regarded as highly flexible and innovative. However, because they have limited resources for in-house R&D, they must maintain a broad network of partners to provide them with scientific and technological input (Knudsen, 2007). Figure 2: Various industries arranged on a continuum from closed to open innovation Paul Isherwood, Director Innovation and External Networks at GSK Introduction 15

16 Figure 2 shows that the food sector is just under the middle of the continuum from closed to open innovation: on a par with consumer electronics, just behind pharmaceuticals and biotechnology, but ahead of semiconductors. Furthermore, the sector is increasingly active. The food industry is moving progressively in the direction of open innovation. Food firms are making a strategic choice to focus more intensively on their core competencies. They are looking beyond the walls of their own organisations, actively seeking knowledge, technology and partners to implement a portion of the innovation process. Figure 3: Development of the number of probiotics patents from 1990 to 2010 Adapted from Bornkessel et al. (2011) The boundaries between various industries, such as food, pharmaceuticals and cosmetics, are also rapidly blurring. As shown in figure 3, food firms involved in probiotics are patenting more frequently, both independently and in partnership with pharmaceutical companies. The development of probiotics really started after the market launch of Activia, the innovation breakthrough from Danone in Activia was the first yoghurt based on probiotics. This product aids digestion due to the addition of the Bifidus Regularis bacteria. We can see that the increase in number of patents since 1999 has been nearly linear, with an obvious acceleration in the food sector in Furthermore, in 2009, we see an indisputable climb in the number of patents based on collaboration between food and pharmaceuticals firms. Recently, Introduction 16

17 though, the European Food Safety Authority (EFSA) dismissed many health claims to the disappointment of many food firms. Until recently, there was no empirical evidence for the true relevance of open innovation in the food sector. Batterink (2009) has shown convincingly that open innovation became increasingly important for innovative food firms during the period , especially since 2000 (see also figure 5). This convincing evidence emerged from the responses to six serial Community Innovation Surveys (CIS) by more than 1300 innovative food firms. Cees t Hart, CEO at Friesland Campina, presented a beautiful example of collaboration from specialised roles. Regarding activities of their cheese, butter and powdered milk division, he said: For the marketing of these products, collaboration with the marketplace plays an important role. We can do it all ourselves, but sometimes specialised companies can do it much better. Besides, market forces are so strong that you can t always beat them. Partners in open innovation Figure 4: Percentage of innovative food firms that collaborate with various partners in open innovation projects CIS Introduction 17

18 Figure 5 clearly shows that building and maintaining an external network is now crucial for the survival of innovative food firms. Until 2000, only 15-20% of innovative food companies collaborated with suppliers, clients and knowledge institutions. Since then, these collaborations have become more common: up to 45% with suppliers and 30-35% with clients and knowledge institutions. The rate of collaboration with competitors is the lowest and also shows the least increase, from 10% until the year 2000, and then up to only 15%. Interestingly enough, the same CIS database reveals that the pattern of collaboration between innovative food firms is very comparable to that in high-tech sectors. This is true for both the increase and the distribution among the various types of partners. Enzing et al. (2009 and 2011) investigated three specific issues: 1. What is the role of various partners in an open innovation network? 2. What influence does involving these partners have on the success of market introductions? 3. What chances do new products have of surviving on the market? In total, Enzing researched 129 innovative products: 76 for the consumer market, 37 for the industrial market (ingredients and machines) and 16 for the food service market. The products studied were very successful: Enzing established that almost two-thirds of the products were still on the market seven years after introduction. This outcome was unexpected, as there is little mention in the food sector s professional literature of new products having a long life (Buisson, 1995; Rudolph, 1995; van Poppel, 1999). Apparently, the radical character of these products increased their chances of survival. Another conclusion was that the innovative products developed by food firms in open innovation networks were more successful than those that came from the firms own R&D labs. Innovations resulting from chain partners collaborations with universities and research institutes performed particularly well. Collaboration with companies that supply ingredients was very valuable for long-lasting market success, for example in the development of functional foods and probiotics. Ingredient suppliers have indeed begun generating more total product concepts, which encompass both a product s ingredients and its formula (Joppen, 2004). Enzing discovered, furthermore, that business-to-business clients were involved in the development of about 30% of the new products. However, in none of the cases studied was there a correlation (positive or negative) between the Introduction 18

19 involvement of these clients and the success of the market introduction. This was also true for the new products long-term market performance. Knudsen (2007) even found a significant negative correlation between client involvement and market performance in food innovation processes. He concluded that when clients were too closely involved, this inhibited the creativity necessary for development of more radically innovative products. Bonner and Walker (2004) also concluded that clients tend to express preferences for products that are already known, which results in more incremental innovation. Another negative aspect cited by innovators during the interviews was the possibility that direct involvement of clients in open innovation trajectories could result in dependence. A dependent relationship can have a negative influence on the openness so essential to the process. Supplier management, for example, worries about unintentional indiscretion during innovation discussions because there is always the risk of leaking information formulas or profit margins, for example that the supplier would rather not reveal to its clients. We suspect, though, that the relationship between food retailers and manufacturers in innovation trajectories is changing. This has to do with the emergence of private label products: the client's level of influence depends on whether the manufacturer has its own product line or produces for a brand. We are seeing more and more examples of food retailers and private label manufacturers collaborating in innovation projects; in these instances, consumer data (cash register information) provide the basis for what is often a more incremental type of innovation. Introduction 19

20 Introduction 20

21 C ritical failure factors for open innovation In search of certainty about possible pitfalls, referred to as critical failure factors, Omta and van Rossum carried out a study in 1999 on the dark side of open innovation. They spoke with ten alliance and network managers in large businesses representing various industries in the Netherlands and Ireland. For insight into problems that may arise in both domestic and international open innovation projects, they asked each manager for in-depth commentary on an open innovation project that had not gone well. These projects concerned issues such as the development of radical new products, faster time-to-market or more efficiency in production and chain processes. In addition, the alliance and network managers were asked to indicate which lessons they had learned from their experience and what recommendations they could make based on these lessons. In this chapter, we discuss these problems and recommendations for the various stages of the open innovation process. Defining problems and establishing objectives Lay the proper groundwork and change course in time As open innovation projects focus on new technologies and/or markets, a careful preliminary study is essential to making a balanced assessment of technological and business opportunities. In two cases, the partners were so enthusiastic about the collaboration itself that without conducting any research they labelled the business opportunities good in advance and went on much too long in the chosen direction. MacLaghlan (1995) comments that it can be traumatic enough shutting down an R&D project in one s own lab, let alone in a shared effort. Bruce et al. (1995) also touches on this, adding that collaboration as a phenomenon has a tendency to create its own agenda. Make roadmaps These kinds of problems could probably have been prevented if the technology and the market had been carefully researched beforehand. Businesses must try to predict the technological and market potential of an innovation as accurately as possible. A number of respondents said that input from sales and marketing was Critical failure factors for open innovation 21

22 too focused on the short term, despite the fact that, for radical innovation, it is vital to look much farther into the future: about five to ten years. On the basis of such prognoses you can draft market-technology roadmaps in which future product plans are tied to: Expected developments in the various technologies; Emerging trends in customer needs; Possible competitor activities. These roadmaps require regular cross-functional adjustment; about once every one to two years (see boxes 1 and 2). A new perspective: looking ahead In 2007, Fortuin studied cross-functional collaboration between R&D, marketing and sales and the business units of large multinational companies. This research revealed that there is often still a gap between the short-term view of marketing and the business units on the one hand and, on the other, the R&D long-term orientation that is essential for radical innovation. Recent research by the authors of this report demonstrates that the short-sightedness of marketing and sales in combination with the future orientation of R&D still causes problems in the food sector. The cultural clash between these two groups continues to play a role in their mutual communication. Expressed as stereotypes, it s a case of bringing together the Poindexters in R&D and the golf-playing executives in marketing. Automobile manufacturer Henry Ford once said: If I had asked customers what they wanted, they would have said a faster horse. There are similarities between Ford s famous quote and this food sector R&D director s characterisation of the dissonance inherent in innovation: Marketing plays an essential role when it comes to indicating trends, but contributions from marketing are more likely to put the brakes on true breakthrough innovations. This is because they extrapolate from existing lines, while radical innovations require you to go in a different direction. [ ] Yet the translation to marketing is essential. The not-invented-here syndrome is present not only between firms, but also between business functions. Critical failure factors for open innovation 22

23 Partner selection Search quickly and in the right place If you don t have a clear picture of your R&D environment, you will tend to overlook obvious partners. This is often due to too little commitment on the part of top management to finding the right partner. In one case, the entire process of finding a partner with the required competencies took five years (!), and once the partner had been found the business momentum was gone. During that time, of course, the market had changed. In another case, a prominent university laboratory in the firm s own country had not appeared on the radar because the firm had been searching the globe for collaboration partners. The possibility of excellence just around the corner had occurred to no one. In two cases, the partner s technological competencies and financial resources were insufficient to successfully implement its share of the collaboration. Think beyond your own interests Erens et al. (1996) studied fifty companies in Europe, the US and the Far East, including Airbus, Boeing, Canon, Hitachi, IBM, Philips and Toyota. The researchers concluded that many prestigious firms were too egocentric in their search for a suitable partner. The authors emphasise that businesses should not be looking solely at what they need from a partner, but also at what they themselves have to offer in terms of assets such as skills, market access and economies of scale. An R&D director from a multinational dairy company put it this way: Our central position in our business network often allows us to see more possibilities for the specific innovations of our partner companies. Because we consciously search for advantages for our network partners in other markets, our partners are in turn motivated to make extra investments in new technologies. This is an efficient mechanism for maintaining a stable and efficient innovation network. Look beyond technology Furthermore, Erens emphasises that firms generally focus too much on the tangible aspects of the collaboration, despite the fact that a good match of intangible factors such as organisational culture and the chemistry between (top) managers is much more important for successful collaboration. Bailey et al. (1996) studied 70 firms in the United Kingdom and also arrived at the conclusion that choosing collaboration partners purely on technical grounds results in solutions that are not always optimal. Critical failure factors for open innovation 23

24 Drafting a collaboration agreement Agree on terms One of the most important problems revealed was that the collaboration had not been planned out, and the interests of the firm had been insufficiently secured beforehand. In half of the collaborative ventures, the lack of attention to business interests was named as the leading cause of (serious) problems. Partners had not agreed on how they would divide the effort, both financially and in terms of R&D nor how they would divide the yield. Furthermore, there was not enough prior agreement on the nuts and bolts of the collaboration: details such as hiring an alliance manager or network manager, decisions about monitoring, and criteria for go or no go. Some collaborative partnerships do not include a clause on what to do if one of the partners pulls the plug. The study tells of one partner who left the project in order to put the knowledge gained to competitive use. Getting a handle on risks: it is possible The advantages and disadvantages of (open) innovation projects are often difficult to predict. Unexpected results can send the process in a very different direction than the one planned. As illustrated in the examples above, if clear agreements are not reached beforehand, with or without official contracts, this ambiguity can be a source of conflict. Yet the idea that uncertainty appears to be inherent to innovation led a number of respondents to remark that it is very difficult even impossible to cover everything in contracts, because especially in open innovation projects, the gains are often uncertain and unexpected problems may arise. The path of the unknown certainly does not always lead to the intended goal. And still the goal that is reached can be very valuable. This feature of innovation can be used to help structure the process. SKF, the world s largest producer of ball bearings, had had previous experience with collaboration partnerships formed for open innovation, and thus already knew that they do not always end up at the point planned, but do have other interesting outcomes. Unexpected outcomes led to discussions afterwards: which of the participants is responsible for what portion of the costs, and is everyone s profit from the proceeds directly proportionate? Because of this experience, they now reach clear agreements in collaborations with large automobile manufacturers. They currently stipulate in contracts that SKF owns the rights to every innovation within the ball bearing system (i.e. the housing and linked ABS system), while rights to all other innovations go to the car manufacturer, regardless of who thought of it. This works well in practice. There have been no conflicts over property rights since they began to work in this way. Critical failure factors for open innovation 24

25 Implementation of the open innovation project When fear gets the upper hand Distrust and fear during an innovation trajectory were the problems mentioned most often. Six of the ten collaborations experienced these problems at some point. Some were worried about divulging too much confidential information and technological expertise because they were concerned that their partners might have a hidden agenda, or that their partners would look after only their own interests. Sometimes these fears were justified. Two collaborations failed because one of the partners turned out to be more interested in exploiting the information and technology gained than in mutual success. Another fear was that the R&D partner would merge with a competitor, thereby increasing the risk of sensitive information leaks. Collaboration with another business is not the only source of worry; collaboration with universities can also lead to concern. One of the respondents mentioned being worried about the possibility that strategic information would fall into the wrong hands if the doctoral students involved were eventually to be hired by the competitor. Furthermore, respondents warned of asymmetrical collaboration between large and small businesses, and between suppliers and clients. Intercultural problems arose in three cases. For example, language difficulties and cultural differences hampered communication between the Japanese and European businesses. Interestingly, there were also problems with the American businesses. Two collaborations derailed when American partners showed up for negotiations with their lawyers and weighty contracts. This violated the other party s trust and the collaboration never really got off the ground. In two other cases there were complaints about lack of openness on the part of the American partners, and failure to provide up-to-date information. Invest in trust Partnership management is all about creating trust. Lack of mutual trust keeps businesses from investing in less tangible (radical) innovation trajectories focused more on the long term. As it is easier to predict their risks and benefits, these businesses are more likely to choose projects aiming to improve efficiency. Thus, if trust is an issue, the resulting chain will likely be single-dexterous: one-handed. Critical failure factors for open innovation 25

26 Connect cultures Achieving effective collaboration requires bridging the various business cultures; sometimes these bridges cross the lines of responsibility in the participating businesses. Having studied 84 alliances, Lorange et al. (1992) conclude that trust and commitment are necessary conditions for a long-lasting collaboration. Communicate often and extensively Firms must forge alliances to create win-win situations. The challenge is to find the critical balance between openness and confidentiality. As long as the collaboration lasts, it is essential that partners keep each other abreast of their activities. Frequent communication and sending (or forwarding) all reports facilitates mutual understanding. Furthermore, interim progress checks save costs because they prevent expensive adjustments later in the process. An alliance or network manager s primary competence is speaking the language of the various collaborating parties. This goes beyond merely knowing the technical jargon and being able to help seek solutions in various areas, although that is certainly essential. Truly critical, however, is a feel for cultural differences, as this is crucial for the images participants will have of each other and the open innovation project. The manager must also recognise the interests of the various partners, as bringing together these often conflicting interests and images often creates tense moments. And yet these moments are useful because they make underlying differences visible early on, and this clarity often helps move the innovation process through obstacles or hesitation. Expose conflicts Also essential for creativity and learning in teams is a sense of safety. Bringing information about objectives and potential conflicts to the surface early in the game can support the creative process. Clearly, then, stress tolerance and conflict management are valuable competencies of alliance or network managers, complemented by capable monitoring of progress to ensure that these differences, real or imaginary, are exposed in time. Monitoring, finalisation and evaluation What role does cost play? Partners in large innovative collaborations tend to underestimate problems regarding communication and coordination, and also the costs associated with these problems. Transaction cost theory (Williamson 1985) is often used to Critical failure factors for open innovation 26

27 analyse these problems. Firms aim to reduce costs. If the internal costs exceed those of the collaboration, they will choose to collaborate. This theory predicts that the extent and form of collaboration are influenced by the specific investments required to achieve that collaboration. Collaborative relationships between firms must be arranged so that the transaction costs are minimised while keeping the risks acceptable. Both collaboration partners will need to continually evaluate what they are willing to invest in the relationship with an eye to preserving this balance. Increasing complexity, rising costs Gerritsma and Omta (1998) investigated the communication and coordination costs of thirteen large open innovation projects at Philips. They assigned a score (standardised at 0 100) for project complexity, based on ten parameters including the number of radical product and process innovations, the desired production volume and the complexity of the parts required from suppliers. The study revealed an exponential relationship between project complexity and development costs (see figure 5). The authors concluded that management at Philips had underestimated the communication and coordination costs, especially those related to contacts with suppliers and between the various business functions. Figure 5: R&D project complexity versus development costs Gerritsma and Omta (1998) Critical failure factors for open innovation 27

28 Box 1: Wageningen Innovation Assessment Toolkit (WIAT) WIAT consists of two scientifically based analytical instruments: one for evaluating innovation capacity at the corporate level (WIAT company) and one for assessing whether an individual open or closed innovation project meets the innovation objectives (WIAT project). These instruments are supported by a continually updated, comparative database of innovative food firms in comparison with high-tech businesses. WIAT company evaluates a company in terms of its innovation potential, practice and performance and compares its innovation profile as described by the general director, the R&D director and the marketing director on the basis of a structured questionnaire with that of the leading innovative businesses in the agrifood and technology sectors. WIAT company thus helps companies to link their corporate business strategy to their innovation strategy by maintaining focus within their innovation portfolio on what should be done in-house, what can be outsourced and which innovation trajectories could best be implemented with other firms and/or knowledge institutions. Point 0 represents the average for the database; green is the range of responses given by the various people working on the open innovation project; dark green is the average when higher than the database; yellow is the average when lower than the database. WIAT project diagnoses the strengths and weaknesses of the innovation projects. This tool can indicate the potential for technical and commercial success of a given open or closed innovation project at an early stage by comparing the product and process innovation profiles drafted by those involved in the project with a database of new product and process profiles from successful and failed projects. WIAT project thus provides early warning signals that, in turn, can be used during cross-functional meetings for projectlevel decisions regarding go/no go, adjustment, outsourcing or collaboration. Critical failure factors for open innovation 28

29 Box 2: The open innovation matrix Innovation isn t only about collaboration. The complexity of the innovation process can also be reduced by outsourcing some of the work to specialised businesses or to knowledge institutions. Management tools such as the open innovation matrix designed by the authors (Omta and Folstar 2005, Fortuin 2007) can be used by food firms to decide which technologies and products should be developed in-house, which should be developed in collaboration with one or two partners and which would preferably be outsourced. The first step is to determine the competitive impact of the firm s various technologies by classifying them by category: emerging, fast-growing, key and existing technologies (Roussel et al. 1991). The second step is to evaluate the firm s internal competencies in terms of each of these technologies. The open innovation matrix Competencies of the firm Technology Weak Average Strong Emerging Environmental scan Scan or collaborate Collaborate Fast-growing Collaborate Share risk In-house Key Optimise Optimise In-house Existing Outsource Outsource/trade Sell/trade Although emerging technologies can have an influence on the future competitive position of a business, a great deal must be done in the area of market and technology development before they can begin to change the basis of competition. When internal technological competencies are weak or average, an effort to close the gap could be in order. However, the uncertainty of this situation calls for a scan of the R&D environment: seeking fitting partners through flexible relationships, preferably in strategic partnerships and alliances, or via contract research and sponsorship of knowledge institutions. In any case, adequate protection of patents should be considered. Fast-growing technologies have the potential to change the competition in the medium-long term. When technological competencies are strong, there should be a preference for in-house R&D whenever possible. Extra investments may be necessary for the research and development of various applications of the technology in new products and markets. When technological capacity is average, risk sharing through strategic alliances seems to be the most prudent route. When technological competencies are weak, the most realistic alternative is joint development. As key technologies are essential for the short-term survival of a business, it is necessary to track competitors R&D efforts intensively. Key technologies should, if possible, be owned by the business and protected with patents. When technological competencies are weak or average, extra technological capacity should be acquired, for example by expanding the firm's knowledge base through acquisition. For non-critical existing technologies, outsourcing could be the appropriate choice when technological competencies are weak; when they are average, they can serve as a medium of exchange in a partnership. When they are strong, they can either be used as a medium of exchange or be sold, leaving the business to concentrate its R&D on fast-growing and key technologies. Critical failure factors for open innovation 29

30 Management and coordination needed Four large partnerships exceeded their budgets some substantially so. One key problem was the difficulty of managing such a large network, and the lack of agreements to this effect. Open innovation projects need to be managed differently than in-house innovation. Many times, the composition of the partnerships, the structure and the management of the network were not chosen explicitly, but tended to evolve or come about by coincidence rather than as a result of planning. Conditions for effective innovation During the past decade, the authors of this study incorporated its results in the development of a number of management tools to help businesses innovate more effectively. Of major importance is that a firm first develop a keen awareness of: Its own focus; Success and failure factors; Key risks and uncertainties; Drivers of and barriers to innovation. These insights provide the basis for a firm s innovation strategy as a whole and also serve as a focus for individual innovation teams. The Wageningen Innovation Assessment Toolkit WIAT (see box 1) is designed to aid this process. The open innovation matrix (box 2) is an instrument developed to help businesses decide whether an innovation trajectory can best take place in-house, be pursued in collaboration with others, or be outsourced. Although both tools were originally intended for large firms, they are also useful for SMEs in streamlining innovation processes. Critical failure factors for open innovation 30

31 C ritical factors for open innovation in the food sector Critical failure factors To gain insight into the most important problems typical of open innovation projects in the food sector, Du Chatenier (2009) conducted a survey in various links of the food chain: among producers, food firms and supermarkets actively involved in open innovation projects. She also interviewed people working in knowledge institutions and intermediaries that had initiated and/or facilitated such projects. These twenty interviews were followed by focus group discussions in a so-called Group Decision Room aided by group decision-making software. Seventeen experts participated in these discussions. The following problems for open innovation projects in the food sector (in order of importance) were mentioned in both the interviews and focus groups: Low rational commitment and free riding Mentioned in ten interviews and in one focus group discussion. Respondents formulated this problem as follows: "There are too many parasites. Of course you want to give, but you don't know what you will receive in return. This makes you cautious." "Some companies participate in open innovation projects for strategic and political reasons, not for the sake of the project itself. They pursue their own rather than joint interests." Low team cohesion Mentioned in eight interviews and both focus group discussions. The power gap in relation to the customer (particularly between food producers and supermarkets) was named explicitly in three interviews and in one focus group discussion. A few quotes: Collaborating with the client is complicated. Everything you say can be used against you." It is difficult to give direct feedback because you are very dependent on, and don't want to lose, the client." Critical factors for open innovation in the food sector 31

32 The two cultures are totally different. In academia they have time to think things through, whereas I have to justify every single minute to my boss." Innovation insecurity Mentioned in four interviews and both focus group discussions. A comment about a radical innovation project: The innovation process is not linear. It develops in totally different directions. You never know what might happen." Lack of resources and commitment from higher management Mentioned in four interviews and one focus group discussion. One quote: My firm wants me to participate in this open innovation project, but at the end of the day I will be judged by how well I solve the daily problems within the company." Lack of hierarchy Mentioned in two interviews and in both focus group discussions. An example of a complaint: You have no direct hierarchical relationship with your innovation partners. That makes it difficult to alert them to their responsibilities. To collaborate successfully in an innovation network, firms have to be very much aware of their own capacities. Each one has a role to play; for some this is directed more toward efficiency and for others toward innovation. The aims of an individual firm have to fit with the collaboration it enters into. Critical success factors In 2010, Tepic et al. initiated a study of complex innovation projects focused on sustainability in the food sector. The researchers looked specifically at whether the combination of contractual agreements and trust leads to success, and if so, how. Here too, transaction cost theory offered an analytic framework. Contractual protection from distrust In open innovation projects, there is often fear of opportunism: i.e. that firms will pursue their own interests by implicitly or explicitly breaking promises. If one collaborative partner suspects another of acting opportunistically, this will lead to Critical factors for open innovation in the food sector 32

33 a breakdown of trust. To protect themselves from opportunism, parties enter into contractual agreements. Bogus solution These contracts in themselves generate extra transaction costs. Moreover, they offer only limited protection. No contract is watertight, and certainly not in relation to open innovation projects, in which unexpected extra costs and benefits are more the rule than the exception. Extensive and one-sided contracts with many requirements and risks in the form of penalty clauses certainly do not help build a trusting relationship. Double agendas in public-private partnerships Good collaboration revolves largely around finding the right trade-off between the material and immaterial aspects, i.e. between business interests and building partner trust. Public-private collaborative projects provide an ideal context in which to study trust-building in complex innovation projects which lack certainty about results. Here there are clear differences between the objectives and interests of the various participants. Although sustainability and business continuity are often overlapping objectives, this is not always the case. Publicprivate collaborative projects are characterised by double agendas. There are many possible types of objectives that need not coincide. The partners work together within the overall objective of the whole project, while they are, in any case, also trying to achieve their own objectives. Eighteen complex projects in focus A research project looked at 18 such projects in which the partners had already been working together for 3 to 4 years. These were large projects with an annual budget of more than one million euros, often involving a diverse variety of partners. The study focused specifically on innovation insecurity and complexity, both of which were caused on the one hand by the large heterogeneity of the network and on the other hand by the complexity of the technology and objectives. A good example was a project in which an agribusiness park was to be developed. The objective was to create an eco-industrial complex where companies use each other's waste streams in order to restrict collective energy consumption and minimise CO 2 production. The project involved many different stakeholders, including representatives of the companies themselves and government Critical factors for open innovation in the food sector 33

34 authorities, but also branch organisations, environmental groups and special interest groups of consumers and local residents. Impossible demands? Other projects were less complex with respect to the heterogeneity of participants, but more complex in the sense that they encompassed a seemingly impossible combination of demands. For example, a new housing system for chickens had to fulfil all the requirements for organic production, but still house 30,000 chickens so that the farmer could achieve his return on investment. Varying outcomes Open innovation projects have uncertain outcomes and are by nature chaotic. Heterogeneity is often high, partners vary in their interests, perceptions and approaches, and a tendency toward opportunistic behaviour is not uncommon. These characteristics can create challenges for both the continuity of the innovation networks and their stability. A heterogeneous collaboration can stimulate creativity, but if the goals and interests of the partnership are too far apart this can easily lead to conflicts. Costs and knowledge The coordination costs of complex collaborative partnerships can also prove to be much higher than expected. In addition, fear of opportunistic behaviour can make partners more reticent, particularly in sharing knowledge about topics such as firm-specific technology, new markets, trends and future developments or possibilities. Network stability as primary indicator There is another problem with this type of complex and sustainability-oriented projects: the outcome (increased sustainability) is not clear until years later. In this research, network stability was therefore chosen as the most important indicator of performance. For each of the collaborative partnerships, the network stability indicator measured whether and to what extent they were able to achieve each of the objectives after their three or four years of working together. The criteria for this indicator include the following: How satisfied are the parties with the collaboration? Have the parties become more open and collaborative? To what extent are external parties interested in the outcomes achieved? The study revealed that six of the collaborative partnerships had achieved little or no network stability (low in figures 7 and 8). In five cases obvious progress had Critical factors for open innovation in the food sector 34

35 been made, but there was still some insecurity about the stability of the network (medium). In seven collaborative partnerships the outcomes were so positive that the partners were (in some cases: very) motivated to continue with the innovation after the project was completed (high). Figure 6: Level of formality and network stability 7-point Likert scale Impact of formal agreements Figure 6 compares the degree of formalisation at the start of a project to the level of network stability eventually achieved. Formalisation refers to the establishment of clear (in some cases contractual) agreements. The degree of formalisation was ascertained by measuring a number of parameters, including whether agreements were made with respect to: Confidentiality IP protection Partners objectives and contributions Monitoring frequency and criteria Discontinuation of the collaboration by one of the partners. These data were converted to a 7-point Likert scale. A score of '1' indicates that none of the points were agreed upon in advance. A score of '7' indicates that agreements were made on all of the points at the start of the collaboration. Critical factors for open innovation in the food sector 35

36 Striking differences Figure 8 also shows another outcome: in projects that achieved little or no network stability after four years, little attention had been paid at the start to arriving at clear and/or contractual agreements. This effort had in any case been much lower than in the projects that achieved average or high network stability in the same time span. The projects with low stability received a score of 3.7, and the others received a score of 5.0. Clarity is more important than a 'big stick' The specific agreements reached were actually not so important. They were filed somewhere and only consulted in the event of conflicts or unexpected developments, such as the departure of one of the partners due to a takeover by another company. They served primarily as a means to clarify the objectives of the open innovation project and of the individual partners. This process made it possible to identify (real or imagined) conflicts of interest and perceptions at an early stage while they were still manageable. Figure 7: Rational commitment and network stability 7-point Likert scale Necessary incentives As illustrated in figure 7, there should be clear incentives for all actors to participate in the collaboration. Figure 8 clearly shows the importance of rational commitment for network stability. When partners see their own interests and perspectives reflected in the project objectives, stable collaboration becomes Critical factors for open innovation in the food sector 36

37 more likely. Projects with low network stability scored 4.3, those with average stability 4.8, and projects with high network stability 5.7. This supports the findings in chapter 3 indicating that low rational commitment is the most important failure factor for collaboration in the food sector. Experience helps A final important factor for achieving network stability is whether the partners have previously worked together. With respect to this indicator, the projects with low network stability received a score of 2.3, those with average network stability 3.5, and those with high network stability 3.9. Whether the parties have experience working together is thus a significant factor. A formalised structure is also important for SMEs Formalisation at the start is thus essential. This holds true not only for multinationals, but also for SMEs in the food sector. Establishing a clear structure right away creates a framework for collaboration. It also ensures that the strategic objectives of the various partners are clear, and thus subject to discussion, at an early stage in the project. Recipes in jeopardy An SME in the food sector needs to make formal or informal agreements regarding certain issues before revealing a recipe, or other confidential information, to innovation partners. Secrecy has always been, and still is, the most important way of protecting such key information. For the director of an innovative food company, revealing the company's formulas and recipes was the greatest obstacle to participation in open innovation, especially when this involved collaborating with large companies. During the interview, he expressed this concern as follows: "Our recipes are our most important intellectual property. The problem is that you can't protect them with patents, and secrecy is difficult to maintain if a much larger client demands openness about recipes as a condition for collaboration." For this reason, it is essential that solid, negotiated agreements be made at the start of any collaboration for open innovation. In principle, the aim should be a win-win situation. All parties have to see the benefit of the collaboration. That it is possible to work together with clients was illustrated by a director of another innovative food company: Critical factors for open innovation in the food sector 37

38 "Our added value for the customer in terms of collaboration with clients lies in our knowledge of where the bottlenecks are and how to use them to our advantage." Striving for balance The fact that the partners' rational commitment was key to a good outcome of the open innovation process shows that in these cases the negotiation process was implemented effectively. It also shows that the various partners managed to strike an intricate balance between: Advantages and disadvantages Risks and opportunities Investments and potential return. Competencies make all the difference A firm should choose collaborative partners in terms of its own sharply defined key competencies and on the basis of a well-delineated innovation strategy. Collaborations in which the contributions of the various companies consist of poorly or moderately developed competencies generally lead to suboptimal outcomes (see boxes 1 and 2). Top-down solutions Open innovation projects are in direct competition with in-house projects for available resources and attention to engineering. This is often a losing battle, however, because blood is, after all, thicker than water. This was demonstrated in chapter 3. Since strategic interests play a prominent role over the successful course of an innovation project, involvement of top management is essential. Problems can also arise between business functions, such as with supplier relations. This type of obstacle can only be resolved at management level. An R&D manager of a large company in the food sector illustrated this as follows: "During the economic recession of 2008 to 2010, our purchasing function was compelled to revise the terms and conditions for the most important suppliers. Only with the CEO's direct intervention were we able to prevent relations with suppliers from deteriorating to the extent that the open innovation projects they were involved in would have to be terminated. By bringing R&D and purchasing together in the negotiation process with the suppliers, we were able to create a win-win situation in which the short-term disadvantages for the suppliers were outweighed by greater advantages in the long term." Critical factors for open innovation in the food sector 38

39 O pen innovation in food and high-tech SMEs Reinmöller et al. (2010) found that collaboration with high-tech companies can produce high returns for food companies, which tend to be more low or medium-tech in nature. This appears to support Ebersberger's (2011) position on the impact of external innovation expenditure: A positive impact is found in those countries which are the farthest away from the technological frontier. Countries, and probably also companies, thus make use of the knowledge of pioneers to strengthen their own innovative capacity. To discover what innovative food companies could learn in the open innovation processes of hightech companies, the present authors conducted a comparative study in 2011 of open innovation in food and high-tech SMEs. The study participants were: Eight innovative companies in the seed industry Three innovative food SMEs Four high-tech SMEs. Most of the interviewees were general managers of an SME and managers who were directly involved in collaborative projects. Every respondent was asked to complete a questionnaire for a number of open innovation projects the company had been involved in. All together, 32 open innovation projects were reviewed, of which 27 were successful (i.e. they resulted in the expected outcome) and 5 were not successful (the desired outcome was not achieved or the projects were terminated prematurely). In the seed sector, 15 successful and 2 unsuccessful open innovation projects were reviewed. The three innovative food SMEs were involved in three of these successful projects and the two that failed. This result was compared to the one failed and nine successful open innovation projects that involved a high-tech SME (see figure 8). Open innovation in food and high-tech SMEs 39

40 Figure 8: (Un-)successful open innovation projects in the seed improvement, food and high tech sectors Before discussing the open innovation projects, we will first give an impression of the innovative seed sector. We will then describe the participating companies and their innovation processes, and, finally, elaborate on the successful and unsuccessful open innovation projects. The seed sector is highly innovative The food industry is generally classified among the 'low-innovation' sectors. However, this is definitely not the case for the seed improvement sector. The most important Dutch seed companies spend on average 25% of their sales on R&D. In this respect they are clearly among the global leaders. Due to climate differences and culturally determined consumer preferences, the R&D laboratories of innovative seed companies are located throughout the world. Similarities with high-tech sectors The development time in the seed sector is also reminiscent of high-tech sectors. It takes six to twelve years to bring a new variety onto the market. The failure rate is also similar: only one in twenty cultured varieties ever makes it to the market. Open innovation is very important in this sector. This is illustrated by the four seed improvement companies that together own Keygene, a molecular genetics research institute in Wageningen, which has laboratory facilities in the US and China. Keygene has drastically accelerated the R&D process in seed improvement, thanks to techniques such as seed selection based on genetic mapping. In Open innovation in food and high-tech SMEs 40

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