Low-Cost, Low-Tech Innovation

New Product Development in the Food Industry

Vijay Vyas

• Publisher: Taylor & Francis
• Year: 2014
• Print ISBN: 9780367867515
• eBook ISBN: 9781136686672
• Edition: 1
• Topic: Business
• Subtopic: Agribusiness
• Index: Business

Like much of SMEs research, innovation studies of small enterprises have commenced later and are less numerous. The focus of such studies remains high-technology enterprises, which continue to attract both academic and popular interest, oblivious to the innovative endeavours of people in traditional low-tech industries.

This book attempts to address this imbalance through a comprehensive analysis of innovation in this largely neglected area. Based on case studies of seven small innovative food companies, this book presents an in-depth analysis of innovation in the Scottish food and drinks industry and unravels a lesser-known approach to effective low-cost product innovation, which is simple and economical, yet elegant and successful.

Using careful data collection and rigorous statistical testing, the analysis and findings in this book address a wide spectrum of interests: academics in business schools, policy makers in governments and executives and entrepreneurs in food and other low-technology sectors.

1
Innovation and new product development in the food industry

An overview of international research

Food and drinks, one of the largest industries in the world, has been registering a sustained ‘recession proof’ growth over last several decades. This industry, valued at $5.7 trillion in 2008 and expected to be worth $7 trillion in 2014, like most other major manufacturing and processing sectors, is dominated by enterprises principally from Europe and the USA. However, China and India are gradually emerging as major potential contributors to this sector (IMAP, 2010).

Constant growth in this industry is due largely to a long-term trend of rising global incomes and population but also, in no small measure, to continuous introduction of new products and processes. There has also been a long tradition of research on innovation and new product development in this industry. Unsurprisingly, the bulk of this research involves investigation of North American and European enterprises, along with occasional studies emanating from Australia and New Zealand. From Asia, studies on the Thai food and drinks industry have recently been more regular, whereas studies investigating African and Latin American food companies are rare.

This overview of the last 4 decades of research on innovation in the food and drinks sector looks at findings of a range of studies investigating both the process of innovation as well as the factors influencing innovation success. Much of this work is exploratory, and some studies happen to be the first and/or the only study of innovation in the food and allied sectors in the geographical region in which they are conducted. There is a remarkably high level of constancy in the findings of these studies, revealing a significantly unchanging pattern of innovation and new product development in this industry, reflected both in the process details and in determinant identification.

The approach to innovation in this sector seems to be marked by a high level of conservatism, and despite the epoch-making events of technological change that have transformed the process of new product development in many other industries, food and drinks enterprises have largely continued to develop new products using almost the same process reported by Nystrom & Edvardsson (1982) in one of the earliest studies involving 20 major Swedish food processing companies for the 1969–1978 period. Though there are signs that some of the enterprises are bucking this trend and breaking new ground, not too many enterprises have taken uncharted routes and, more importantly, those that have done so have not achieved any spectacular success to tempt others to follow suit. The reason for such conservatism is not difficult to decipher. As the following analysis shows, those who have developed new products not very different from their existing products are invariably the most successful new product developers in this industry.

Historically, the food and drinks industry has consistently exhibited a low research intensity, reflected in much lower R&D-to-sales ratio in comparison to other industrial sectors (Sandven & Smith, 1993 and Galizzi & Venturini, 1996). Jones (1995), in his survey of 120 food and drinks firms from around the world, found that only 10% have an R&D facility. In Nigeria, Ilori, Oke & Sanni (2000)found few companies investing in formal R&D whereas Capitanio et al. (2009) reported that only 28% of 234 investigated Italian food and drinks manufacturing firms carry out R&D. Food companies seem to avoid the high costs of R&D, widely perceived within the industry to be ‘unnecessary’ for innovation success, particularly the smaller food companies which happen to dominate this industry in numbers. When Martinez & Briz (2000) reported ‘lack/scarcity of appropriate sources of finance’ along with ‘excessive perceived risks’ of innovation as the main barriers to innovation, it is obvious that they are referring here to R&D-led innovation, which not too many food and drinks enterprises seem to practice.

There is significant evidence that the largely non-R&D food and drinks product development is singularly focused on incremental innovation. Koku’s (1998) content analysis of 284 news items published in the Wall Street Journal between 1980 and 1989 on new product announcements found incremental innovation as the dominant form of food sector NPD. Ernst & Young (1999) reported that only .04% of new products introduced in the Spanish food industry in 1997 could be rated as truly new. Martinez & Briz’s (2000) study, based on two successive surveys – first of 149 Spanish food companies and then of 54 innovative food companies amongst them – also found that innovative activities of companies in this sector are predominantly incremental. Bogue & Ritson (2006), using descriptive sensory analysis by the experts as well as hedonical evaluation by untrained end users of Irish food products, concluded that successful product innovation invariably involves incremental rather than radical change. Similarly, Bhaskaran (2006), based on a survey of 87 Australian seafood SMEs, concluded that incremental innovation offers substantial competitive advantages to SMEs. Although there are not many studies which elaborate on the precise nature of this incremental innovation, van der Valk & Wynstra’s (2005) refer to relevant trends that food companies should focus on when deciding to successfully vary their existing products, such as changing lifestyles, increasing interest in convenience foods, growing incomes and the consequent expectation of higher product quality. Most importantly, despite a popular perception, this search for incremental variation has not proceeded in any substantial way towards the development of health foods. The unanticipated failure of low-fat variants to deliver the promised premiums to their creators is caused by food consumers’ conservative and dogged attitudes, resulting in the battle between taste and the perceived health benefits, going in favour of the former (Bogue & Ritson, 2006). Though the industry experts have been maintaining for some time that low-fat foods promise significant potential in years to come (Longman, 2001), research on the subject does not show that the food companies are anywhere near realising this yet.

Shunning R&D and being satisfied with only an incremental change, however, is not the behaviour of the very largest of food and drinks giants. They do not seem to worry too much about the high costs of cutting-edge science and are willing to invest in a search for radical new products. They do not, however, succeed consistently in these efforts, and the successful amongst them are few. Alfranca et al. (2004), from a close scrutiny of nearly 17 thousand patents granted in the US between 1977 and 1994 to 103 of the largest food and drinks MNCs in the world, found that very rarely an enterprise exhibits an innovative spell lasting more than 4 years, and a small number of persistent patentees account for nearly 80% of the all patents granted to the agri-food sector MNCs. With such a record of the big boys in this industry, it is not a wonder that shunning R&D makes a lot of sense to smaller players with shallow pockets.

The reason for a focus on incremental innovation, avoidance of ‘unnecessary’ high R&D budgets and low research intensity in this sector is also analysed by the researchers in this field. They attribute it essentially to the fact that food habits take a long time to change. Food consumers have historically shown and continue to show a remarkable conservatism, and people around the world are very reluctant to eat products on a regular basis that are very different from what they are used to eating. This poses an almost insurmountable challenge to a product developer who would like to develop a radically new food product. Nystrom & Edvardsson (1982) explained that consumers’ unwillingness to try completely new products means that only the enterprises that develop new products which are variants of their existing products achieve significant commercial success. In Jones’s (1995) study, respondents defined the very term innovation as ‘modification of existing products’. Galizzi & Venturini (1996) also support the observation that consumers in general are conservative in their food choices and find it difficult to accept radically new food products. One of their related finding is a weak relationship between R&D intensity and innovation. Prospects of achieving commercial success through incremental innovation that does not necessitate investment in R&D along with inability of R&D to lead to innovation with some certainty explain a historical reliance on incremental innovation and avoidance of R&D investments in this industry. Despite a continued evidence of positive engagement of food SMEs with innovative activities (Baregheh et al., 2012), the nature of innovation in this sector thus has not undergone any significant change.

Another major finding emerging from these studies is significant and growing retailer involvement in new product development in this industry, which Hughes (1997) has been amongst the first to report. Citing Hoban (1998), Parr et al. (2001), Knox et al. (2001) and their own unpublished work, Stewart-Knox & Mitchell (2003), in their analysis of NPD in food companies in the UK, USA and Denmark, identify deep involvement of retailers as a vital success factor in innovation in this sector. Fortuin & Omta (2009), from their study of nine food processing MNCs in the Netherlands, also report this, and so does Colurcio et al. (2012), based on their study of five Italian and six Swiss food SMEs. This working together of retailers and small food companies in new product development ensures that the innovation in this sector is neither purely market-led nor it is purely production-led (Hughes, 1997). However, though the retailer involvement is widely seen as beneficial to small food companies trying to develop new products, the retailer motives of this involvement and its consequences for small food companies are complex. Retailer’s interest in encouraging and abetting small food companies to develop new food products is generally focused on creating products for the high end of value chain, and their objective in this is to compete with major food brands. This cocreation, however, is not a partnership between equals, and the retailers enjoy a distinct bargaining advantage (Hingley & Hollingsworth, 2003). There is also an element of coercion as retailers practically force food companies to either innovate, or lose shelf space to the competitors (van der Valk & Wynstra’s, 2005). However, it is also found that when a small food company networks with a large retailer for the purpose of innovation, the resultant conflict helps them maintain ‘the competitive driving force and creativity’ (Colurcio et al., 2012).

Despite an apparent high probability of NPD success while cocreating with a large retailer and assured shelf presence at multiple outlets, the new product failure is still significant in this industry. Redmond (1995), based on a range of previously published industry survey data, found new product failure rates in the food and drinks industry much higher than in any other industry. Looking at the issue from an ecological perspective, he concluded that a major contributing factor in this is ‘competitive overcrowding’. The food and drinks market is saturated by existing products as well as swamped by new product introductions. Rudolph (1995) similarly reported that during 1993, 80% to 90% of more than 8,000 new food products introduced in the American retail market failed in less than a year. Low costs of ushering in incremental change and a sense of security provided by large retailer involvement seem to make too many small companies attempt to innovate too often. Unusually high new-product failure rates thus appear to be the consequence of a creative profligacy fed by complacence due to retailer involvement and low costs, and consequent low risks of failure. Interestingly, despite strong evidence of retailer involvement leading to product innovation success, van der Valk & Wynstra’s (2005), in their study of Dutch and Scandinavian food companies, do not find any conclusive evidence of supplier involvement in new product development success in the food and drinks industry.

Another significant finding is the focus in this industry on product rather than process innovation. The reason for this is not difficult to fathom. Process innovation, which has high capital cost (Jones, 1995), does not fit well with low-cost, low-risk, low-tech models of innovation prevalent in this industry. However, that these enterprises can make substantial gains by embracing process innovation that entails higher risks is obvious. Galizzi & Venturini (1996) found that amongst Spanish food and drinks companies the percentage of highly innovative firms, those that earn more than 50% of the sales from process innovation, is twice of what is earned via product innovation.

Cross-functional cooperation within the enterprise is another hallmark of the innovation process in this industry. Suwannaporn & Speece (2000), in their study of new product development by five MNCs as well as 10 Thai and two Taiwanese large companies, found participation by and cooperation amongst functional specialists a strong predictor of new product development success. Their later investigation of 114 Thai medium-to-large food companies also found the same (Suwannaporn & Speece, 2003); so does a survey of 93 Thai food companies, nearly half of which are SMEs, by Dhamvithee et al. (2005). This gives an indication that cross-functional cooperation’s role in new product development success cuts across firm size. Inclusion of Thai as well as Taiwanese firms in the first cited study and a similar finding by Capitanio et al. (2009), based on data from a study of 234 Italian firms on the positive role of quality of communication between R&D and marketing in innovation success, suggest some validity to these finding across regions. In a study, from a different perspective, Munksgaard & Freytag (2011) found that enhanced internal collaboration and improved cross-functional communication in turn is aided by complementor involvement (a company’s complementors are the firms whose activities increase the value of its outputs).

Firm size has consistently shown to be a determinant of innovation in this industry. Avermaete et al. (2003), based on an investigation of 55 small Belgian food companies, found the size (though not the age) of the enterprise influencing its ability to innovate. Dhamvithee et al. (2005), based on a survey of 93 Thai food companies of all sizes, found firm size to be a significant determinant of new product development success. Huq & Toyama (2006), based on a sample survey of 62 firms in the Thai food indus...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• List of figures
• List of tables
• Acknowledgements
• Preface
• 1 Innovation and new product development in the food industry: An overview of international research
• 2 Business innovation: Meaning, antecedents, process and consequences
• 3 Methodology
• 4 Context of study I
• 5 Context of study II
• 6 Innovation in case study companies
• 7 New product development in Scotland: A survey
• 8 Conclusions and implications
• 9 Research findings and extant literature: Congruence, conflict and implications
• Index