Best Practices In Collaborative Innovation: How CPG Manufacturers & Retailers Can Partner for Profit

Best Practices in Collaborative InnovationHow Manufacturers and Retailers Can Profit from Col aborative InnovationKalypso White Paper by Mike Friedman and Helayne AngelusNormalReversedOriginal TypefacesColor SwatchesGadget Pantone 505u C 13 M 96 Y 81 K 54 R 120 G 35 B 39 HEX # 782327Trebuchet MS Pantone 428u C 12 M 6 Y 5 K 12 R 195 G 200 B 200 HEX # C3C8C8Research Overview and Key InsightsResearch OverviewOpen innovation is the process of managing the interaction and collaboration of multiple partners to deliver new solutions within a business ecosystem. Today’s industry leaders are competing to win with open innovation, working with many partners in the value chain—including universities, and even companies from other industries—by opening up to external partnerships, increasing reliance on collaborative idea generation, and becoming less protective of their intellectual property. As a result, successful open innovation partnerships are enabling the discovery of new and meaningful ways to satisfy the customer and consumer in a way that builds bottom line results for all value chain partners. I/P P In-sourced Products s i ni -sos uo rcedfof ro r D eve ev le opment for scale upuInputsFuzzy Front EndDevelopmentCommercializationIn-sourced idi ed ae s &Technon lo ol giesMP LicensingTechnology Spin-outsFigure 1: Open Innovation. Source: M. Docherty, Venture2 Inc.(with concepts adapted from the Collaborative innovation is an open innovation strategy that enables book by Henry Chesborough, Open Innovation: The New Imperative for consumer packaged goods (CPG) manufacturers and retailers to partner for Creating and Profiting from Technology, Harvard Business School Press, 2003)profit and provide shoppers and consumers with more innovative offerings. Through work with CPG manufacturers and retailers, Kalypso noted an increasing interest in collaborative innovation. To better understand the drivers behind this increased interest, and to learn how manufacturers and retailers are working together in a market where they are often both customers and competitors, Kalypso conducted a research initiative with thirty global manufacturers, retailers, and brokers—80 percent of which are Fortune 500 companies. Interviews were conducted with executives including CEOs, COOs, Presidents, and leaders in Sales, Marketing, Innovation, Retailing, Supply Chain, Logistics, and other operational disciplines. The interviews identified a number of insights and best practices that can help companies achieve more profitable offerings by working more closely across organizational boundaries. Best Practices in Collaborative Innovation 2Kalypso found that while many companies are claiming to collaboratively innovate, the right initiatives are not in place, and the right due diligence is often missing. The result: innovation that is not working to an organization’s full advantage. While the urgency and need for collaborative innovation is clear, the questions remain:•• How does an organization know if they are implementing it correctly?•• How do they know where it fits into their business model? •• How do they make sure it is working most efficiently for them?Key InsightsThe research revealed six key insights:1.• Success in other industries provides valuable lessons. CPG companies are showing growing interest in results achieved and lessons learned in other industries, where open innovation has been practiced profitably for years. Consider the following examples that demonstrate the power and success open innovation can have in transforming an organization.a. The development of Apple’s iPhone applications is one of the shining benchmarks that transformed the company. Originally at launch, the iPhone had only a few software applications which led outside innovators to create additional applications and share them online. Apple recognized this innovation, identified the need for a formal third party development program, and today thousands of external software developers have written applications for the iPhone that have greatly enhanced its value.b. Rockwell Collins needed a faster way to transmit information between fixed and wireless communication devices to improve military pilot communication and safety. Internally, this technology development and certification would take years. Rockwell Collins identified Adapt4 LLC, a company that had developed a commercial cognitive radio technology previously certified by the Federal Communications Commission (FCC). Rockwell Collins successfully integrated the technology into existing hardware in just four months to create one of the first radios of its kind for the military.c. An $87 billion manufacturer and distributor of medical supplies was looking for a cost effective way to wirelessly transmit patient health data from a monitoring device inside a patient’s home. The core technology required to meet initial product specifications did not exist inside the company —or anywhere else in the world, for that matter—until the 3 Best Practices in Collaborative Innovationcompany discovered a small university that had developed the technology and was looking for a way to commercialize it. The two parties negotiated a technology licensing arrangement and are currently planning to launch a product that has the potential to radically change the home health market.And, successes in the CPG industry outside of the manufacturer-retailer relationship can also provide valuable lessons.d. Procter & Gamble (P&G) successfully developed a new type of Pringles, Pringles Prints, with customized words and images printed directly on each potato chip. Through its open innovation program, P&G discovered a small bakery with an ink-jet method for printing edible images on cakes and cookies. The company rapidly adapted the technology and was able to lower product development costs and time to market for Pringles Prints as a result.e. Kimberly-Clark launched Sunsignals, suncare products that monitor UV ray exposure, in just six months. Kimberly-Clark identified this small company’s technology, and collaborated with them to introduce a self-adhesive sensor that changes color when a wearer is at risk of burning from too much sun exposure. 2.• Relationship and business model paradigm shift is a must.Leading CPG manufacturers and retailers pursuing a best practices collaborative innovation model are realizing strong early results. However, for those companies lagging behind, a relationship and business model paradigm shift is a must in order to stay in the race [see Figure 2].3.• Find the common ground with each partner.Without a doubt, today’s manufacturers and retailers are each facing significant, but different, challenges. For manufacturers, this may be that the biggest retailer is their biggest competitor; for retailers, it may be the mounting pressure to differentiate in the marketplace. Despite differing business imperatives, there is common ground that drives collaboration—strategic intersections between the retailer and manufacturer that will benefit both parties. These benefits are what form the foundation for the development of a common vision, driving the strongest relationships.Best Practices in Collaborative Innovation 44.• Collaborative innovation sounds intuitive, but many find it difficult.Though seemingly intuitive, many CPG companies find collaborative innovation difficult—and daunting. Successful collaborative innovation requires a non-adversarial mind-set, a multi-level and multi-functional organizational approach, the ability to learn to speak “another language,” new metrics, and the willingness to share intellectual property. In other words, a complete internal transformation must take place before attempting collaborative innovation with external sources. What many companies fail to realize is that before innovating with a business partner, they must be certain that their own company is structured to collaborate. A clearly formulated innovation strategy that focuses on organizational behavior, processes, and capabilities is the key to success. 5.• Collaboration and integration drive business growth.The strongest common benefit for manufacturers and retailers is sales and profit increase. There is potential for a 15 to 20 percent sales and profit improvement opportunity via increased collaborative innovation. This can be considered blockbuster territory. Other benefits include improving idea generation and decision making with shopper and consumer insight data, providing consumers with more innovative offerings, reducing rework, increasing speed to market, and improving execution. Traditional Relationship ModelEmerging Collaborative ModelMfg. MarketingMfg. Sales/TradeMfg. MarketingRetailer Mkt.Mfg. SalesRetailer MarketingRetailer MerchandisingRetailerMerchandisingConsumerShopperConsumerShopperFigure 2: A relationship and business model paradigm shift is a must.5 Best Practices in Collaborative Innovation6.• Collaborative innovation best practices fall into four fundamental groups:a. Developing a Strategy for Collaborative Innovationb. Conducting Collaborative Business Planningc. Getting Your House in Orderd. Building Trusted RelationshipsThe research identifies best practices for each of these themes, allowing manufacturers and retailers alike to develop an action plan to adopt—or extend—collaborative innovation and increase profitability.Figure 3: Collaborative Innovation Best PracticesDevelop Strategy Conductfor Collaborative Collaborative InnovationBusiness PlanningGet Your Own Build Trusted House in OrderRelationshipsBest Practices in Collaborative Innovation 6The Urgency for Collaborative InnovationThe innovation objectives identified through this research initiative vary broadly by company based on their target markets, their supply chains, and their business strategies. Despite the wide variation in goals, collaborative innovation appeared frequently among the top priorities to achieve innovation objectives and ultimately to grow profitable sales. Overall, 95 percent of companies felt collaborative innovation was very important to achieving their business objectives.The following quotes highlight the importance placed on collaborative innovation by participating companies: “Extremely important, it’s the highest ranking. If you’re not col aborating, you won’t be around in 20 years. You’ll be gone.” – CPG company“Very important, especial y as there is more focus on private labels and more pressure on national brands.” – Retailer“Very important; as media becomes more expensive and less effective you need to figure out how to leverage customer ideas.” – CPG company“Very important—when the customer wins, you win. You need to know what makes your customer tick and help them with it.” – CPG companyOther comments underscored the importance in relation to corporate strategy, identifying collaborative innovation as “the top of the top three priorities,” “the third strategic pillar,” or “one of the six strategic pillars.” One manufacturing company summed up the priority for collaborative innovation by stating that “otherwise it’s just negotiation on price.”Why is Collaborative Innovation Such a High Priority?Clearly, collaborative innovation is getting significant attention, which leads to the question, “Why is this a top priority for both manufacturers and retailers?” While there are some commonalities between the two groups, the view is different depending on a company’s role in the supply chain.The Manufacturer’s ViewLike all industries, the manufacturing industry is dealing with the implications of the economic downturn of 2008 and 2009. Downsizing has reduced organizational capabilities, and left them with scarce and stretched R&D resources. This means that manufacturers have to focus innovation resources on the best possible revenue opportunities, having to make difficult choices between portfolio options.7 Best Practices in Collaborative Innovation“Due to the focus on price in Europe, the quality of innovation has suffered. Manufacturers are so squeezed on price that they can’t afford to innovate. The ‘voice of the product’ is not being heard. Due to the lack of innovation, there is a sea of sameness.” – CPG companyAt the same time, manufacturers are facing unprecedented change in their relationships with retailers. Their customers—the retailers—are continuing to consolidate. As one manufacturer said, “The big will just keep getting bigger.” This has shifted the balance of power further towards the retailer, resulting in diminished brand power for many manufacturers. “Retailers have gone from shelf management to category management. With shelf management, retailers carried A, B, C, D, private label and store brands. In the move to category management, many retailers have eliminated B, C, and D brands.” – CPG company“If you have a strong brand, like Coca-Cola, the retailer has to accept the terms of the brand. If you can’t differentiate, it’s just a price negotiation.” – Retailer“In Europe, they just started col aborating with retailers. Manufacturers are doing this because they have to, not because they want to.” – CPG company• Scarce resources drive al ocation to best possible revenue opportunitiesManufacturer’s View• Retailers are consolidating• “Biggest retailer may be biggest competitor”Figure 4: Top Business In addition, retailers have increasingly invested in bringing their own brands Imperatives for Collaborative Innovation: Manufacturerto market. The combination of consolidation and strong store brands means that some manufacturers must recognize that their biggest customer may also be their biggest competitor—at least in some categories. The changing relationship between retailers and manufacturers brings up some significant questions, including:“Whose equity wil be more important, the store or the brand? This wil be an interesting dynamic to understand in the future.” – CPG company Best Practices in Collaborative Innovation 8The Retailer’s ViewRetailers are looking for innovation in their own products, but also in the store. Retailers need to differentiate based on the products they carry, but also on the shopper’s experience. As one retailer said: “How do you design a store around the shopper? Most stores are not designed with the customer in mind.” – Retailer “For the manufacturers, it’s about product offerings and consumer needs. For the retailers, it’s more about process than product. You can have the best product in the world, but you need the best process to get it into stores and sold.” –Distributor Retailers are also challenged with rationalizing the brands and SKUs that they carry, and trying to determine to what degree they should pursue vertical integration.• Increased focus on product & store innovationRetailer’s View• Need to differentiate in the marketplace• Decreasing growth opportunities from store expansionsFigure 5: Top The Common ViewBusiness Imperatives for Collaborative Innovation: RetailerOf course there are also commonalities between manufacturers and retailers that are driving this phenomenon.• Shifting consumer focus on value• Consumer safetyCommon View• Increasing diversity of shoppers requires changing retail and product experienceFigure 6: Top Business These include the global economic crisis driving a changing consumer Imperatives for focus on value, the need to streamline supply chains, and the need for Collaborative Innovation: consumer safety (particularly in the food industry). The primary common Retailer & Manufacturergoal is to please the consumer and gain greater market share. As one major manufacturer said:“The key driver is the focus on the consumer and the desire to partner on the consumer.” – CPG company9 Best Practices in Collaborative InnovationBenefits of Collaborative InnovationRegardless of the drivers, collaborative innovation benefits both manufacturer and retailer. One of the key benefits, of course, is to provide more innovative offerings to consumers. By better understanding customers’ needs and desires, manufacturers and retailers can develop a more compelling offering.“True col aborative innovation starts with insights that are developed into products, packaging, and promotions.” – CPG companyOne element of collaborative innovation is joint business planning (JBP). JBP aligns the goals of manufacturer and retailer to identify opportunities for win-win product offerings. Of the companies interviewed, 81 percent stated that they utilized some form of JBP that addressed the needs of their strategic customers. One manufacturer describes their results: “The approach was to use ‘strategic intersections’ between our priorities and the customer priorities. One program identified intersections around the power of big brands to drive impulse purchases, resulting in a 30 percent increase with the retailer and 17 new items.” – CPG companyAnother retailer discusses how combining insights from the manufacturer’s perspective (consumer intelligence) with the retailer’s perspective (shopper knowledge) helped expand and strengthen their relationship.“Our customer [the retailer] was interested in branding the department. We used our company’s insights to help them make the aisle more shoppable and could tell the retailer that consumers using one of their brands were also the shoppers. We built the commercial idea and research to deliver against this target together. They jointly expanded the brand into category adjacencies, which was a win-win for the customer and manufacturer. Currently the customer is exclusively carrying these products.” – CPG companyInnovation can take many forms, including enhanced “shoppability.”“We successful y worked with retailers to implement new shelving in the store. This has had many benefits, including improved shoppability for consumers that has increased sales by 10 percent.” – CPG companyOf course, the one benefit that drives the interest of most companies is growth. Manufacturers and retailers are gaining an increase in sales and profits and blockbuster results by jointly growing the category. By working together, they can develop better promotion vehicles, enhance in-store support, and develop unique, value-added offerings for both the retailer and the manufacturer.“We experience consistent, profitable growth with customers where we’re col aborating. For example, we grew $85MM out of one col aboration session with a major retailer.” – CPG companyBest Practices in Collaborative Innovation 10