Stage gate process model and Open Innovation in the Fast Moving Consumer Goods Industry

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Stage gate process model and Open Innovation in

the Fast Moving Consumer Goods Industry

MSc BA Master Thesis Strategy & Innovation

University of Groningen

Faculty of Economics and Business

MSc of Business Administration

Strategy and Innovation

Author: Diana Wandén

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st

Supervisor: Dr. Hendrik Snijders

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Supervisor: Dr. Thijs Broekhuizen

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ABSTRACT

Keywords: Stage Gate Innovation model, Open Innovation, New Product development (NPD), Fast Moving Consumer Goods (FMCG) Industry

Stage gate model, named and developed by Cooper in 1985, is simply a roadmap for product development from idea to launch. Stage gate divides the product development process into five stages where in between there are five gates where management decisions will be made. This model is often used by companies to improve their innovation efforts and speed up the time for market. The model has proved its effectiveness and numerous companies have implemented the stage gate process, including the companies in the FMCG industry such as P&G, Unilever, Nestlé and Kraft Foods. By analyzing the stage gate models of six companies in the FMCG industry we can conclude that they use rather similar steps in their new product development process, as Cooper‘s theory defines. Based on this research on average the companies have four stages and five gates, with main differences occurring in the begin phase of the stage gate process. However despite the fact of varying numbers of stages and gates, and the different titles used, each company has the same underlying objectives.

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1 INTRODUCTION

Much evidence identifies innovation as the main driver for companies to prosper, grow and sustain a high profitability. The current focus in research lies on how to innovate and how innovation processes can be managed instead of questioning why innovation is important (Fredberg et al. 2008). Different innovation methodologies and frameworks such as the innovation funnel and sequential Cooper‘s ‗stage gate' model of project management have been popular among organizations in managing the innovation processes. However a recently proposed and popularized model for the management of innovation is based on the need for companies to open up their innovation processes and combine internally and externally developed technologies to create business value (Fredberg et al. 2008). This approach was named by Chesbrough: ―open innovation‖ (2003). The ideas of open innovation originated from experiences from the Open Source Software (OSS) development where new principles for development projects were identified. This OSS approach started blooming when internet was commercialized and past years it has been adopted by several large IT companies.

In the past companies could rely on internal research and development (R&D) to drive growth. At the same time important innovation was increasingly done by small and medium size companies (Huston & Sakkab 2006). In the old model of closed innovation, companies relied on the assumption that innovation processes need to be developed and controlled internally by the company. The open innovation model instead highlights that companies should go beyond the internal boundaries of the company and search for external technologies, ideas and paths to market. These external ideas and paths come from individuals and companies that are willing to license and sell their intellectual property. University and government labs that have become more interested in forming industry partnerships, and eagerly wanting to monetize their research (Huston & Sakkab 2006).

Most large international companies in the fast moving consumer goods industry claim that they have a stage gate model in use within the open innovation approach and innovation process. However, how are these models implemented? This research will make a comparison of the stage gate process models of six large international companies in the FMCG industry and their open innovation strategies. The following research question will be the main focus point of this thesis:

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2 THEORETICAL FRAMEWORK

2.1 Innovation

Innovation is the total set of activities leading to the introduction of something new, resulting in strengthening the defendable competitive advantage of a company (Van der Meer 2007). Tidd et al (2005) define the '4Ps' of innovation, and when they are talking about innovation, they are talking about change:

 product innovation - changes in the things (products/services) which an organization offers

 process innovation - changes in the ways in which they are created and delivered  position innovation - changes in the context in which the products/services are

introduced

 paradigm innovation - changes in the underlying mental models which frame what the organization does.

Tidd et al (2005) plots the dimensions of innovation of a simple matrix which defines the space which has to be managed Figure 1.

Figure 1. Dimension of Innovation (Tidd et al 2005)

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types of component, and system level innovation is incremental or radical changes in configuration of components in a given product or service.

2.1.1 Product and process innovation

The development of new product is increasingly becoming a focal point of competition. Product life cycles are shorter than ever and new products make your old ones obsolete (Cooper, 2000). At the same time new product development is becoming increasingly difficult since approximately 2/3rds of all new products and line extensions fail within the three years of being launched, according to market researcher and consultancy TNS Global (TNS, 2009). Companies able to get to the market faster with products which are matched to the needs and expectations of the customer create significant competitive advantage (Ciborra et al 1998). The reality is that innovation, for the most part, frightens organizations because it is inevitably linked to risk (Pervaiz 1998). Companies must take risks to launch new products speedily and successfully. The essence of product innovation is to create or establish something new. Since this process necessarily involves risk, innovating companies require a strategy not of risk avoidance, but of early risk diagnosis and management. The true nature of project risk is determined not only by its likelihood and its effects, but also by a company‘s ability to influence the risk factors. Thus a project activity should be labeled ―risky‖ if:

 the likelihood of a bad result is great

 the ability to influence it within the time and resource limits of the project is small  its potential consequences are severe.

Too often risk analyses are directed exclusively towards either technological, organizational, market or financial factors. The success of product innovation, however, is determined by external influences and internal circumstances in which all these factors interact. To be effective, a risk assessment method therefore needs to help identify potential risks in the following domains (Keizer at al 2002):

 Technology: product design and platform development, manufacturing technology and intellectual property

 Market: consumer and trade acceptance, public acceptance and the potential actions of competitors;

 Finance: commercial viability

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Many companies utilize a Stage-Gatenew product process to drive their new-product projects to market quickly and successfully (Cooper, 2000). While the details of a particular company system may vary, a typical Stage-Gate process model is illustrated in Figure 2 which was developed by Dr. Robert G. Cooper and implemented by numerous global companies including DuPont, Procter & Gamble, Exxon, Guinness, Unilever, Lego and Royal Bank of Canada (Cooper, 1990). Each stage of the diagram represents an element of the product development process, a group of activities. Each gate represents the review point for the previous stage, a point where decisions are made based on the information generated in the previous group of activities. The framework allows the organization to improve the quality of the output, by focusing on the process itself, in being able to remove non-value-added activities in the process and reduce risk associated with the product's development (Phillips et al 1999).

Figure 2. Stage gate model (Cooper, 2000)

Leading companies have focused on the process of innovation: They have re-engineered their new-product process and, in doing so, have built in the critical success factors that make the difference between winning and losing (Cooper, 2000). Stage-gate systems recognize that product innovation is a process. And like other processes, innovation can be managed. Stage-gate systems simply apply process-management methodologies to this innovations process (Cooper, 1990). Stage-gate development is a framework, which aids the process and enables the efficient and effective movement of a new product from idea to launch. It is essentially an integration of project management disciplines and the processes needed to realize a new product. It is a conceptual model which more and more organizations are implementing to overcome the problems of product performance, development cost increases and development time slippage. It is therefore an aid to keeping the risk associated with new product development to a minimum. Risk is a measure of likelihood and consequence of a situation arising, risk will affect the three measures of product performance, development time and cost (Phillips et al 1999).

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gate systems build in key activities and focus attention on often-deficient areas such as the predevelopment and market-oriented tasks. And finally, there is a quality focus to the process: a complete process with quality of execution. Product innovation will always be a high-risk endeavor. The stage-gate system is merely a discipline that builds the success ingredients into the innovation process by design rather than by chance. The results are better decisions, more focus, fewer failures, and faster developments (Cooper 1990). Other payoffs of stage-gate processes have been frequently reported: improved teamwork, less recycling and rework, improved success rates, earlier detection of failures, a better launch, and even shorter cycle times (by about 30 percent) (Cooper, 2000).

Gates

At the entrance to each stage is a gate, which serves as the quality control and Go/Kill check point in the process. Cooper also defines each gate:

Idea screen / Initial screening: This gate is the first decision to commit resources to the project. Gate 1 is a gentle screen, and amounts to subjecting the project to a handful of key ―must meet‖ and ―should meet‖ criteria. These criteria deal with strategic alignment, project feasibility, magnitude of the opportunity, differential advantage, synergy with the companies‘ core business and resources, and market attractiveness (Cooper 1990).

Second screen: The project is re-evaluated under the light of the information gained in the Stage 1. At Gate 2 the project is again subjected to the original set of ―must meet‖ and ―should meet‖ criteria used at Gate 1. Here, additional ―should meet‖ criteria are considered, dealing with sales force and customer relation to the proposed product, the result of new data from Stage 1. The financial return is assessed at Gate 2, but only by a quick and simple financial calculation (Cooper 1990).

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Go to testing / Post development review: The post development Review is a check on the progress and the continued attractiveness of the product and project. Development work is reviewed and checked, ensuring that the work has been completed in a quality fashion. This gate revisits the economic question via a revised financial analysis based on new and more accurate data. The test or validation plans for the next stage are approved for immediate implementation, and the detailed marketing and operations plans are reviewed for probable future execution (Cooper 1990).

Go to Launch / Pre-commercialization decision: This final gate opens the door to full commercialization. It is the final point at which the project can still be killed. This gate focuses on the quality of the activities at the Validation Stage and their results. Financial projections play a key role in the decision to move ahead. Finally, the operations and marketing plans are reviewed and approved for implementation in Stage 5 (Cooper 1990).

Stages

Stage-Gate approaches break the innovation process into a predetermined set of stages, with each one consisting of a set of prescribed, cross-functional and parallel activities (Cooper, 2000). Usually stage-gate systems involve four to seven stages and gates, depending on the company or division. Each stage is usually more expensive than the preceding one. Concurrently, information becomes better and better, so risk is managed (Cooper 1990). The above model is a typical system with five stages, and these stages are described here.

Scoping / preliminary investigation: This first and inexpensive stage has the objective of determining the projects technical and market place merits. A preliminary market assessment is one facet of Stage 1 and involves a variety of relatively inexpensive activities, a library search, and contacts with key users, focus groups, and even a quick concept test with a handful of potential users. The purpose is to determine market size, market potential and likely market acceptance (Cooper 1990).

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Development: Stage 3 involves the development of the product and (concurrently) of detailed test, marketing and operations plans. An updated financial analysis is prepared, and legal / patent / copyright issues are resolved (Cooper 1990).

Testing and validation: This stage tests the entire viability of the project: the product itself; the production process; customer acceptance; and the economics of the project. A number of activities are undertaken at Stage 4: In-house product test, user or field trials of the product, trial or pilot production, pretest market, test market or trial sell and revised financial analysis.

Launch / Commercialization: This final stage involves implementation of both the marketing launch plan and the operations plan.

2.2 Open approaches

In the past companies could rely on internal R&D to drive growth, but important innovation was increasingly being done at small and midsize entrepreneurial companies. Even individuals were eager to license and sell their intellectual property. University and government labs had become more interested in forming industry partnerships, and they were hungry for ways to monetize their research. The Internet had opened up access to talent markets throughout the world. And a few forward-looking companies like IBM and Eli Lilly were beginning to experiment with the new concept of open innovation, leveraging one another‘s (even competitors‘) innovation assets—products, intellectual property, and people (Huston & Sakkab 2006).

2.2.1 Open Source Software

The past several years the Open Source Software (OSS) has been adopted by companies such as IBM, Hewlett-Packard (HP), Sun Microsystems and many more. OSS, also known as Free Software is a matter of the users‘ freedom to run, copy, distribute, study, change and improve the software. During the 1990‘s when the internet was commercialized it became an enabler for the OSS. Some businesses saw this as an opportunity, and even as a weapon against competitors (Theunissen et al 2004). There are different levels of engagement to OSS and the extent to which the companies engage in the production and use of OSS ranges from simply using an OSS product to driving an OSS project. The different levels are as below:

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Modifying a product without sharing the modifications. At this level of OSS engagement, one may decide to customize an OSS product to suite specific needs. For a variety of reasons it might be preferable to keep these changes internally instead of sharing them with the community. For example, it might be that the modifications include royalty and/or patent regulated elements, or represent significant competitive advantage. At this level, the degree of resource investment increases in proportion to the extensiveness of the modifications to the original OSS product.

Modifying a product and contributing the changes back into the community. Here, again one acquires the product and makes changes to suite one‘s particular needs. However, arrangements are then made to integrate these changes back into the original project or to make the changes available to the community in some other way. The resource expenditure at this level of OSS engagement will also vary in proportion to the extent of the contribution.

Initiating and/or managing an OSS project. Usually, at this level, significant resources will have to be invested into an OSS project. Participation at this level usually becomes necessary when no one else is willing or able to address a need and/or when one is the leader in the project‘s solution domain. The most noteworthy benefit is the ability to steer (at least to some extent) the direction of the project. Examples of this level of engagement include Netscape‘s initiative in undertaking the Mozilla project, Sun with OpenOffice, and IBM with Eclipse (Theunissen et al 2004).

2.2.2 Open Innovation

The ideas of open innovation originated from experiences from the OSS development where new principles for development projects were identified (Fredberg et al. 2008). Chesbrough defines open innovation as: “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open Innovation is a paradigm that assumes that companies can and should use external ideas as well as internal ideas, and internal and external paths to market, as the companies look to advance their technology” (Chesbrough et al. 2006).

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West et al (2006) define open innovation as systematically encouraging and exploring a wide range of internal and external sources for innovation opportunities, consciously integrating that exploration with company capabilities and resources, and broadly exploiting those opportunities through multiple channels. Open innovation is a powerful framework encompassing the generation, capture, and employment of intellectual property at the company level. West et al (2006) identify three fundamental challenges for companies in applying the concept of open innovation: finding creative ways to exploit internal innovation, incorporating external innovation into internal development, and motivating outsiders to supply an ongoing stream of external innovations.

The ‗do-it-yourself‘ mentality in technology and R&D management is outdated, in the last decade, stronger global competition has led to the labor sharing and cooperation between companies‘ innovation processes. In most industries, agility, flexibility, and concentration on core competencies are now regarded as sources of competitive advantage. (Gassmann 2006) The open innovation phenomenon is a complex issue that has received contributions from different research streams. Opening up the innovation process includes various perspectives: (1) globalization of innovation, (2) outsourcing of R&D, (3) early supplier integration, (4) user innovation, and (5) external commercialization and application of technology (Gassmann 2006).

In closed innovation model the focus is on internal development of technologies and products for internal commercialization.In closed innovation, Figure 3, a company generates, develops and commercializes its own ideas. This philosophy of self-reliance dominated the R&D operations of many leading industrial corporations for most of the 20th century (Chesbrough 2003).

Figure 3. Closed Innovation Model (Chesbrough, 2003)

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company and its surrounding environment is porous (represented by a dashed line), enabling innovations to move more easily between the two.

Figure 4. Open Innovation Model (Chesbrough, 2003)

Chesbrough (2003) gathered the principles of both the open and closed models that are contrasting with each other, Table 1:

Contrasting Principles of Closed and Open Innovation

Closed Innovation Principles Open Innovation Principles

The smart people in our field work for us. Not all of the smart people work for us so we must find and tap into the knowledge and expertise of bright individuals outside our company.

To profit from R&D, we must discover, develop and ship it ourselves.

External R&D can create significant value; internal R&D is needed to claim some portion of that value.

If we discover it ourselves, we will get it to market first.

We do not have to originate the research in order to profit from it.

If we are the first to commercialize an innovation, we will win.

Building a better business model is better than getting to market first.

If we create the most and best ideas in the industry, we will win.

If we make the best use of internal and external ideas, we will win.

We should control our intellectual property (IP) so that our competitors do not profit from our ideas.

We should profit from others‘ use of our IP, and we should buy others‘ IP whenever it advances our own business model.

Table 1. Contrasting principles of Closed and Open Innovation (Chesbrough, 2003)

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Globalization has not only lowered entry barriers for new international competitors by decreasing cost pressure, but also provides the companies that can innovate faster and are able to adapt better with an opportunity for competitive advantage. Global industries favor open innovation models because they achieve economies of scale more swiftly than the traditional closed model and promote more powerful standards and dominant designs

Technology intensity In most industries, technology intensity has increased to such a degree that not even the largest companies can cope with or afford to develop technology on their own.

Technology fusion Technologies are increasing morphing into new fields, and consequently industry borders are shifting or even disappearing.

New business mode. With the rapid shift of many industry and technology borders, new business opportunities arise and consequently lead to new alliances. The main motives for these alliances are the sharing of risks, the pooling of complementary competencies, and the realization of synergies. Companies also tend to acquire those innovations and technologies that fit their business model.

Knowledge leveraging Knowledge has become the most important resource for companies. Instead of hiring the best engineers internally, companies are forced to act as knowledge brokers. New capabilities and organizational modes are needed to cope with this outside-in thinking.

Based on West et al (2006) definition of open innovation, in practice the integration of internal and external innovation entails three challenges:

Maximization. Companies need a wide range of approaches to maximize the returns to internal innovation – not just feeding the company‘s product pipeline, but also outbound licensing of IP, patent pooling and even giving away technology to stimulate demand for other products.

Incorporation. The existence of external knowledge provides no benefits to the company if the company cannot identify the relevant knowledge and incorporate it into its innovation activities. This requires scanning, absorptive capacity, and also the political willingness to incorporate external innovation.

Motivation. Prior open innovation research assumes that external sources of innovation will arise. To date this has clearly been true. However, external sources of innovation are supplied by some person or entity.

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system is found by installing a more formal innovation pipeline, also named a funnel or later known as stage gate model, Figure 5. These systems are inward looking and characterized as closed, but this system has several advantages, including a clear overview of projects in progress and use of active portfolio management. However, the criteria qauqed at the gates cause it to be a double-edge sword. The feasibility criterion leads to a conservative portfolio, and the effectiveness criterion causes any potential innovations outside the dominant business model to be left unused. Similarly, the idea/project/ business inflow is closed in nature, and ‗out of the box‘ thinkers are repressed in human resources potential. In the most extreme of cases, the funnel vision ultimately leads to tunnel vision (van der Meer 2007).

Figure 5. Closed System Stage-Gate Model for Innovation (van der Meer 2007)

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Figure 6. Open System Stage-gate Model for Innovation (van der Meer 2007)

Van der Meer et el (2007) found evidence that there is a difference in collaboration between innovative larger companies and innovative SMEs. Innovative larger companies have a tendency to display closed behavior when things really start to matter, while innovative SMEs are more naturally suited to engage in open innovation.

Hagel and Brown (2005) argue that closed networks need to become more open to develop the necessary specialization and deepening of the innovation capability of the participants. So research could test whether closed networks have performance disadvantages where specialized or deep knowledge is required, and what form of ―openness‖ provides value over others. If openness has economic value, then research would also be useful to identify the levers of inter-organizational change for making an existing ecosystem more open.

Benefits of Open Innovation (Docherty 2006)

 Ability to leverage R&D developed on someone else's budget

 Extended reach and capability for new ideas and technologies

 Opportunity to refocus some internal resources on finding, screening, and managing implementation (important not to position as a threat to internal resources)

 Improved payback on internal R&D through sale or license of otherwise unused intellectual property

 A greater sense of urgency for internal groups to act on ideas or technology (use it or lose it)

 Ability to conduct strategic experiments at lower levels of risk and resources, with the opportunity to extend core business and create new sources of growth

 Over time, an opportunity to create a more innovative culture, from the ‗outside in' through continued exposure and relationships with external innovators

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number of different roles that companies can have in models of open innovation (Fredberg et al. 2008).

Organizations that fund innovation:

 Innovation investors (incubators, VC, private equity etc) and innovation benefactors (early financing)

Organizations that generate innovation:

 Innovation explorers (discovery research functions, used to belong to R&D)  Innovation merchants (codifying and commercializing IP, royalties etc)

 Innovation architects (create value through creating a system for bringing pieces together, e.g. Nokia)

 Innovation missionaries (create and advance technologies to serve a cause, OSS) Organizations that bring innovation to the market

 Innovation marketers (profitably market new ideas)

 Innovation one-stop centers (sell other‘s ideas, e.g. Yahoo!)

There are still some organizations – fully integrated innovators – still try to keep control of all parts.

2.3 Intellectual Property appropriation

All companies using open innovation need to deal with the need to protect its intellectual capital. How companies manage intellectual property (IP) depends on whether they operate in a closed innovation paradigm or an open innovation paradigm according to Chesbrough (2003a). One assumption of open innovation brought forward by the author, is that there exists a multitude of ideas outside the company that the company should be an active buyer and seller of IP (Fredberg et al. 2008).

Engaging in an open innovation initiative without having adequate IP strategy in place would involve risk for any company. In technology development in a competitive industry, patents are key leadership assets. Management of the patent portfolio needs to plan for a decision model for the future IP. At this stage, it is important to note that the revision of IP strategy does not ignore traditional principles used for internal innovation, and seeks to include successful guidelines and best practices in addressing the emerging open innovation mechanism.

The results of this evolution in IP practice include a number of key points:

 It is essential to secure IP positions before entering any collaboration. This is a prerequisite to successful discussion and negotiation.

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 It is important to conduct systematic and recurrent portfolio revisions. The variety of technologies, as well as the number of ―patent families‖ within the portfolio, can no longer be managed passively. The same approach should be applied when the time comes to decide IP protection extensions. One important criterion is not to engage in vast country coverage for a single case if the decision cannot be linked to a business case. Neither patents nor technology have much value when separated from their business model, and a close connection between the two is vital in creating value from technology.

 Knowledge of the IP behavior of future partners must be acquired. Depending on a potential partner‘s size, nationality or legal regime, IP negotiations might be completely different (Jolly et al. 2007).

2.4 Culture and leadership

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3 RESEARCH METHODOLOGY

The literature related to open innovation offers examples of companies how they have adopted the open innovation model in their organization. This thesis aims to introduce and compare the currently used innovation models of six large multinational companies in the FMCG industry. The main research question is as following: How open innovation and stage gate process model are implemented in the Fast Moving Consumer Goods (FMCG) industry?

Related to the main research question several interrelated research questions are asked such as: 1. How stage gate process model is implemented in the companies‘ innovation strategy? 2. How the organizations in FMCG industry have implemented open innovation?

3.1 Research approach – multiple case study

To answer the research question, multiple case study approach is used. As a research strategy, the case study is used in many situations to contribute to our knowledge of individual, group, social, political, and related phenomena. Not surprisingly, the case study has been a common research strategy in psychology, sociology, political science, social work, business, and community planning. A case study method involves an in-depth, longitudinal examination of a single instance or event. Case studies provide a systematic way of looking at events, collecting data, analyzing information, and reporting the results. Case studies can be single or multiple-case designs. In general case studies are the preferred strategy when ―how‖ or ―why‖ questions are being posed, when the investigator has little control over the events, and when the focus is in as contemporary phenomenon within some real-life context. (Yin, 2003). This thesis attempts to answer the above mentioned ―how‖ questions by using qualitative research method.

3.2 Case Selection

3.2.1 The fast moving consumer goods industry

This thesis takes as case studies Procter & Gamble, Royal DSM, Unilever, Nestlé, Kraft Foods and Kimberly-Clark, which are six large international companies in the Fast Moving Consumer Goods (FMCG) industry. However, Royal DSM is life sciences and material sciences company which does not directly compete with the other five, but rather is a key supplier for them, e.g. Unilever and Nestlé. From this aspect and as DSM has adopted the open innovation strategy, besides using the stage gate process model, it is relevant to make comparison with the other players in FMCG industry.

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the FMCG industry and 5) data availability and accessibility. The first criterion is the use of stage gate innovation process model, which is the primary interest leading into this research. The Cooper‘s stage gate model has been adopted by several organizations to gain more competitive advantage, since it was developed by Cooper in 1986. The second criterion is the use of open innovation strategy. The theory of Chesbrough (2003) inspired to find out more about this topic which seems to become a necessity in the FMCG industry. Stage gate in combination with open innovation strategy have led the companies to open up to the outside. The third and fourth criterions are the size of the company and the industry, since to be able to make comparison and have results which have enough coverage of the FMCG industry, this thesis has chosen to analyze big multinational organizations which are key players of the chosen industry. The fifth criterion is the data availability and accessibility. The companies in this thesis are openly publishing research material, and are open for research and interviews related to the topic.

3.2.2 Case introduction

Procter & Gamble (P&G) was founded in 1837 by William Procter and James Gamble as a small, family-operated soap and candle company, has grown to be one of the most admired companies in the world. Today P&G has over 138,000 employees working in over 80 countries worldwide and it is a multinational manufacturer of product ranges including personal care, household cleaning, laundry detergents, prescription drugs and disposable nappies. P&G has one of the largest and strongest portfolios of brands, including Pampers, Tide, Ariel, Always, Pantene, Bounty, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay (Procter & Gamble, 2009a). P&G‘s revenue in 2008 was $83,503 billion (€57,066 billion) and the company invested more than $2 billion (€1.4 billion) in R&D (Procter & Gamble, 2008). P&G has more than 7,200 R&D resources, nearly 1,000 PhDs and it is present in nine countries with its 20 R&D facilities (Anthony, 2008). P&G has 20% of global market share in hair care, 70% in blades and razors (mainly Gillette), 20% of the oral care, 10% in snacks, 10% in pet care, 15% in fabric and home care, and 35% baby care (Procter & Gamble, 2008). The driving mission of P&G is ―Touching lives and improving life‖ which is the company‘s slogan. By this P&G highlights the importance of the products it produces in people‘s everyday life and is willing to improve it by making even better products (Procter & Gamble, 2009a).

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that help to improve the quality of life. End markets include human and animal nutrition and health, personal care, pharmaceuticals, automotive, coatings and paint, electrical and electronics, life protection and housing. DSM is involved in the FMCG industry as a producer/supplier. DSM has annual net sales of €9.3 billion in 2008 and employs some 23,500 people worldwide. The company is headquartered in the Netherlands, with locations on five continents (DSM, 2009). On average €50 million per year (€30 million in 2006 increasing to €70 million in 2010) will additionally be spent on innovation. About 15% of capital expenditure will be allocated to new business development in this context, and the innovation infrastructure in DSM‘s main research centers will be upgraded (DSM, 2009). DSM has a global market share of about 5% DSM Engineering Plastics, 20% DSM Melamine and with 25% market share DSM is a major player in the merchant acrylonitrile market in Europe (DSM, 2008).

Unilever was founded in 1920s by a merger of companies that produced products made of oils and fats. Today Unilever is known from its brands in the foods, home and personal care categories. It has 400 brands in 14 categories, such as Lipton, Knorr, Dove and Omo. In 2008 its turnover was €40.5 billion and the company employed 174 000 people worldwide. The company has more than 6000 people working on R&D, on which it invests over €1 billion each year. Unilever‘s mission is to add ―Vitality to life‖, which focus is on better achievement, looking good, feeling good, providing a good start for our children, living without health problems and to live longer and healthier (Unilever, 2009).

Nestlé was founded in 1866 by Henri Nestlé and is today the world's leading nutrition, health and wellness company.In 2008 its revenue was CHF 109.9 billion (around €69 billion), employing around 276 050 people and it has factories or operations in almost every country in the world. Nestlé‘s portfolio covers practically all food and beverage categories, and it has known brands such as Nestlé, Nescafé, Kitkat, Nesquik, Maggi, Nesteá and Nespresso (Nestlé, 2009). Four words that sum up Nestlé philosophy is ―Good Food, Good Life‖ with its aim is to engage consumers to manage their diet and nutrition, and to help live healthier and longer lives (Nestlé, 2009).

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aim to make delicious food that people feel good about. The vision of Kraft‘s is "helping people around the world eat and live better‖ (Kraft Foods, 2009).

Kimberly Clark (K-C) was founded in 1872 by John A. Kimberly operating in paper mills. Today K-C is a global health and hygiene company which specializes in the manufacture of consumer products and synthetic health and hygiene products worldwide. In 2008 K-C sales was $19.4 billion (around €13 billion) and it had 53 000 employees. The company‘s global brands are sold in more than 150 countries, and it has well-known family care and personal care brands such as Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex, Poise and Depend. K-C‘s global mission is to have global perspective and mindset, and to create innovative solutions and moving into new market spaces to enhance the health, hygiene and well-being of people every day, everywhere. (Kimberly Clark, 2009b). K-C invented the rolled bathroom tissue category, which is its largest market where it competes, and where K-C holds nearly 25% market share (Kimberly Clark, 2009c).

3.3 Data Collection and data analysis

3.3.1 Data Collection

Secondary data is data that has already been collected for purposes other than the problem at hand, but it can help to identify and better define the problem, answer certain research questions and interpret primary data more insightfully (Malhotra, 2004). Primary data is data that will be collected by the researcher in purpose of the research in hand, such as using interviews, questionnaires and observations (Malhotra, 2004). The data collection in this thesis was conducted by secondary and partly primary data1. The data collection was firstly started by investigating the relevant literature related to the topic. Secondly secondary data was collected of the six companies from several sources such as company websites, internal research studies, annual reports, presentations, articles, interviews and case studies. Thirdly the relevant person‘s of the companies related to the topic were contacted. This thesis is mainly conducted based on the secondary data found from several sources. In the analysis part for the patent data, European network for patent databases, esp@cenet was used to gather patent information.

3.3.2 Data analysis

Firstly there is an analysis of the FMCG industry with focus on consumer packaged goods, products which are used on a regular basis. Secondly there was six case studies prepared describing each selected company‘s innovation models and strategy and organizational changes related in adopting the new innovation strategy. The full case studies are described in the appendices 1-6, and the empirical part (Chapter 4) is focusing on the stage gate and open

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4 EMPIRICAL RESEARCH

4.1 FMCG Industry

The Fast Moving Consumer Goods (FMCG) industry, also known as Consumer Packaged Goods (CPG) deals mainly with the production, distribution as well as marketing of packaged goods for all consumers. FMCG has to do with consumables which are regularly being consumed (Datamonitor, 2009). The factors that make the FMCG industry a highly competitive are low operational cost, solid distribution networks, and emergence of new FMCG companies. In addition, the growth of the world‘s population is another responsible factor for the huge success of this particular industry. Some of the leading FMCG companies all over the world are Sara Lee, Nestlé, Unilever, Procter & Gamble, Coca-Cola, Carlsberg, Kleenex, General Mills and Mars (Gonzalez 2009). The FMCG industry retail value is almost €700 billion in Europe and $1.5 trillion (over €1 trillion) globally, which can be compared with the value of $480 billion (over €325 billion) for the global automotive manufacturing industry (Gonzalez 2009). The wide range of consumable goods provided by the FMCG industry turns over a large amount of money, while competition among FMCG manufacturers is become more and more fierce. D&E economies are expected to account for 90% of the world's population by 2010, and this is expected to drive demand for fast moving consumer goods (Datamonitor, 2009).

In today‘s competitive environment, innovation is a necessity and is probably the only way to survive. For the consumer goods industry, innovation is a combination of a product‘s inherent value to the consumer, combined with elements of services and solutions, well-being, good and healthy, and convenience. In general, well executed innovation with value for consumers always comes from challenging conventional wisdom and searching, finding, and implementing new solutions to old or new problems. Over the past decades, market forces have pushed many food companies into a process of continuous cost cutting and rationalization. The only way to escape this ―spiral of death‖ is to innovate. This presents new challenges to food technologists; they have to connect the right functional benefits to the emotional benefits to support brand strengths (Traitler & Saguy, 2009).

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operates in the FMCG industry. One R&D leader estimated that by 2010 the split between internal and external work would reach 60/40, compared with the ratio of 85/15 in 2006. Furthermore, R&D budgets are rising for the most part, and there is continued pressure to be more efficient and make resources stretch further - one way of achieving this is to involve third parties. The complex network of agreements, partnerships and alliances with outside parties who operate diffusely, is far removed from the traditional FMCG R&D organization centered on a single, monolithic campus populated by thousands of R&D professionals and removed from the corporate centre. The model emerging in FMCG companies is for ―core‖ activities to be controlled in-house, while everything else is outsourced to third parties (Shields et al, 2006).

Innovations also keep consumers from deflecting to less-expensive private label products that do not have the same features. According to Advertising Age, product categories in more than 20 countries show a private-label market that is 56% higher where there is low innovation activity compared with categories with many new products (Sun, 2008). The current economic climate is forcing shoppers to watch their expense and look for cheaper options of discounted brands or own label merchandise. This is leading to discounters like Aldi, Lidl and Netto taking an increasing proportion of the market from the major supermarkets and stores, which has a direct effect on sales of the major brands. What is making the situation worse for branded goods suppliers like Unilever is the pressure that big retail chains like Tesco have been putting on them recently. These big retailers, for sustaining their revenue growths and margins, are promoting their own-labels. The dent in disposable income of consumers caused by the global economic slowdown is making it increasingly difficult for branded product manufacturers to maintain their sales volume and revenue growth (Datamonitor, 2009). Rising and fluctuating energy, material, and ingredient costs put additional pressure on margins. Limited availability of materials and ingredients requires ingredient substitutions which add complexity and increase costs. Faced with an already wide variety of choices, value conscious consumers are demanding an even wider variety of higher quality, safe, and more convenient products. Powerful retailers are also placing new product specification requirements on manufacturers and expecting more innovative and responsive supplier partnerships (ARC Advisory Group, 2009).

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consumer spending in these markets will overtake developed countries in terms of purchasing power parity (ARC Advisory Group, 2009).

4.2 Stage Gate models and Open Innovation in FMCG Industry

Procter & Gamble

P&G adopted in the late 90s the Initiatives Diamond Philosophy which served as a guide for each business‘s product innovation effort, and helped to focus management‘s attention on what is important to success. The top half of P&G‘s diamond in Figure 7, is strategic in nature, and captures the business‘s product innovation strategy: goals, the mix of new products required to meet those goals, and the required resources. Portfolio management (or project selection) is thus closely connected to strategy. The bottom half of the diamond is more operational and focuses on delivering specific new product projects or initiatives: what resources must be put in place for each project; and how individual new product projects are managed so they succeed, using P&G‘s idea-to-launch SIMPL™ methodology (Cooper & Mills, 2005).

Figure 7. The four points of performance in the Innovation Diamond – the factors that drive new product development results (Cooper & Mills, 2005)

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points in the model; each gate is comprised of a team recommendation and a management decision (Cooper & Mills, 2005).

Figure 8. P&G’s SIMPL™Process – An Idea to Launch Stage-Gate®

Model (Cooper & Mills, 2005)

The Main Principles Behind P&G’s SIMPL™ Process

 Remember that winning in the marketplace is the goal.  Use criteria for making Go/Kill decisions.

 Balance risk and rigor.  Use a common language.

 Keep in mind that SIMPL™ is not stand alone.

 Practice effective implementation (Cooper & Mills, 2005).

The current SIMPL™ process is a corporate global process—the same stages, gates, principles and measures—and is universal across geographies and business units. The idea-to- launch process is only one ingredient of successful innovation, a single element of a much larger whole, the Diamond. Individual projects cannot be managed independently of other projects, their priorities, resource constraints, and changing business conditions. Thus the Diamond represents the relationship between these elements: innovation strategy, resource planning, project selection, and the SIMPL™ new product process. A.G. Lafley, then Chairman of the Board, President and Chief Executive sponsored the early work on stage-gating. Having a strong sponsor at the highest level was one key to successful implementation. Perhaps it is no coincidence that the earliest proponent of the stage-and-gate process later also became P&G‘s chief executive (Cooper & Mills, 2005).

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on solid work? What are the risks in moving forward? What are you asking for? Now the main gate report is no more than two pages, and there are four required attachments, most kept to a limit of one page. The emphasis in lean gates is on making expectations clear to project teams and leaders - that they are not required to prepare an ―information dump― for the gatekeepers. The principles are that: information has a value only to the extent it improves a decision; and the deliverables package should provide the decision-makers only that information they need to make an effective and timely decision. Page restrictions, templates with text and field limits, and solid guides are the answer favored by progressive firms (Cooper, 2009).

P&G’s Connect+Develop

For generations P&G created most of its phenomenal growth by innovating from within - building global research facilities and hiring and holding on to the best talent in the world. However P&G wanted to be known as the company that collaborates – inside and out – better than any other company (Procter & Gamble, 2003). The new model was Connect and Develop (C+D) method. Through this radical alternative, P&G connects with external sources of new ideas: university and government labs, Web-based talent markets, suppliers, even competitors. Then the ideas are developed into profitable new or refined products using the company‘s R&D, manufacturing, and marketing process (Huston & Sakkab 2006). P&G made a goal to acquire 50 percent of innovations outside the company. The strategy was not to replace the capabilities of 7,500 researchers and support staff, but to better leverage them. Half of the new products would come from P&G‘s own labs, and half would come through them. Lafley had the task to move the company's attitude from resistance to innovations "not invented here" to enthusiasm for those "proudly found elsewhere" (Huston & Sakkab 2006).

Figure 9. P&G’s Connect and Develop relationships (P&G, 2003)

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ready-to-go innovations. P&G is particularly interested in solutions that have already been reduced to practice in some part of the world, and in disruptive ideas for its business categories. Through C+D relationships, P&G continually search for products, packaging, technologies and commercial opportunities that can be reapplied to P&G‘s brands and rapidly introduced to better serve consumers (Procter & Gamble, 2003). Its current network of external partners is wide and includes government laboratories, research institutes, suppliers, universities, academies and e-R&D networks (such as Innocentive.com, NineSigma.com, Yet2.com and yourEncore.com2). In addition anyone can submit ideas on P&G‘s website www.pgconnectdevelop.com

.

On the same website, called P&G‘s Future works, also business proposals can be submitted3

.

P&G‘s problem is not ideas since its research department is reviewing around 5000 ideas yearly. In addition, through its employees around the world, it has a lot of ideas. And through the open innovation architecture in Connect and Develop, half of the innovations that go to market every year have at least one external partner, so it is connecting to a lot of ideas on the outside. The issue P&G has is getting the ideas clarified, prototyped and sorted, and then, starts putting them through the pipeline of development and qualification. P&G‘s businesses target somewhere between 10% to 20%, maybe a max of 30%, disruptive innovation (Anthony, 2008). The failure rate of innovations is high, and even for P&G nearly half of new product innovations fail to deliver the business objectives or financial goals (Traitler & Saguy, 2009).

Once an idea is qualified and begins moving through product launch system, the innovation team continues to face go/no-go gates at every critical milestone. At each gate, decisions are made about which initiatives are ready to progress, which need further work, and which should be stopped. Every decision is grounded in maximizing the productivity of innovation investments and generating shareholder value. P&G plan three-to-five years out and fill its pipeline with three distinct kinds of innovation: Disruptive innovation creates new categories, new segments, or entirely new sources of consumer consumption. These are innovations that address consumer needs no other brand or product has met. Virtually all of P&G‘s billion-dollar brands were created with disruptive innovations. Sustaining innovation is what P&G focus on most. These are extensions or improvements of existing products: big initiatives that meet consumer needs by filling gaps, eliminating consumer trade-offs, or providing new benefits. Commercial innovation generates trial on existing products without a product or package change. Examples include the Gillette Champions and Pampers Unicef programs, marketing efforts that give consumers new reasons to be interested in and loyal to a P&G brand (Procter & Gamble, 2008).

P&G‘s R&D activities are fully integrated into overall business operations rather than operating as an isolated function. Each business unit has its own product development department, which is

2

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linked to downstream business needs. R&D is responsible, along with marketing, for conducting research to understand consumer needs. A sub-discipline of R&D called Products Research integrates consumer and marketing input into the technology development process. Together with general management, R&D and marketing establish strategic directions for each of the company's businesses (P&G, 2009a).

Connect and Develop model works for P&G and it has achieved positive results with this strategy. In 2006 more than 35% of its new products in market had elements that originated from outside P&G (Huston & Sakkab 2006)4. In comparison, in 2000 P&G was introducing new brands and products with a commercial success rate of 15 to 20 percent. In other words, for every six new product introductions, one would return its investment (Charan, 2008). Similarly, in 2006, 45% of the initiatives in its product development portfolio had key elements that were discovered externally. Through Connect and Develop — along with improvements in other aspects of innovation related to product cost, design, and marketing — P&G‘s R&D productivity has increased by nearly 60%. P&G‘s innovation success rate more than doubled, while the cost of innovation fell down. R&D investment as a percentage of sales went down from 4.75% in 2000 to 3.04% in 2006. And in 2004-2006, P&G launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company‘s stock collapsed in 2000, it had doubled its share price and had a portfolio of 22 billion-dollar brands (Huston & Sakkab 2006). In 2008 P&G achieved success rates between 50 and 60 percent, meaning about half of its new products succeed. This is the success rate the company wanted to receive, since if it tries to make it any higher, it will be tempted to err on the side of caution, playing safe by focusing on innovations with little game-changing potential (Charan, 2008). P&G could in fact be considered a technology company as it owns over 27,000 patents, in addition to its many world-famous trademarks. After avoiding licensing for decades, P&G implemented a policy whereby its patents and trademarks should be either actively developed, licensed or sold. In the past P&G used fewer than 10% of its patents in its products and spend more than million a year just to maintain them (Forbes, 2005).

In addition to the mentioned changes, the company culture has changed; decisions are made faster, better information sharing and less central control. Earlier P&G always placed emphasis, and still is, on hiring young, promoting from within and rarely bringing executives from outside (Davidson, 2003). P&G is still looking for the old qualities in its people, but it added the characteristics of agility and flexibility. The company tries to identify carefully and ease out people who are controlling or insecure, who do not want to share, open up, or learn - who are not curious (Charan, 2008).

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Not long after P&G, also DSM implemented the open innovation approach in its company. In 2001 DSM created a new business group: DSM Venturing & Business Development (DV&BD) in which people was active in open innovation. This group DV&BD directly participated in about 10 start-up companies, both outside and within the company (which have now been spun out). DV&BD did not restrict itself to areas already familiar to DSM, but looked for opportunities based primarily on the criterion of whether DSM could use, add and share its core competences to create value. Its focus was on identifying new business opportunities in life sciences and performance materials, and synergistic areas that span both fields. Its mission was to develop these ideas into practical, profitable businesses (Kirschbaum, 2005a). Today DV&BD is part of DSM Innovation Center (DSM, 2009).

Figure 10. DV&BD's open innovation model (Kirschbaum, 2005b)

DV&BD's open innovation model for creating and nurturing new businesses involves the continuous appraisal and testing of ideas, projects and businesses until they are fully developed, spun off or rejected, Figure 10. When creating a new business, DV&BD assesses the "First Gate deliverables." New business ideas are identified, screened, developed and evaluated, and a SWOT (strengths, weaknesses, opportunities, threats) analysis is carried out. The potential business is tested according to a "5C" analysis (Kirschbaum, 2005a). If the results of the rigorous evaluation are positive, DV&BD then progresses to the "Second Gate." Before the business idea can pass through this gate, a realistic business plan has to be drawn up, based upon customer trials, commercial approvals, and market feedback following initial sales. Before these initial sales are made, however, all patent and health and safety issues have to be clear, and all lab experiments successfully completed. The production process has to be designed and small-scale production begun. Finally, a marketing plan based on a "5P analysis" (product, promotion, personal selling, price, place) has to be implemented (Kirschbaum, 2005a).

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inside as well as outside the company-from other companies, universities or research institutes. Only some of these ideas will be of interest to DSM, and these are investigated in more detail (Kirschbaum, 2005a).

Figure 11. DSM Innovation funnel (Brasz, 2008)

Idea generation identify areas of interest from the fuzzy from end. Also direct business opportunities are areas of interest (e.g. starting a business, acquiring a company) which are identified, screened, developed and evaluated, and a SWOT analysis is carried out and tested based to a "5C" analysis (Kirschbaum, 2005):

1. Context: evaluation of the value chain, markets, attractiveness, drivers, dynamics, and value added.

2. Customers: screening of segments, key customers, their needs and values. 3. Competitors: analyzing the competitive position.

4. Company: the synergy between markets, customers and raw materials, and evaluation of technologies, competences and strategy, determination of key success factors.

5. Costs: system costs, cost structure, projected financial performance

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are started for the most promising ideas. After some time, a go/no-go decision has to be made. If the decision is made to stop the project, the technology may be offered to other parties. This may also happen in reverse: other parties may offer projects that are of interest to DSM. After a development project has been approved, a small company is established to develop the technology further. Two or three years later, DSM re-evaluates and decides whether to continue or spin out the company. As other companies and venture capitalists do the same, there may also be companies offered for sale at a similar stage of development that are of interest to DSM (Kirschbaum, 2005a). In the next phase of development, when the commercial value of the technology has been proven, DSM can still decide to divest. Likewise, it can also acquire businesses or technologies that other companies wish to divest. Finally, some projects and start-up companies reach the end of the funnel and grow into mature businesses (Kirschbaum, 2005a).

The innovation process is fed with approximately 200 ideas every year, which are received mostly via email and DSM‘s internet sites. The first screening is done by the Business Creation team, during which many ideas are aborted due to technical implications and/or a lack of economic opportunity. The ideas that pass the first stage of evaluation will be followed up by the Business Development team, where the idea is turned into a project. Projects in this process are meant to run from initial (technical) developments up to and including the commercial introduction. On average there are up to 5 projects running simultaneously, with lead times from 6 months to 2 years (max.). About 40% of the projects are aborted during their runtime because they turn out to be less promising than expected at initiation. Once first sales are realized and a small customer base is set-up, the business is handed over to dedicated marketing and sales organizations that will further grow the business in existing segments as well as in newly created segments (Dardel, 2006).

DSM defines three innovation horizon‘s, which are related to the time from product development and time to market: 1) business groups: launching products to exploit unmet market needs, time 1-4 years, 2) Cluster New Business Development (NBD): extending business / technology into emerging spaces, time 3-7 years, and 3) Emerging Business Area (such as in biomedical materials, specialty packaging, personalized nutrition, white biotechnology) / Incubator: exploring and developing options for the future, 5-10 years (Brasz, 2008), Figure 12.

Figure 12. Innovation in Emerging Business Area (Van Leen, 2006)

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knowledge throughout the company, irrespective of departments, sites, business groups or geographic borders), entrepreneurial behavior, collaboration with external partners, multi-disciplinary collaboration across organizational and geographic borders and absence of incomprehensive and redundant rules. In addition Schneider highlights that people are by far the most important element in the realization of Open Innovation; they deserve trust, authorities and resources to act accordingly.

At DSM, the best way for R&D activities to break new ground is to leverage both internal and external knowledge networks. Internally, this is achieved through a global program and project and competence management, and by ensuring that the valuable knowledge of all the people is recorded and readily available within the organization. By encouraging the staff to build up their personal academic networks and to pursue important part-time positions outside DSM. The company also works closely with some of the world‘s most innovative R&D partners and exchanges scientific and technological knowledge with some 2,000 university departments. It participates in renowned research organizations and networks, such as Gene Alliance (Germany), the Bio-catalysis & Bio-processing of Macromolecules Consortium (USA), the Wageningen Center for Food Sciences and the Dutch Polymer Institute (The Netherlands) (DSM, 2009).

DSM Venturing, the corporate venturing unit of DSM, invests in promising start-ups to gain access to new technologies and innovative products in DSM‘s strategic growth fields. This way DSM Venturing plays an important role in the innovation process at DSM as an interface between DSM and the start-up community (DSM, 2009). DSM frequently reviews and evaluates external innovations for potential In-License. Licensing-In is an important part of open innovation and treats each opportunity professionally and expediently (DSM, 2009). With licensing in DSM has been able to cut-off the time-to-market. Licensing-Out innovative ideas is an excellent way of allowing ideas to become as useful as possible, while at the same time rewarding their originators fairly, and giving them an incentive to develop even more innovations. DSM ‗license out‘ intellectual capital to others, either permanently or temporarily, to enable the development of practical applications of a DSM process, technology or patent in new fields or in new ways (DSM, 2009).

Unilever

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development proceeds, and achieve convergence around a specific concept and design that the company will bring to the market (Ciborra et al 1998).

Figure 13. Unilever innovation funnel (Keizer at al., 2002)

The innovation funnel at Unilever is structured in four phases; idea generation, feasibility, capability, implementation/roll-out, reflecting the development process going from the generation of an idea to the roll out of the product. An increasing degree of commitment regarding resources and investments corresponds to the different phases. At the end of each phase there is a ―gate‖, where screening occurs and a decision is made concerning the advancement of the project across the funnel. A top management board sits at each gate and decides the approval of the documents that accompany the development phases of each project (Ciborra et al 1998). Throughout the innovation funnel there are four different gates; Charter gate, Contract gate, Launch gate and Rollout gate. At the end of each gate the top management board makes the decision based on the criteria set, and if the idea or projects fits the criteria it goes ahead in the funnel (Rao, 2005).

Stage gate process model and Open Innovation in the Fast Moving Consumer Goods Industry