Writing is an exploration. You start from nothing and learn as you go.

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INNOVATION BY INTERACTION

a study on innovation by vertical cooperation in the carton packaging industry

Writing is an exploration. You start from nothing and learn as you go.

E.L. Doctorow, American novelist (NY Times October 20, 1985)

Groningen, October 2005

Rijks

universiteit

Groningen

Faculty of Management & Organization, specialization Strategy & Innovation

Author: Elisabeth Stavenga Student number: 1064819

1

^st

supervisor: Dr. Gerda Gemser

2

^nd

supervisor: Evelien Croonen

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Preface

With this thesis I finish my studies in which I learnt, learnt to learn, and learnt to like to learn. It is this pleasure and interest in learning that will now result in the graduation for my Master’s degree.

I would like to thank the people who enabled me to write this thesis. First, I owe much gratitude to the participants of my case studies. Thank you all for your time, very useful information and interest in my research. Then I would like to thank Mrs. Gerda Gemser for her supervision, with more accuracy than one might expect from a supervisor. Further my family, friends and colleagues have been

indispensable. I thank them for their mental support and putting things into perspective. Without laughing so much with all of you, this period would have felt much longer. Paul (Studio PAK) thanks for your front page design, now this paper at least looks professional! Finally, Jasper, thanks for your brainstorm sessions, resulting in a thesis that I’m proud of in all respects. Thanks for being more than just a brother!

Elisabeth Stavenga

Groningen, October 18, 2005

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Management summary

The Dutch packaging industry must adapt to changing circumstances, causing increasing pressure on the margins. This study aims for improving the competitive position of the industry by innovativeness.

The research is limited to the marketing-communication function of consumer packaging. Related to this, the relevant partners in the value chain are the brand owner, converter and the designer and for that reason these are involved in this research.

The research is based on a literature study and two case studies (Go-Tan’s Meal Kit and Douwe Egberts’ Caffiato). The case studies are selected in the market place, on the basis of their

distinctiveness in the product category. Each case study is based on interviews with informants of the brand owner, converter and designer.

Innovative packaging is defined as (partly) new packaging in a certain product category of which the value is determined by the brand owner. The innovation process is mentioned to be a process wherein knowledge is absorbed, assimilated, shared and used with the aim to create new knowledge. Central in this view is learning, which can take place in knowledge networks. These networks learn, with the aim to innovate, in a cycle of exploration and exploitation, which build on each other for firms to survive now as well as in the future.

In the Meal Kit case, the partners involved were Go-Tan, SHC and Brandnew Design. Go-Tan has been the initiator of the process and came up with the idea of the shape. Brandnew was involved in a latter stage of the process, to design the 2D-design. Brandnew and SHC hardly interacted with each other, both interacted with Go-Tan.

In the Caffiato case, Douwe Egberts cooperated with preferred suppliers Drukkerij de Vries and FutureBrand. FutureBrand has besides being designer of the 2D-design, also been strategic partner of DE in the development process. The idea of the shape of the Caffiato was of DE, which was also initiator of the project. The designer and converter communicated both with DE and hardly interacted with each other.

An analysis of the case study results, applied to the theoretical framework led to the conclusion that the partners do not optimally profit from cognitive diversity in practise. It is for that reason that I recommend that designers should be involved in an early stage of the process, and all partners should interact to profit from cognitive distance and to contribute to learning and innovativeness. Interaction should further improve mutual understanding.

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Chapter 1 Introduction

1.1 A dilemma in developing (innovative) packaging

“The packaging industry is a dynamic branch. During the last couple of years it has developed

strongly, and new products and packaging are created continuously. Market demand and governmental policy induced packaging to become of lower weight, user-friendlier en with better properties than before. For this reason products can be transported more efficiently, are non-perishable and are packed with better care for the environment. Besides packaging itself, also firms operating in this industry are due to changes. The market they operate in develops. Consolidation of buyers as well as suppliers of packaging firms, and a growing international environment leads to more pressure on the margins of firms in packaging. Small and light standard packaging is being outsourced to low-cost countries. This is only profitable when transport costs don’t exceed loan cost advantages. To remain successful, Dutch packaging companies have to deliver added value to customers, by specialisation, focus on niche markets and/or by playing an active role in the development of new packaging. In addition to this, to remain competitive, companies have to anticipate on the development of substitutes of certain packaging and the development of new products that need to be packed” (Geerts, 2002). This shows the importance of innovativeness in this industry. Colenbrander (2003) studied which factors play a decisive role in commercialising consumer user-friendly packaging for foodstuffs, (non-)alcoholic drinks, and tobacco successfully. He found that the packaging industry doesn’t take the initiative very often to innovate. Further, the research has shown that the Dutch packaging industry has relevant knowledge and experience to develop user-friendly packaging, nevertheless relevant market information does not reach packaging organizations, as it sticks to retailers. Cooperation could improve exchange of information and Colenbrander recommends further research on this topic. In addition to this concrete recommendation, cooperation within the value system might be relevant to this industry to become more innovative, strengthening its position in the (global) competitive environment of packaging industry.

1.2 Cooperation

According to the dilemma decribed above, investigation of cooperation in the value system is of importance to the packaging industry as well as to scientists. “Improving the product development process means speeding up the product development process (in order to avoid risks of introducing obsolete products), lowering development costs (to minimize financial risks) and developing products that better meet the requirements of the customers (to reduce the chances of market failure). One of the most popular ways of achieving these kinds of objectives is to cooperate with other organizations (Hillebrand, 2001). And as Jacobs (1996) mentions: “The shorter the life cycles become, the higher the

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demands in the direction of the teams which have to devise, design, produce, market and deliver the products and services. (…) Increasing flexibilisation and networking are some of the consequences of this.”

The term ‘networks’ is often used to describe a wide range of inter-organizational linkages, without paying attention to different, changing characteristics and environmental conditions of various network structures (Gemser et al., 1996). In this research the term refers to linkages between the converter, designer, and brand owner, in the different stages of the value system.

1.3 Innovation

As innovations help an organization to stay fresh and reinvent itself as conditions in the business environment change, managing innovation is an important strategic implementation issue (Dess, et al., 2005). Development of packaging (to remain competitive) implies making new (parts of) packaging, which is innovating, as Schumpeter defined innovation already at the beginning of the previous century as the making of ‘new combinations’ (Jacobs, 1996). “An innovation is something new that is presented in such a way that the value will be determined by the selectors” (Wijnberg, 2004). The innovation refers to the activity of innovating or to the result of that activity: the innovative product or service (Wijnberg, 2004). This definition of innovation includes commercialisation (Freeman, 1982) of the innovation, but leaves different appearances of innovation out. Tidd et al. (2000) mention two dimensions of innovation: what is changed and the perceived extend of change. Product and service, just as Wijnberg mentioned, are regarded what has changed and Tidd adds process innovation. Process innovation refers to change in the ways in which the product/services are created and delivered. The perceived extent of change is the degree of novelty involved. The degrees are, starting with minor changes, incremental improvements, radical and transformation in the way we think about and use them (Tidd et al., 2000). In chapter 3 the definition of innovation in this research will be framed.

1.4 Scope of the research

This research focuses on the development of innovative packaging by cooperation of the stages of the value system. Above the packaging industry as a whole is mentioned. This industry is too broad to investigate. The industry can be segmented by usage, function and material. This segmentation is based on Geerts (2002), and is given in figure 1.1.

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This research focuses on the marketing & communication function of consumer packaging out of paper and carton board. These can be defined as follows (Geerts, 2002):

Consumer packaging - Packaging of useful amounts of a product for consumers, as these are available in retail. This is also mentioned as primary, or sales packaging.

Marketing & communication - Packaging can provide information on amount, compounding, storage life, weight and if necessary instructions for use.

Packaging has therefore a communication function to the consumer. Besides packaging should express the qualities of the product, because it is the connection between the consumer and the product. Changing demands (for example related to changing demography) to more diverse products have also their impact on packaging.

Paper & carton board - These packaging materials are segmented on the basis of grams per square meter.

Type g/m²

Paper 10-180

Folding carton 180-600

Solid board > 600

Usage

Industrial packaging Transport packaging Consumer packaging

Function Protection Safety Conservation Transport & logistics Marketing & communication

Material

Paper & carton board Synthetic material Metal

Wood Glass

Branch segmentation Research limitation

Consumer packaging

Paper & carton board Marketing & communication

Figure 1.1 Research limitations on the basis of branch segmentation

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Suppliers of (raw) materials

Converters: processing &

printing

Brand owners

Customers (retail, consumer) Designers

Figure 1.2 Value system consumer carton packaging Further corrugated board is distinguished from other carton and paper. Consumer packaging is usually made of paper, folding carton and solid board. Paper and carton combined with synthetic material or aluminium increases uses of the packaging.

Paper and carton board packaging and synthetic material packaging have the biggest market shares in the Dutch industry (Geerts, 2002) and paper and carton board packaging is with this market share of greater importance in The Netherlands relative to other European countries (Geerts, 2002). Because of the importance of this material in the Dutch packaging industry this material is chosen to investigate.

As cooperation within the value system will be investigated it is important to define the different parties involved. The value system refers to the total number of value creating stages (Porter, 1985). A complete value system of the

packaging industry by Geerts (2002) is given in the appendix.

In figure 1.2 a simplified model relevant to this research is given. This model indicates the main parties involved in the value system according to this research. In the first stage the mills are presented, that produce the carton board. This is an important part of the process as it comes to technical

implications of packaging, to improve purposes of packaging.

As this research is limited to the marketing-communication function of packaging, this part of the process seems less relevant and will for this reason not be taken into account.

The converters and designers both operate in order of the brand owner. One might argue that

the designer should be mentioned in an earlier stage, because the designers develop the print.

Nevertheless, the carton has to be developed before the two-dimensional design can be definite. The brand owner is the customer of the packaging industry, who adds value by indicating specific needs, based on market information. Customers of the brand owners are the retailers and in the end, the consumers. In this research we focus on the converter, designer and brand owner. For that reason we define the carton packaging industry here as the industry existing of the converter, designer and brand owner.

Companies may operate in different stages of the value system, especially the first two stages are combined by some large firms. More characteristics on the industry will be given in chapter 3.

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Further this research is limited to the Dutch market, for practical reasons (for example the restricition with regard to duration) and because an attempt will be made to give the partners recommendations, to improve competitiveness (on national and international level) in the end. This implies that partners involved in this research should be located in the Netherlands as well as produce products for the Dutch market.

1.5 Problem statement

To remain competitive in the dynamic packaging industry, continuous innovation is a key success factor. Cooperation might induce innovations, though it is not easy to implement regarding the different parties involved, with each having their own, possibly contradicting, interests. The question that arises is thus how to organize the cooperation process in order to induce innovation? In other words: how to manage the cooperation?

The objective of this research is: Give recommendations to converters, designers and brand owners to strengthen their competitive position in the carton packaging industry.

In this research, we assume that (the ability of) creating innovative packaging is positively related to competitiveness. This assumption will be supported in the theoretical framework of chapter 3. For that reason, the main research question framed is:

How can the partners in the value system of the carton packaging industry cooperate in order to create innovative consumer packaging?

To be able to answer this question, sub questions are framed. The sub questions are framed in order to answer the main research question, as well as to guide the research. The sub research questions are:

1. How does the vertical cooperation process currently take place?

2. What are determinants of successful vertical cooperation to ensure the creation of innovative packaging?

1.6 Outline of this thesis

In the next section the methodology of this research will be discussed, providing how this research has been conducted as well as a justification of proper methods. Then the theoretical framework will be developed in chapter 3, to which the data of the case studies (chapter 5 and 6) will be applied. In chapter 4 an overview of the packaging industry will be provided. In chapter 7 the case studies will be reflected to the theory, providing the recommendations to the packaging industry on innovation management in chapter 8.

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Chapter 2 Methodology

2.1 Research design

Research designs can roughly be classified as exploratory or conclusive. Conclusive research can be split in descriptive and causal research (Malhotra, 2004).

2.1.1 Exploratory research

Malhotra (2004) defines exploratory research as “one type of research design, which has as its primary objective the provision of insights into, and comprehension of, the problem situation confronting the researcher”. The objective of exploratory research is to explore or search through a problem or situation to provide insights and understanding.

The first part of my research has been exploratory. The exploratory research based on secondary as well as primary data, has provided insights in the problems involved in packaging and cooperation and resulted in the research question. The Internet was an important source of secondary data

(www.pakexpert.com, www.top-verpakking.nl, www.nvc.nl, www.packdirect.com, www.vnp- online.nl, www.papierinfo.nl, www.kartoflex.nl, sites of various firms in

packaging/design/consultancy). A visit to the Empack 2005 (trade fair of the packaging industry) in Den Bosch and an interview with Stefan Hermsen of Design Bridge in Amsterdam, provided valuable primary data.

2.1.2 Conclusive research

Malhotra (2004) defines conclusive research as “research designed to assist the decision maker in determining, evaluating, and selecting the best course of action to take in a given situation”. This type of research is more formal and structured than exploratory research. Conclusive research designs may be either descriptive or causal. As the name implies, the major objective of descriptive research is to describe something (Malhotra, 2004). Cooper & Schindler (2003) and Collis & Hussey (2003) mention explanatory study as research that goes beyond descriptive research. Explanatory (or analytical) research is a continuation of descriptive research. In this research design the researcher goes beyond merely describing the characteristics, to analysing and explaining why or how it is happening (Collis & Hussey, 2003).

The second part of my research will be conclusive, as I intend to find out how partners of the value system of the carton packaging industry should cooperate, to induce innovations in carton packaging.

The relationship between cooperation and innovation that is subject of my research and the

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investigation, should lead to the best way to cooperate in order to innovate in this specific industry.

Regarding the above, this is a characteristic of conclusive research and more specific, explanatory research, as it will intend to explain factors influencing innovativeness related to cooperation.

Malhotra (2004) nevertheless mentions that specific hypotheses are tested in conclusive research. In my research no hypotheses are formulated, but open questions are to be answered. In that sense one might say this part of the research also has an explorative character.

2.2 Research method

Blaxter et al. (2001) distinguish three successive levels in the discussion of methods and

methodologies: research families, research approaches and research techniques. They are given in table 2.1.

Research families Research approaches Research techniques - Quantitative or qualitative

- Deskwork or fieldwork

- Action research - Case studies - Experiments - Surveys

- Documents - Interviews - Observation - Questionnaires Table 2.1 Successive levels in discussion of methods and methodologies (Blaxter et al., 2001)

Quantitative research is making a theory operational and measure afterwards by means of variables.

Qualitative research means very careful understanding of the situation of something or someone else (Jonker & Pennink, 2000). In practise qualitative and quantitative forms might not be as distinctive as it might be concluded from the above (Blaxter et al., 2001). This investigation involves qualitative research. The industry analysis will mention some figures, however these serve only to frame understanding of the industry.

The research contains both field- and deskwork. In desk research the Internet is important as a source of information (as mentioned earlier). Besides (scientific) literature on the relevant topics and the industry, it provides useful insights into the problem. Fieldwork contains various (informal) conversations with specialists in the industry and interviews with informants of case studies. This brings us to the research approach, which will be case studies. The choice of case studies is based on three conditions (Yin, 2003):

1. The form of research question is ‘How?’

2. Control of behavioural events is not possible 3. It focuses on contemporary events

These conditions suggest case study research as an optimal strategy (Yin, 2003). In a case study, a researcher tries to illuminate a decision or set of decisions: why they were taken, how they were

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implemented, and with what result (Yin, 2003). Interviews will be used as research technique to gather data (discussed in section 2.5).

The units of analysis in these case studies are two innovative packages (Go-Tan’s Meal Kit and Douwe Egberts’ Caffiato) and the main three parties involved in the development of each of them.

These are the brand owner, the converter and the designer, because they are the main parties involved in the development process of the marketing-communication function in the value system of

packaging. Because two cases are involved, it is a so-called multiple-case study (Yin, 2003).

Theory development is also the level at which the generalization of the case study results will occur.

Yin (2003) distinguishes two levels: level one is the statistical generalization, but more important to case studies are ‘Level Two Inferences’, which is analytic generalization. In this mode of

generalization a previously developed theory is used as a template with which to compare the empirical results of the case study. Replication may be claimed, if two or more cases are shown to support the same theory (Yin, 2003). The level of analytic generalization will be applied to this research.

Figure 2.1 shows the set up of my research as mentioned above, schematically.

Figure 2.1 Research model Exploration

Execution

Elaboration

Realization

Investigation of literature

- innovation - cooperation - management - specialist literature

Conversations with specialists

- Stefan Hermsen, Design Bridge

- ProCarton

Operational definitions Preparation interviews

Conducting interviews

Results interviews

Analysis

Conclusions and recommendations

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2.3 Case study selection

Choice of the Meal Kit and Caffiato as units of analysis in the case study is based on several arguments. First the decision for a multiple-case design is taken because the evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust (Yin, 2003). Further, with regard to how ‘innovation’ is being defined in this research (chapter 3) two cases are chosen in the market place. Both packages are innovative in the product category, as they are distinctive from the other products in the category. The Meal Kit has won awards for the innovative impact (chapter 4). The Caffiato has been introduced very recently (April 2005) and hasn’t won awards so far. This package is innovative as in the coffee category packages are square cartons or packages of other materials, whereas the Caffiato is a carton with round sides. The cases have been introduced recently and therefore the gathered information by interviews will be reliable. If the cases would have been developed a long time ago, the organizations involved would not have exact information anymore.

Both cases are packages for fast moving consumer goods. This improves the internal validity (discussed below), but has consequences for the external validity (discussed below).

Both cases are conform the criteria of this research that they should be new in a certain product category and all parties involved operate in the Dutch market.

2.4 Fundamentals in research

To be able to judge the quality of a research design, Yin (2003) distinguishes four tests which are, among others, also relevant to case studies. In table 2.2 these tests and the tactics for dealing with them are given.

Tests Case Study Tactic Phase of research in which tactic occurs Construct validity - Use multiple sources of evidence

- Establish chain of evidence

- Have key informants review draft case study report

Data collection Data collection Composition

Internal validity - Do pattern-matching - Do explanation-building - Address rival explanations - Use logic models

Data analysis Data analysis Data analysis Data analysis External validity - Use theory in single-case studies

- Use replication logic in multiple-case studies

Research design Research design

Reliability - Use case study protocol - Develop case study database

Data collection Data collection Table 2.2 Case study tactics for four design tests (Yin, 2003)

2.4.1 Construct validity

In construct validity correct operational measures for the concepts being studied are established (Yin, 2003). In this research, the development process of two innovative packages are being studied, with

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regard to the vertical cooperation. It is argued in chapter one why the brand owner, converter and designer are chosen as partners of the value system of the (carton) packaging industry. Two innovative packages are selected, that meet the definition of innovative packaging formulated in chapter 3. As tabel 2.2 shows, use of multiple sources of evidence is a case study tactic to meet construct validity.

For that reason, scientific articles, specialist literature, various sources on the Internet and interviews with informants of seven companies are used as sources of evidence.

2.4.2 Internal validity

Yin (2003) mentions internal validity as a test for “establishing a causal relationship, whereby certain conditions are shown to lead to other conditions, as distinguised from spurious relationships”. As internal validity is a concern for causal and explanatory case studies, it is relevant to this research. It is important to keep in mind that also other factors, next to cooperation, might induce innovation (Yin, 2003). Second, a case study involves an inference every time an event cannot be directly observed.

“An investigator will “infer” that a particular event resulted from some earlier occurrence, based on interview and documentary evidence collected as part of the case study” (Yin, 2003). To anticipate this problem, the case studies involved are recently developed packages. For that reason it is more likely that parties involved in the development process will still remember all relevant parts of the

development. Further, the cases are both developed for fast moving consumer goods in the food industry, which makes it possible to recognize patterns in the development of these more or less similar packages.

2.4.3 External validity

The external validity refers to the question if the results are applicable to the development of

innovative packaging in other product categories, of other materials, or to (incremental) innovations in other industries. The fact that both cases involve fast moving consumer goods, makes it possibly harder to generalize the data beyond the immediate product category. Other products may have other requirements to packaging. In packaging of luxury goods for example higher costs are allowed, because of the higher margins on these products compared to fast moving consumer goods. Although research aims for strengthening the competitive position of the carton packaging industry, we will attempt to generalize the results to incremental innovations.

To improve the external validity, the empirical data will be tested on a theoretical framework.

2.4.4 Reliability

The goal of reliability is to minimize errors and biases in an investigation (Yin, 2003). Yin (2003) mentions the general way of approaching the reliability problem is to make as many steps as

operational as possible and to conduct research as if someone were always looking over your shoulder.

Reliability can be improved by triangulation. In triangulation different sources are combined and

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compared to show the same results (Jonker & Pennink, 2000). In my research triangulation is possible because of the different sources in the exploratory phase, the theoretical framework and the case studies. Data triangulation can also address potential problems of construct validity, because the multiple sources of evidence essentially provide multiple measures of the same phenomenon (Yin, 2003). Every step taken in research will be justified in the thesis.

2.5 Research technique: interview

As mentioned above, the interview will be used as technique to gather data. Cooperation is something between organizations, but more important between people. Interviewing is an useful technique to report and interpret human affairs through the eyes of specific interviewees, and well-informed informants, resulting in important insights into a situation (Yin, 2003). The case studies involve six interviews: of both cases the brand owner, designer and converter will be interviewed. The interviews will be face-to-face, preferably at the firm concerned. In face-to-face interview I can better estimate the situation or environment the interviewee is in, which might be relevant to interpret the data.

The interviewees are informants (as they supply information) because they have been closely involved with the package concerned. They are selected by contacting the persons involved with the package at the brand owners Go-Tan and DE. These persons indicated the relevant informants of the converter and designer. The table below shows the position of the informants and their task in the development of the package that shows their relevance with regard to this research.

Company Position Task with regard to the package Meal Kit

Go-Tan SHC

Brandnew Design

Technical Director Senior Account Manager Senior Designer Project Manager

Technical development of the package, contact SHC Contact with Go-Tan; development 3D-design Designer 2D-design

Contact person Go-Tan, however not yet during development of Meal Kit.

Caffiato DE

Drukkerij de Vries FutureBrand

Brand manager Account Manager Creative Director

Project coordinator Caffiato

Contact person DE, in development of 3D-design

Contactperson DE, in development of 2D-design; co-designer 2D-design

Table 2.3 Informants of this research

Every interview is recorded, to be able to listen more carefully and to be able to use the exact information of the interviewees. The records will be transcribed, except for information that goes beyond the topic of research. The transcription will be given in the appendix of the research. The

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relevant data of the interviews will be presented in the case study descriptions in chapter 5 (Meal Kit) and chapter 6 (Caffiato) and analysed in chapter 7, reflected to the theoretical framework.

The interviews are structured by topic, based on theories related to the topics involved. This makes it easier to interpret the questions by the informants. The structure by topic also improves comparability of the data of both case studies and relating the data to the theory. This improves the analysis of the data in the elaboration phase.

2.6 Data analysis

As mentioned above, the theoretical framework of chapter 3 will be applied on the empirical results of the case studies in chapter 7. The theoretical framework presents how cooperation in the value system in order to innovate could be managed, including a description of all relevant dimensions. This theoretical part will be tested by the data from case studies. As the research involves two case studies, analysis can take place by pattern matching (Yin, 2003). To be more precise in pattern matching, both descriptions will have the same structure. The pattern matching technique can strengthen the internal validity, if the patterns coincide (Yin, 2003).

On the basis of this analysis conclusions will be drawn, to provide recommendations to the carton packaging industry. Further an attempt will be made to generalize the conclusions to (incremental) innovations in general.

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Chapter 3 Theoretical framework: Cooperate to innovate

The objective of this chapter is to develop a theoretical framework in order to be able to analyse the empirical data of chapter 5 and 6. For this reason, this chapter presents an overview of the literature on the core elements of the research question. It should be noted that the sections do not intend to give a comprehensive overview of the literature on the mentioned concepts. The aim is to provide an explanation of the meaning of the concepts in this research. In the end conclusions will be drawn, supported by a conceptual framework.

3.1 Strategy

The aim of the research is to give recommendations to the Dutch carton packaging industry to

strengthen its competitive position. The strategy for this industry to improve its position is innovation.

This concept is also supported by Prahalad (2005), who is one of the most important management advisors of the last 10 years. He mentions strategy as being all about searching for new sources of advantage. “A strategist must continually strive for new advantages. No advantage is sustainable.

Competitors will figure a way of replicating advantages of a firm. In fact, benchmarking best practices is all about this process of replicating the advantages of any one firm in the industry. Continuous innovation is the only source of sustainable advantage” (Prahalad, 2005). In this research vertical cooperation is chosen as a tool to create innovative packaging, as the capability of organizations to co- innovate with other organizations can be of crucial importance in sustaining and strengthening competitive positions in markets (Bossink, 2002; Tidd, 1995; Gómez Arias, 1995). First, in the next section innovation within the context of this research will be defined.

3.2 Defining an innovation

Wijnberg’s definition of innovation presented in chapter 1 -An innovation is something new that is presented in such a way that the value will be determined by the selectors- (Wijnberg, 2004) refers to

‘the selectors’ of the ‘selection system’. The conceptual framework of the selection system seems a useful tool for analysis as it provides a shorthand description of how value is created in competitive processes (Wijnberg, 1994; Mol, 2005). Three different ideal types of selection systems can be distinguished: market selection, peer-selection and expert selection. In market selection fitness is determined by the characteristics of an ‘impersonal’ environment, where selection takes place by consumers/clients. Peer-selection means that the group of selectors and the group of those to be selected are essentially the same. In expert selection, a special evaluative capacity is attributed to a relatively small group of selectors who are not members of the group in which the selection process

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takes place (Wijnberg, 1995). Rival firms compete to create value for the final customers and in doing so hope to become selected by the relevant selectors (Mol et al., 2005). This shows the importance of the selectors on the competitive process.

Most relevant in Wijnberg’s definition is that something new should be determined and for this reason it is perceived newness by the selectors. It might not be something new to other parties in the industry, or other industries. In this research it is something new in a certain product category.

In order to be able to measure innovative packaging, the definition has to be operational. The extend to which the product (the package) has been changed (Tidd et al., 2000) is difficult to make explicit, as it depends on the perception of the selectors, which is subjective (Raaij et al., 1999). In the carton packaging industry, the brand owners are customers, and therefore market selectors of packaging.

Brand owners select packaging on the basis of various requirements of which the marketing- communication function in this context is relevant. This function of packaging aims for stimulating sales of the products of the brand owner by improving market value. Or, as Levitt (1981) mentions:

“packaging is a common tool to make buyers more comfortable and confident about (product) tangibles that can’t be pre-tested.” Packaging should provide reassuring tangible surrogates for what’s promised but can’t be more directly experienced before the sale (Levitt, 1981).

Market value is defined as “the highest price in terms of money which a property will bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus”

(www.landmark-resources.com/glossary.asp). Added value is an economic term that refers to “the difference between the market value of the output and the cost of the inputs to the organisation”

(wps.prenhall.com/wps/media/objects/473/484501/glossary.html). Packaging becomes part of the product in the market place as perceived by consumers and is therefore an aspect that can improve added value of the product, either in reducing costs of packaging or in improving market value of the product.

Brand owners are the market selectors of packaging, based on their expectations of the selection process of the end consumers. Brand owners can in that sense also be noted as expert selectors (Wijnberg, 2004), trying to select the best suitable package for the market selectors of their products (Wijnberg, 2004), which are the end consumers. These end consumers in fact select a product mostly out of a range of products, of which packaging is only a part. Levitt (1986) distinguishes the core product, which are the physical product features, from the augmented product, which are psychosocial and symbolic product features, these come into existence in packaging, promotion and distribution.

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Regarding the above, innovative packaging will in this study be defined as (partly) new packaging in a certain product category of which the value is determined by the brand owner.

This definition enables us to determine whether a package is innovative. The next section will discuss the innovation process in networks, to come to innovative packaging.

3.3 Innovation in networks

An innovation process is essential to develop innovative packaging. Harkema and Browaeys (2001) define innovation as a process wherein knowledge is absorbed, assimilated, shared and used with the aim to create new knowledge. This new knowledge then becomes embodied in new products or services (Harkema & Browaeys, 2001). This definition emphasizes knowledge creation. In this research three firms are involved. Each firm has specific knowledge in the value system. With regard to their definition Harkema and Browaeys (2001) accept Lundvall’s (1992) argument that the most important success parameter in a knowledge economy should be the extent to which knowledge is efficiently created, shared, and transformed.

From a business perspective, networks are “clusters of firms or specialist units co-ordinated by market mechanisms instead of chains of commands” (Miles & Snow, 1992). Hence, based on the definition of Miles and Snow (1992) the vertical cooperation between converter, designer and brand owner can be regarded as a network. It implies an external, vertically aligned network (Gómes Arias, 1995).

Theory developed different approaches to explain networks. As evolutionary theory wants to explain how novelties emerge and diffuse, the knowledge-based approach of evolutionary economics takes factors as learning, individual and collective motivation, mutual trust etcetera into account, that lie beyond the scope of other approaches. Actors in evolutionary models are characterised by incomplete knowledge bases and capabilities. Further, heterogeneity and variety play an important role in the development processes. The third point deals with the time dimension in which learning and the emergence of novelties take place. These processes are by nature truly dynamic, meaning that they occur in historical time, as the mainstream approaches rely on linearity and equilibrium (Pyka, 1999).

Summarized, a network in the knowledge-based approach consists of heterogeneous actors, which have incomplete knowledge bases and capabilities, therefore playing variable roles in a dynamic process in which learning and innovation takes place. This can be applied on our value system, in which the converter, designer and brand owner are heterogeneous actors adding value in the development of packaging by their specific knowledge and competences.

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Innovation requires seeing the world in a new light and acting accordingly. A learning organization is an organization skilled at creating, acquiring and transferring knowledge about markets, products, technologies, and business processes, and at modifying its behaviour to reflect new knowledge and insights (Gómes Arias, 1995; Garvin, 1993). Nooteboom (2000) states that knowledge people have differs, even when they obtain the same data or information. Knowledge construction takes place in interaction with the physical and social environment. It is in interaction with nature and with others, in markets, organizations, and private contexts, that people construct information from data and develop their own knowledge and views of the world. For this reason it is in their mutual interaction that both people and firms learn and contribute to innovation (Nooteboom, 2000). For that reason the network organization form appears ideally suited to the goals of the learning organization, by providing linkages with external learning partners in relationships that facilitate information sharing. Sometimes the most powerful insights come from looking outside one’s immediate environment to gain a new perspective (Gómes Arias, 1995).

In this section, innovation is related to knowledge creation in networks. These knowledge-based networks consist of cognitive diverse firms that have their own knowledge (and view of the world).

They interact to learn and contribute to innovation.

3.4 A knowledge-based network

The previous section discussed the knowledge-based network as a form to innovate by organizational learning. Learning has been distincted in several ways, by various authors. Nooteboom (2000) listed these:

- first- and second-order learning - single-loop and double-loop learning - exploitation and exploration

First-order learning, single-loop learning, and exploitation are learning to do existing things better (more efficiently) and second-order learning, double-loop learning, and exploration are learning to do new things (from a new perspective) (Nooteboom, 2000). Nooteboom (2000) states that “exploitation is required for firms to survive in the short term, and exploration is required to survive in the long term”. This implies that firms must perform both, to survive now as well as in the future (Nooteboom, 2000).

To analyze innovation networks in exploitation or exploration, Nooteboom and Gilsing (2004) employ network features. The features in both networks differ, which is related to the paradox of stability and change in exploitation and exploration:

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- “Exploitation requires the maintenance of existing identity, knowledge, and practices, with a certain amount of control and coordination, in a dominant design” (Nooteboom, 2000).

- “Exploration requires their change, with a loosening of control and coordination” (Nooteboom, 2000).

Table 3.1 summarizes the network features for exploration and exploitation. The dimensions will be discussed extensively below.

Network features exploration exploitation

Strength of ties:

scope wide narrow

specific investment in mutual understanding

high low

trust/mutual openness high generally low

control low high

duration limited often long

frequency of interaction high low

Network structure:

density high low

stability limited high

centrality low Often high

Table 3.1 Networks for exploration and exploitation

Scope

The scope as a dimension of tie strength indicates the range of activities involved in the tie. The uncertainty in exploration is wide ranging and for that reason ties are strong in the dimension of scope.

For the sake of efficiency in exploitation, there is an increase in specialisation that makes that relations entail more specific knowledge on a narrower scope of issues. Applied on the network involved in this research, it involves knowledge required to develop (innovative) packaging. For that reason,

knowledge concerns technical knowledge, market knowledge, knowledge about production processes and reputation of partners. As in exploitation the scope becomes narrower, ties become weaker (Nooteboom & Gilsing, 2004).

Specific investment in mutual understanding

Cognitive distance (explained below) requires more investment in mutual understanding. Larger investments imply stronger ties. In exploration building mutual understanding might require a relation-specific investment. The investments should be worthwhile, requiring frequent interaction and/or a certain duration. Because of the fast changing knowledge in exploration, the economic life of

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the investment is short. This implies that “it should be recouped in a short time” (Nooteboom &

Gilsing, 2004). In exploitation, knowledge is increasingly codified enabling knowledge to diffuse without the need for relation-specific investments of mutual understanding. This enables a less dense structure, as now can be identified what competencies are and will remain relevant, who has those competencies, and who is likely to survive in the industry. Instead, investments shift to large-scale production, distribution systems, and brand name, which are all long-term, and increase in size and economic life (Nooteboom & Gilsing, 2004).

Trust/mutual openness

In exploration, trust is initially competence trust, which establishes a basis for intentional trust. This building up of trust is also a reason for a higher frequency of interaction in exploration. Uncertainty in exploitation is reduced and codified, diffused knowledge on a more narrow range of issues enable the specification of contracts and the monitoring of compliance, entailing a shift from trust to control (Nooteboom & Gilsing, 2004).

Formal control

Networks can vary on a formal control, from formal contractual agreements and loosely coupled informal networks. Formal agreements imply stronger ties. In exploitation, ties have to be strong in formal control . As mentioned above, in exploration trust is high, which requires less formal control.

Further, governance by contract and monitoring is in exploration difficult (Nooteboom & Gilsing, 2004).

Duration & Frequency of interaction

To the extent that the investments take time and are specific, ties need to entail sufficient frequency and/or duration of interaction. While investment, frequency and duration facilitate learning, they also facilitate spill-over. Long duration of a tie may reduce learning potential, particularly if the tie is exclusive, implying that in the areas of collaboration (scope) there are no direct ties with others.

“Optimal duration of ties for learning is long enough to build mutual understanding and trust, but not so long as to run out of steam for learning” (Nooteboom & Gilsing, 2004)Both duration and frequency of interaction strengthen ties. Increased specialisation, reduced scope and reduced need for trust reduce frequency of interaction(Nooteboom & Gilsing, 2004). Nooteboom and Gilsing refer to interaction in the exchange or joint production of new knowledge. For these reasons, in exploitation ties should be fairly strong in duration, and weak in frequency. On the other hand, in exploration ties are weak in duration and strong in frequency (Nooteboom & Gilsing, 2004).

Cognitive diversity

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Cognitive diversity has two dimensions: the number of cognitive frameworks in a network, which we may call variety, and cognitive distances between them. The first is determined by the size and density of the network, which enhance spillover risk. The novelty value of a relation increases with cognitive distance, while mutual understanding (absorbtive capacity) decreases with cognitive distance. In that sense, learning performance from interaction as a mathematical product of novelty value and

understandability can be drawn with an inverse-U shaped relation with cognitive distance (Nooteboom

& Gilsing, 2004). The extent to which people have developed their cognitive structures in different action contexts, will influence the difference in the way they think (perceive, interpret, explain, evaluate) (Nooteboom & Gilsing, 2004). For that reason, we mentioned in the previous section, Nooteboom (2000) states knowledge people (or in a broader sense organizations) have differs, even when they obtain the same data or information. With respect to this, in an innovation network this cognitive distance is a useful tool for the partners in the network to interpret data individually. The interpretations might differ and for that reason lead to innovative solutions in cooperation with the other partners.

Nooteboom and Gilsing (2004) state that in exploration networks are dense. A more stand-alone activity (like the development of packaging) allows for smaller and less dense networks. To exploit, the network should be of low density (Nooteboom & Gilsing, 2004). This requirement is based on the need for efficiency in exploitation, that requires the elimination of redundant ties.

Centrality

Degree centrality arises to the extent that some nodes have more direct ties than other nodes do. An extreme case is a hub-and-spoke structure. Centrality may be useful for the coordination of activities.

Nooteboom and Gilsing (2004) state: “in incremental innovation under systemic conditions, network centrality may be high, for the sake of coordination, to ensure that the different components of the system change in tune with each other”. In radical innovation, with much more uncertainties, centrality is less relevant. This implies low centrality in exploration and high in exploitation networks

(Nooteboom & Gilsing, 2004).

Stability

The stability has implications for how a network develops in time. A stable network substitutes a set of component firms, each tied closely to the core firm by contractual arrangements, but each maintaining its competitive fitness by serving firms outside the network (Miles & Snow, 1992). In dynamic networks, independent firms are linked together for the one-time (or short-term) production of a particular good or service (Miles & Snow, 1992). In exploration network stability is expectd to be generally low, (implying entry and exit), to maintain the variety of cognition needed (indicated above) for exploration. With regard to investments mentioned above, with a long economic life, and to

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maintain efficient division of labour, the network structure in exploitation is likely to be stable (Nooteboom & Gilsing, 2004).

Nooteboom (2000) developed a ‘cycle of discovery’ to resolve the paradox of exploitation and exploration. The basic idea of the cycle is that “new meanings, ideas, and competencies are generated from practice across a variety of contexts” (Nooteboom, 2000). Applied to development of packaging, these ‘contexts’ are cooperations between different partners, in different projects. To explore novelty the present practice must be exhausted and radical innovations need to ‘settle down’ (dominant design, generalization, differentiation, and reciprocation) before they lead up to a next round of novel

combinations. In other words: exploitation and exploration build on each other (Nooteboom, 2000).

Figure 3.1 shows a combination of different cycles developed by Nooteboom (2000). The model shows phases of the innovation process in the squares. These will be elaborated in the next section.

Figure 3.1 Cycle of discovery (Nooteboom, 2000)

The model in figure 3.1 shows the elements of the learning cycle (novel combinations, consolidation, generalization, and reciprocation). The different elements of the cycle show the phases in the development process related to exploitation, and to exploration.

In exploration, novel combinations might set a new dominant design. This is the consolidation, that

‘provides a platform for applications in novel contexts (generalization)’ (Nooteboom, 2000). “In new contexts, the need and opportunity are encountered to adapt the system to local conditions

(differentiation)” (Nooteboom, 2000). Then, in reciprocation practices are compared and improved.

Further, Nooteboom (2000) states that “for novel combinations, relatively disintegrated structures are

Differentiation Reciprocation

Generalization Consolidation novel combinations

opening variety of content

closing variety of content

INERTIA CHAOS

exploration

exploitation DISINTEGRATION

INTEGRATION dominant design

trials

selection hybrids

differentiated products and technologies

novel applications/novel markets

DIFFUSION INNOVATION

efficient production

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at an advantage”. This might be networks, though “it may also entail ‘virtual organizations of loosely coupled, highly autonomous entities” (Nooteboom, 2000).

As mentioned above, exploitation and exploration build on each other, though they are in a certain sense contrasting. To resolve how the partners in the packaging industry should cooperate to come to innovative packaging, the two cases will be analyzed in the next chapters on the basis of the network features shown in table 3.1. The aim is to discover if the networks in practice are oriented towards exploitation or exploration and if they are able to run through the cycle, in order to profit optimally from learning. This will show if the networks “act on the basis of available knowledge and other competencies (exploitation)” (Nooteboom, 2000) or “aquire new knowledge and competencies (exploration)” (Nooteboom, 2000). It implies that real novel combinations (innovations) come from exploration. For that reason, exploration is essential with regard to innovation in networks in the packaging industry.

3.5 Cooperation & innovation process

The previous section already mentioned some stages of the innovation process in figure 3.1. The innovation process within a network involves two processes: a cooperation process and an innovation process. Both processes will be described below.

3.5.1 Cooperation process

Marxt and Link (2002) put the cooperation process in a model, which is given in figure 3.2.

Figure 3.2 The cooperation process (Marxt &Link, 2002)

Marxt and Link (2002) mention the make or buy decision as the main goal of the first step, the initiation phase. Related to this, Bossink (2002) calls this stage the autonomous strategy making. In this stage all parties make their own plans and consider various options, also with regard to

opportunity costs, as mentioned in the previous section. However, the motives for entering into a

Initiation

Partner selection Set-up

Realisation

Relaunch Termination

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relationship must be positive (to pursue opportunities), suggests Gómes Arias (1995) for successful interfirm networking. Motives may come forth from market research. With regard to the mental models we mentioned earlier, in a knowledge-based network it is important that all parties conduct market research. Because of their mental model, the interpretations of the partners might be different, as I mentioned earlier that Nooteboom (2000) stated that knowledge people have differs, even when they obtain the same data or information.

The second step concerns partner selection, which comes after defining individual objectives. Besides the firms’ technological capacities, it is a question of strategic and cultural fit (Marxt & Link, 2002).

Boissink (2002) has a broader approach as he mentions this stage to be the cooperative strategy making. Partner selection takes place in four steps (Marxt & Link, 2002):

1. Establishing the requirement profile 2. Searching the partner

3. Selection of the partner according to the established profile 4. Acquisition and persuasion of the partner

Now the different partners joined the network, the third step (set-up) is characterised by discussing project goals, the financing, the definition of the risk and reward sharing, the right of using for further applications. Afterwards the project goals need to be defined clearly. The result of the set-up might be a (formal) contract (Marxt & Link, 2002). Contracts are used to secure a basic level of agreement (Boissink, 2002).

The realization phase concerns the development of innovations and corresponds to ‘common’ project management (Marxt & Link, 2002). We will discuss this stage more in-depth by describing the innovation process below. According to the cooperation model, after realisation of the innovation, the network can either continue to cooperate in other projects or terminate the cooperation. As mentioned in section 3.4 a continuation of the network (increase in duration) implies stronger ties, with its consequences on learning.

3.5.2 Innovation process

Though this research focuses on cooperation, a description of the innovation process is useful to fully understand the cooperation process that should result in innovative packaging.

Innovation models have been designed since the 1950s and developed in five generations from a technology push model, to a recent (post-1990) systems integration and networking model (Rothwell, 1993). Until the third generation, the models were sequential, although in the third generation models feedback loops were integrated. From the fourth generation model on, the innovation process becomes

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parallel, where the fifth generation model makes use of ICT systems (Siedlok, 2002). I apply the fourth generation model here, as the fifth generation model is basically a development of the fourth generation process towards ‘system integration and networking’ leading to greater speed and efficiency of the process (Siedlok, 2002). This implies no differences in the model itself.

The fourth generation model is characterised by two main features:

- Integration of suppliers into early stages of product development

- Parallel development in-house.

Instead of sequentially passing the project from one department to another, all teams work at the same time on the project (Siedlok, 2002).

Keeping this modern approach in mind, a more descriptive model of the process is needed to apply on this research. The stages of the innovation process are in this research derived

from Cooper (1983), and overlap partly with the phases of the innovation process in figure 3.1:

Full description of the activities in the different stages is given in appendix 2.

“According to some authors, innovation processes are not rational and ordered, but to a large extent better described by chaos” (Biemans, 1992). Although a certain level of chaos may be useful as a catalyst for the creation of innovative solutions, chaos can be controlled to a certain extent (Biemans, 1992). Biemans (1992) introduces the five C’s for innovation management, given in figure 3.3.

Figure 3.3 The five C’s of innovation management (Biemans, 1992)

idea preliminary assessment concept development testing trial launch

Industrial trends

Cooperation between parties

Coordination of activities

Communication between people

C r e a t i v i t y

Level of chaos

Expected value of innovation

success

Figure 3.2 Fourth generation innovation model (Siedlok, 2002)

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The cooperation, coordination, and communication are key elements in successfully developing innovations through reduction of the level of chaos, according to Biemans (1992). A reduced level of chaos serves to increase the expected value of innovation success at a project level. Creativity serves as a critical intermediary variable. Successful innovations do not come from routine, detailed procedures, schedules, and measures. Instead, a firm should strive to enhance its competitive advantage by applying creative management to devise innovative solutions (Biemans, 1992).

The above developed innovation process applies to the realisation phase of the cooperation model (figure 3.2).

3.6 Conclusions & conceptual framework

This chapter provided the theoretical framework in order to answer the sub research question:

What are determinants of successful vertical cooperation to ensure the creation of innovative packaging?

Innovation has been mentioned as the only source of sustainable advantage. This research aims for innovating packaging that is (partly) new in a certain product category, and that is determined by the brand owner. This can be achieved by vertical cooperation. It has been discussed that innovating is a process wherein knowledge is absorbed, assimilated, shared and used with the aim to create new knowledge. In vertical cooperation in a knowledge-based network, the converter, designer, and brand owner are the heterogenous actors who create knowledge in order to innovate.

This (innovation) process is learning by exploitation and exploration, building on each other. The network is characterised by different features in exploitation and exploration, and however they build on each other, they are in a certain sense also contrasting. Both exploitation and exploration are important to run trough the cycle of innovation, to survive now as well as in the future. The network features are important to discuss the ability of the network to manage the whole cycle.

The cooperation in the network has been divided in four stages. These stages are: (autonomous) strategy making, and related to this and the innovation process market research; partner selection;

defining project goals; and the innovation process. The modern approach of the innovation process is characterised by integration of suppliers into early stages. Further, innovation is the result of chaos. To increase the expected value of the innovation, this chaos can be managed by cooperation, coordination and communication.

With regard to the above, the first research question is answerd. Vertical cooperation occurs in knowledge-based networks, that are successful when brand owners determined the value of (partly)

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new packaging in a certain product category. The determinants of the network and the cooperation are summarized in the conceptual framework.

Figure 3.5 The conceptual framework of this research Network features

Scope

Specific investments Trust/openness Control Duration

Frequency of interaction Density

Centrality Stability

Innovative packaging

Cooperation process (autonomous) strategy making Market research

Partner selection Defining project goals Innovation process:

Integration of suppliers into early stages Management of chaos: cooperation, coordination, communication

Competitiveness Cycle of discovery

Exploitation and exploration building on each other

Writing is an exploration. You start from nothing and learn as you go.

INNOVATION BY INTERACTION