What is open innovation and why does it matter to you?

March 29, 2016, 9:13 am

How much do you know about open innovation?

In this expert Q & A Dr Kevin McFarthing, explains why it’s all about collaboration and trust

Q: What is open innovation?

A: Open innovation is about partnering and collaboration. It works in two ways: in bound innovation and out bound. Open innovation describes the process of bringing new capabilities and technical expertise into a company (in bound) but also sharing the businesses’ existing capabilities externally, for example through licensing (out bound).

In food and drink most large companies will be looking to bring ideas IN to the company and it’s less common to be doing the outbound work (this is more common in sectors like IT or telecoms.)

The classic food and drink model of open innovation is a large business, for example Nestle or Unilever looking to collaborate with smaller companies. It is usually the larger company that uses the fruits of the partnership initially, with the small partner getting a licensing fee or royalty, or a supply contract.

Q: How did it begin?

A: Even though the principles were not new, the term was coined in 2003. It took off in companies like Procter & Gamble (P&G) where the CEO, AG Lafley, wanted to boost the flow of innovation. He wanted at least 50% of ideas to come from outside the company. Since then other firms have taken a similar approach. Unilever for example now wants at least 70% of ideas to be influenced from outside, and P&G has upped its target.

Q: Can you share an example of open innovation in the food and drink sector?

A: Soda-lo is an interesting one. It was originally developed in a collaboration between Tate & Lyle and Eminate (a subsidiary of the University of Nottingham) and is now sold as a component ingredient for other companies to use.

As a general example of where it is working well, Nestle runs a programme with its suppliers called ‘Sharing is Winning’ which is all about working in a collaborative way to use the competence that the suppliers have, combined with Nestle’s understanding of the consumer, to optimise innovation. This works because the suppliers generally know more about the technical aspects of food production, for example about individual ingredients – gelling agents, modifiers, and so on. Then it is the customer, in this case Nestle, which has the best knowledge of what the consumer wants, the appeal of the product and how to optimise it. When you put those complementary skills together you get something greater than the sum of the parts. And it works best when both sides have the trust in the relationship so they are more open to sharing knowledge and skills.

Many companies are moving away from the classic transactional method of innovation (which is not completely dead) instead building longer term partnerships based on understanding a strategy and a consumer need.

Q: What are the potential pitfalls?

A: Intellectual property is one of the big areas where there can be challenges. Companies who are very good at this make sure the division on the IP is understood right at the start. When it comes to supplier relationships the tension to look out for is that they don’t want to be tied to just one company – so you have to be very clear early on about what you give to who and when.

What can work well is agreeing short-term exclusive supply to the company you have developed the product or process with then, after that exclusive period, the supplier can sell it on to others.

Q: What are main factors for success in open innovation?

A: Trust is the big one. It can take a long time to establish trust – and this can vary from country to country, so there are cultural aspects to consider too.

Trust can break down if one or other partner fails to deliver. This is tricky, because when you’re dealing with innovation things can fail – but it may not necessarily be anybody’s fault. Innovation is, by definition, new: so things are not guaranteed to work. And just because something doesn’t work doesn’t necessarily mean that it was done badly.

We talk about ‘competent failure’: this is when you do everything right and very good work is generated, but then you have either a technical or a business failure which is not down to incompetence on either side. You have to understand that dynamic because if you’re failing to deliver because the partner is not doing things right then you have to close the relationship – but if you think they’re doing everything right then you will want to build on that partnership.

Q: Who is practising open innovation with most success?

A: Unilever, Nestle, Kraft, Mondelez and General Mills all have very good structures and processes in place to make it happen.

Nearly all the retailers get much of their innovation from their suppliers: it’s a slightly different balance of power from the usual way things work. Generally, in other areas, you find that it is the retailers who are in control. But, the more retailers share their data and consumer insights with their suppliers, the better everyone will be able to deliver to the consumer’s demand.

Q: What skills do people need if they’re going to be successful at open innovation?

There’s the functional stuff like having a basic understanding of the legal side: when to sign a non-disclosure agreement, for example.

But then there are all the other very important competencies, around managing relationships, communication, negotiation and so on.

At Unilever people are trained in what’s known as the ‘seven soft skills for open innovation’. These include relationship building; tolerance for uncertainty; passion and balanced optimism, and strategic influencing.

A lot of businesses appoint what are called ‘T shaped’ people to open innovation roles. It’s about having broad experience but with depth in a particular area. People that are successful tend to have the nous – and judgement and experience – to understand innovation and relationships. They are also, typically, very well connected within their own companies, able to interact across different disciplines. 

Q: Do you agree with the notion that innovation is everyone’s job in a business?

No, I don’t believe that. Innovation is the introduction of new products and processes that add value and top line growth to the organisation. If you say that everybody can do it you lose focus on driving this forward.

But this isn’t the same as having an improvement culture in which everybody needs to find better ways of doing their jobs. Absolutely, I agree with that – but that’s different from saying that everybody is responsible for innovation.

And yes, everyone should have ideas, but that’s about creativity. An idea only becomes innovation when it’s been activated and is contributing to growth. An idea is not an innovation.


Dr Kevin McFarthing leads Innovation Fixer, a company set up to aid innovation management and open innovation. His experience spans life sciences, pharma and FMCG.


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