Co -innovation for sustainable competitive advantage: Reasons to be cheerful or just a touch of harmony hairspray?

1. Co-innovation for sustainable competitive advantage:Reasons to be cheerful or just a touch of harmony hairspray? Andrew Fearne Kent Business School, University of Kent (a.fearne@kent.ac.uk)

2. Overview • Sustainable competitive advantage • Co-innovation • Prospecting for opportunities • Conclusions • Further information

3. Sustainable Competitive Advantage?

4. Sustainable competitive advantage? Consumer Value (perceived benefits at acceptable prices) ? ? Innovation Excellence Service Excellence Asset Utilisation (Yours) Asset Utilisation (Competitors) Cost differential ? Operational Excellence

5. Sustainable competitive advantage? • Allocation and utilisation of resources in a manner that is hard to contest and even harder to replicate • Add more value • Segmentation (process effectiveness) • At lower cost • Adopt principles of ‘lean thinking’ (process efficiency) • Faster than the competition • Compress cycle time for agility (responsiveness) • Responsibly • CSR (multiple stakeholder perspectives) Individual businesses cannot achieve this by themselves

6. Supply chain collaboration “The integration of key business processes from end user through original suppliers that provides products, services and information that add value for customers” (Global Supply Chain Forum*, 2002) *Ohio State University: 3M, Cemex-Mexico, Coca-Cola USA, Colgate Palmolive Company, FletcherChallenge, Ford Motor Company, Hewlett Packard, International Paper, Limited Logistics Services, Lucent Technologies, Maersk Sealand, Taylor Made-adidas Golf Company, Wendy’s International Inc., Whirlpool Corporation

7. Supply Chain Collaboration: Integrating and Managing Processes Across the Supply Chain Information Flow Tier 2 Supplier Tier 1 Supplier Customer Consumer/ End-user Purchasing PRODUCTION FLOW Production R & D Marketing & Sales Finance Logistics Manufacturer CUSTOMER RELATIONSHIP MANAGEMENT DEMAND MANAGEMENT ORDER FULFILLMENT Supply Chain Business Processes MANUFACTURING FLOW MANAGEMENT SUPPLIER RELATIONSHIP MANAGEMENT PRODUCT DEVELOPMENT AND COMMERCIALISATION Source: Adapted from Douglas M Lambert, Martha C Cooper and Janus D Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol 9, No 2 (1998) p2

8. Co-innovation

9. What is co-innovation? • Innovation involving the participation of multiple businesses in a value chain, the purpose of which is to improve the sustainable competitiveness of the value chain as a whole and the co-innovating members thereof • Innovation at the interfaces in the value chain is much more difficult for others to copy

10. Co-innovation - how do we do it? • Need to think out of the box, beyond the four walls and embrace change with relish • Vertically co-ordinated responses to an increasingly dynamic and uncertain market, regulatory and technological environment • Development of new (value added) products/services for distinct customers and targetted consumer segments • What we do = output • Process improvement for existing products/services beyond organisational boundaries • How we do it = input

11. Types of Inter-company Business Process Links Tier 3 to n suppliers Initial Suppliers Tier 1 Suppliers Tier 1 Customers Tier 2 Customers Tier 3 to Consumers/ End-Customers Tier 3 to Initial Suppliers Tier 2 Suppliers 1 1 2 2 n n 1 1 1 n 1 2 2 Consumer/End-Customers 1 n 3 2 n Tier 3 to n customers 1 1 3 2 n n 3 n 1 1 n n Focal Company Members of the Focal Company’s Supply Chain Non-Members of the Focal Company’s Supply Chain Managed Process Links Monitor Process Links Not-Managed Process Links Non-Member Process Links Source: Adapted from Douglas M Lambert, Martha C Cooper and Janus D Pagh, “Supply Chain Management: Implementation Issues and Research Opportunities”, The International Journal of Logistics Management, Vol 9, No 2 (1998) p7

12. Co-innovation - fundamental enablers • Consumer focus • Collective responsibility • Value chain visibility • Information flow • Relationships • Inter-personal and inter-organisational • Alignment of (scarce) resources with final demand • Process integration

13. Value chain visibility

14. Relationships • Communication • Strategic & Operational • Trust • Integrity & Capability • Commitment • Resource allocation • Inter-dependence • Power & Control

15. Product & serviceInnovation Process Innovation R&D NPD Structures & Processes Ability Continuous Improvement Motivation Learning Resources Learning Compatible structures & processes Mutual benefits Open communication Co-innovation Shared vision Learning Partner Partner Partner Co-Innovation Roadmap (Bonney et al, 2007) Vision Culture Leadership Learning Trust and commitment

16. Consumer Focus - Prospecting for opportunities

17. What do you need to know? • Two key questions • What opportunities exist for market/product development? • Increase penetration (new consumers)? • Increase purchase frequency (existing consumers)? • How should I target my marketing effort? • Who buys (is likely to buy) my (new) product? • What promotional mechanism(s) should I use? • What communication strategy is appropriate?

18. How do you find the answers? • Two golden rules • Don’t prospect alone • You will miss some gems • What you find may not be as valuable as you think • Having the insight is not the key it’s what you do with it that counts • Be proactive (don’t expect someone else to do it for you) • Who stands to benefit the most from consumer insight? • You have a product range and a dozen products on which your profitability rests… and you have been doing `it for years • Your retail buyers are responsible for dozens of product lines and hundreds of SKUs… and have been doing it for months!

19. Quick example – Local Choice Milk • Regional sourcing • Tesco working collaboratively with farmers and small food producers in response to growing consumer demand for local/regional food • dunnhumby Academy of Consumer Research • providing consumer insight to farmers and small food producers • no more excuses for ‘driving blind’ • greater probability of developing sustainable competitive advantage • creation of a common language for doing business with Tesco

20. The dunnhumby data • Representative panel of 1.2 million supermarket shoppers • 10% sample of 12m households (40% of UK total) • Weekly purchases • Over 30,000 food products • Up to two years of data • Segmented by lifestage, lifestyle and region

21. Key measures – liquid milk 84 SKUs introduced in May 07 across 12 regions in a mature and crowded category with a 10% price premium capturing 4% market share

22. Who buys local choice milk?

23. Fresh milk has strong family appeal

24. Local choice milk has strongest appeal amongst young families but struggles to attract young adults

25. Fresh milk appeals to everyone apart from ‘finer food’ and ‘healthy’ shoppers

26. Local choice milk has strongest appeal amongst ‘finer food’ and ‘healthy’ shoppers

27. Fresh milk has nationwide appeal

28. Local choice milk appeals particularly to shoppers in the South West and Wales

29. Quick example – Local Choice Milk • This initiative would not work without Tesco’s willingness to bend the ‘rules’ of retail distribution • working with large numbers of small producers • increasing fresh milk SKUs by over 30% • The opportunity could not be fully exploited without the use of consumer insight • justify the price premium • differentiate the value proposition (or communication thereof)

30. Conclusions • Opportunities abound in increasingly fragmenting markets • Provenance, environment, health & well-being, fair-trade indulgence… • Need much better understanding of who buys what and why in support of targeted market segmentation • The more scarce the resources the more important it is to target them • Cannot afford to ‘hit and hope’

31. Conclusions • Sustainable competitive advantage requires fundamental changes to industry structure and business capability • leaders with strategic vision who understand the drivers for change and embrace the principles of co-innovation within and between organisations • alignment of scarce resources with the needs & wants of targeted consumer segments in distinct value chains • efficient and effective flow of information to all stakeholders who have the capacity to exploit it • integration ofkey business processes with key customers and key suppliers

32. Conclusions • Reasons to be cheerful or just a touch of harmony hairspray? • the choice is yours!

33. Thank you!