CONVERGENCE How to Select Promising Project Ideas in Converging Industries Since the early 1990s, the nutraceutical and functional food (NFF) sector has been emerging as a separate entity at the boundaries of the pharmaceutical and food industries.1 This up-and-coming segment offers room for a variety of products derived from different industries that can be positioned between food and drugs (Figure 1). The chances of successful market introduction of New Product Developments (NPDs) are high, but also require a specific skill set of competencies from both industries. Companies aiming at the hybrid sector between food and drugs face competency gaps.2 The owners of particular competencies, thus different industries, need to share their abilities and knowledge to develop promising products. Already at the front end of innovation (FEI), these companies need to look for partners with complementary competencies. Owing to a lack of competencies in either market or the disciplines of technology development, the entire 22 P H A R M A / N B T S U P P L E M E N T | 2 0 1 3 NPD process in these converging industries becomes risky and requires input from different players. Pharmaceutical producers tend to build their innovation strategy based on technology oriented innovations in the absence of any experience in retail and the distribution of Fast Moving Consumer Goods (FMCGs). By contrast, food companies have a huge competency in generating consumer insights and, as such, act in a much more market-oriented way. Currently, they face a knowledge gap regarding how to run gold standard clinical trials conducted with healthy patients, as required by EFSA (Table I).2,4 Given these challenges, which are specific to pharmaceutical/ NFF industry convergence, a careful evaluation of innovation projects becomes especially important and crucial for new product success. Manufacturers of health-promoting consumer goods need to examine the requirements for product positioning and market approval for such The precondition for market success in hybrid innovations lies within the capability to combine critical knowledge areas, from consumer insights to gold standard clinical trials. CONVERGENCE Table I: The different competencies of players in the NFF sector.5 Industry Food Strategy Feasibility Pharmaceutical R&D Intensity Low (<1% of sales) High (>14%) R&D Cycles Short (1–3 years) Long (10–20 years) IP Strategies Trademarks, consumer brands Patents (preferably on the product/compound) New Technologies Traditionally external sourcing, no own development skills Foster internal development of technologies Market Insights Consumer market (B2C) Industrial clients (B2B) Access to Distribution Channels Mass-market distribution via retail chains B2B wholesalers, pharmacies, nutritional specialty stores Communication End-consumer-oriented Science, industrial partneroriented Regulatory Approval Processes Little or no skills Own regulatory approval and business functions Familiarity with Safety and Efficacy Testing No experience in clinical product evaluation Long-term experience with clinical trials via CROs or own facilities innovations positioned in the emerging NFF sector. When talking about functional food (FF) ingredients, these not only have to fit into the food matrix, but also into the overall brand and positioning needs of the product. This paper aims to identify the most important selection criteria, which could help to screen project ideas regarding their organizational and environmental feasibility and identify any lack of competencies. This will then enable companies to preselect project ideas regarding their requirements. Managing the Innovation Challenge Successful NPD in converging 24 P H A R M A / N B T S U P P L E M E N T | 2 0 1 3 industries requires the companies involved to adapt industry specific innovation systems and evaluate criteria to identify and account for competency gaps. The precondition for the market success of these hybrid innovations lies within the capability to combine critical knowledge areas, from consumer insights to gold standard clinical trials in the case of an innovation project involving a health claim application under EC 1924/2006.6 There are different approaches to innovation among the different players, all of which have distinctive competence profiles. Evaluating Project Ideas in the NFF Sector In the following section, we summarize the most important criteria to evaluate the likelihood of market success of projects in the hybrid sector between food and drugs. These criteria are grouped together in five categories: strategy, market, technology, regulatory and finance (see Table II). The criteria give an overview of the necessary evaluation fields for both pharmaceutical and/or consumer goods companies as they help to identify competency gaps in the early stages of innovation. As a result of this analysis, the company Table II: Selection criteria to evaluate innovation projects in converging industries.5 Strategy Feasibility 1 Core Competencies Does the project fit the business’ strategy and competencies? 2 Health Platforms Does the project fit the targeted and predefined health platforms? 3 Availability a) Is the required technology available? b) Is the required market available? Market Need/ Consumer a) Is the targeted health issue of relevance for the consumer? b) Is there an immediate need of action (because of pain and/or constrictions)? c) Is it possible to generate a need? d) Does the consumer accept the health ingredient? e) Does the consumer understand the health benefit? 2 Market Size a) What is the size of the market for the targeted health issue? b) How many people are suffering from an issue that the Ingredient targets? 3 Growth Rate How do you evaluate the growth rate of the segment that the ingredient targets? 4 Speed-to-Market How much consumer education is necessary? 5 Market Access a) How much experience with target markets, distribution channels and target groups do you have? b) How huge is the readiness of the retail to adopt and list the product? 6 Differentiator How would you evaluate the unique selling proposition (USP)? 7 Rivalry How powerful is the competition? 8 Pricing How do you evaluate the pricing of the product in comparison with competitve products? 9 Sustainability Do we have access to a sustainable raw material supply? 10 Quality Can the supplier offer a constant raw material quality? 11 Number of Suppliers How many suppliers can offer the raw material? 1 Market Attractiveness Market Competition Sourcing PHARMA/NBT SUPPLEMENT | 2013 25 CONVERGENCE Table II: Selection criteria to evaluate innovation projects in converging industries.5 Alignment With Existing Resources a) How do you evaluate the probability of success in relation to existing technical know-how and project complexity? b) How big is the need to integrate external technological knowledge? c) How good does the project fit with existing human resource skills? d) Is the intention to develop x) in-house or xi) in partnerships? if x) Do we have technology and know how? if xi) Do we have experience with the partners or do we need new ones? 2 Speed-To-Market a) How complex is the transformation of the concept into a useful product? b) How long is the development time until proof of principles and scale-up? 3 Flexibility 1 Feasibility in Manufacturing Technology Technical Attractiveness a) Versatility of the ingredient? b) Possibilities to enter other markets? 4 IP-Protection a) Is the use, species, application or process novel? b) Is there an opportunity to achieve protection from any type? c) Do we have a competitive advantage because of the technique? 1 Speed-To-Market How do you evaluate the time until the product gets regulatory approved? 2 Market Approval Does the product pass all challenges for a necessary market approval? 3 Health Claims Does a Claim already exist? If yes: does it offer a USP? If no: possibility of regulatory approval of health claims? 4 Clinical Trials Availability of published clinical data? If yes, do the studies comply to gold standard? Do they show efficacy? 5 Competitors Do competitors have claims for this indication in place? 1 Time-To-Market 2 Break-Even-Point 3 NPV 4 ROI 5 Development Costs Market-ability Regulatory Claims Finance 26 P H A R M A / N B T S U P P L E M E N T | 2 0 1 3 CONVERGENCE Figure 1: The emerging NFF-sector between foods and drugs.3 can work on “closing the gaps.” Thus, the identified criteria may serve as a basis for the development of a company specific scorecard, which enables the company to rank possible innovation projects based on how well the project fits within the relevant categories. Degrees of Innovation As projects differ in their degree of innovation (radical versus incremental), the process of decision making cannot be standardized.3 Therefore, the selection process should be flexible to account for the individual type of project. Any technological and/or market uncertainty will certainly influence the decision making. Innovations are more risky in dynamic and uncertain markets or in projects that require new technologies. New technologies and uncertain markets, by contrast, offer the opportunity to achieve technology or market uniqueness.7 Both factors are of particular importance in emerging industries such as the NFF sector, as these segments most notably face competency gaps during innovation management. This leads to the fact 28 P H A R M A / N B T S U P P L E M E N T | 2 0 1 3 that a distinction between high- and low-risk projects should be made, combined with a similar mindset regarding long- and short-time projects: whereas the short-term projects solve existing needs, the long-term projects are based upon basic research. Projects that are linked to more time input and the build-up of new technology platforms can be characterized as projects with a high degree of innovation.8 By contrast, the anticipated time until these projects generate revenues is much longer.9 The higher the degree of product innovation in the emerging NFF sector, the higher the likelihood that neither the food nor the pharmaceutical company will bring sufficient competencies to face the challenge of the innovation project. In this case, consumer integration — through open innovation, for example — might help to specify end-user needs.10 Generally, an early competency gap analysis helps to focus the search for appropriate partners in either technology intense or marketoriented companies, depending on the industry background of the source organization. References 1. N.M. Childs, P. Lachance and L. Meagher, “Advancing Nutraceuticals Opportunities: Priorities for Research,” Journal of Nutraceuticals, Functional & Medical Foods 2(3), 85–103 (2000). 2. H. Harmsen and B. Jensen, “Identifying the Determinants of Value Creation in the Market: A Competence-Based Approach,” Journal of Business Research 57, 533–547 (2004). 3. S. Bröring, The Front End of Innovation in Converging Industries. The Case of Nutraceuticals and Functional Foods (Deutscher Universitäts Verlag, Springer Fachmedien, Wiesbaden, Germany, 2005). 4. F. Fai and N. von Tunzelmann, “IndustrySpecific Competencies and Converging Technological Systems: Evidence from Patents,” Structural Change and Economic Dynamics 12(2), 141–170 (2001). 5. S. Bröring, “Innovation Strategies for Functional Foods and Supplements — Challenges of the Positioning Between Foods and Drugs,” Food Science and Technology Bulletin: Functional Foods 7(8), 111–123 (2010). 6. European Union (30.12.2006): Regulation (EC) No. 1924/2006 of the European Parliament and the Council. Available online at http://eur-lex.europa.eu/ LexUriServ/LexUriServ.do?uri=OJ:L:20 06:404:0009:0025:EN:PDF, checked on 15.04.2013. 7. C. Mark-Herbert, “Innovation of a New Product Category — Functional Foods,” Technovation 24(9), 713–719 (2004). 8. C. Herstatt and B. Verworn, “The “Fuzzy Front End” of Innovation,” Working Paper No. 4: www.tuhh.de/tim/downloads/ arbeitspapiere/Arbeitspapier_4.pdf (2001). 9. D. Herath, et al., “Firm, Market and Regulatory Factors Influencing Innovation and Commercialization in Canada’s Functional Food and Nutraceutical Sector,” Agribusiness 24(2), 207–230 (2008). 10.M. Martinez Garcia, Ed., Open Innovation in the Food and Beverage Industry (Woodhead Publishing Ltd, Cambridge, UK, 2013). For more information Stefanie Bröring and Christina Mintgen University of Applied Sciences Osnabrück Fakultät Agrarwissenschaften und Landschaftsarchitektur Oldenburger Landstr. 62 D-49090 Osnabrück, Germany Tel. +49 541 969 5271 [email protected] www.chainnovation.de