Product Development and Enhancement Through Value Chains

Research and innovation in relation to value chains encompass, though are not limited to, food product development and enhancement; the utilization of waste streams; market analysis and consumer behaviour; the increased demand for, and extraction of, high value functional ingredients; traceability technologies; and quality & safety assured supply chains.

The definition of 'value chain management' is the purposeful action of businesses operating along the value chain to utilize their combined resources and capabilities to achieve commercial outcomes that would be unattainable if acting in isolation. Innovation is recognized as one of the most important contributors to economic growth. Co-innovation occurs when multiple sets of individuals (businesses) situated along the value chain are able to conduct and implement leading edge innovations through possessing the ability to share information, learn and create new knowledge from that information, then act upon it in unison or systematically at multiple levels of the chain.

1.2 Theme Description

The product development through the value chain theme focuses on the philosophy and strategy for encouraging and managing value chains with an emphasis on developing products through a consumer pull process.

1.3 Content Components of the Theme

Value Chains are not only about product development. Process improvements are an important area related to overall productivity, profitability, innovation, as well as sustainability, and are all important areas for future research.
Value Chains do not need to be formal, with contracts - organizations can just "do it".

It is important to have clarity and structure between partners regarding organization and governance. For example, who is responsible for what, how will success be measured and shared, etc.
There must be mutuality in the decision making process for trust and open communication to be maintained.
For many organizations, the more formal an arrangement is, the less certain it is that organizations will want to participate.
The product development process within a value chain may more easily be overcome by addressing barriers, such as:

2.0 Context and Background for this Theme

2.1 Context and Background

Product development and value chain research are complementary to each other, but the two areas are not always connected. Much research could be done on Value Chains related to effectiveness and efficiency that are unrelated to product development. Conversely, the overall process of product development and enhancement, and the processes of individual members of the chain, could be vastly improved without necessarily having a new product as the immediate result.

Research need to be more closely aligned with industry, which will enable businesses along the value chain to adapt to market (consumer) demands more than is currently the case. Product developers and the scientific community need to connect much earlier in the process, enabling a more proactive than reactive research culture. The current method for research should be inverted, "industry to involve researchers early in the innovation process. Industry leads…researchers support", with the exception of basic research.

Stronger links between research and industry within a value chain would also bridge current information and communication gaps between the scientific and commercial sectors.

The goal of the research and innovation process must be to create a more successful and profitable agri-food industry in Ontario. Achieving t his requires a conscious acknowledgement of the following: The capacity for agriculture and agri-food to innovate in accordance with market opportunities stems from management capability, as well as workforce training and education. However, this capability is often the resource most lacking in the development and sustainability of successful, closely-aligned value chains, which are able to continually adapt to consumer demands and customer requirements through innovations in process, product and service. This has become a major factor on the processing end - in fact it is at a critical stage affecting the competitiveness of the industry.

Well functioning value chains can provide a means to this end;
Research goals need to be explicit and more closely linked to business;
Agri-food must be in relationship with additional sectors (health, environment, etc) to take full advantage of opportunities.

2.2 Key Assumptions

The goal of all research should ultimately lead to the improved competitiveness of agri-food in Ontario, partly through recognizing the increased influence of value chain business approaches on international competitiveness.
Many value chains are already "there and working".
All product development does not need to create something entirely novel; product enhancements or evolutions are also successful and profitable.
By nature, value chains are specific but we need research to pull out best practice principles that apply to the many, rather than to the specific [such as varieties of soybeans developed and grown for individual target customers]?
In developing a value chain, the earlier in the process producers are involved in the business decision making process the better. Incentives and leadership at an early stage will reduce adversity in a working relationship.
While value chains are useful tools for improving competitiveness, they are not panaceas and cannot provide answers for every problem.

2.3 Trends

Consumer Segmentation

Most fundamental is that consumer segmentation is occurring, and each consumer segment often seeks products with specific attributes. This is the motivation for product development and enhancement. In addition, it is often a motivation for value chains because there is often a need to supply, and preserve the identity, of specific attributes through the chain.

That value chain related research lies at the forefront of international business and management research was not opposed by the Panel. However, there exists some disagreement in what exactly a value chain should look like or how it should be described. One Expert Panel member expressed, "I like the word co-innovation more than value chains."

Ontario suppliers need to anticipate and respond to preferences of consumer segments more effectively than in the past. To do so, a consumer pull attitude needs to develop.

Need for a commercial environment free from "interference"

Value chain alliances require the creation of a commercial environment in which collaborative partnerships can form and prosper without interference from external non-value-adding agencies and institutions.

One example of what is meant by "interference" is 3rd party institutions, such as marketing boards, that do not operate proactively in relation to the overall competitive environment, thereby limiting the creation and capture of value from consumers' perspective. This does not necessarily mean such boards or legislation should be abolished. Rather, it may simply mean they, or the related legislation, need to be modified to motivate/enable more market-focused innovation to occur along the value chain. In Ontario, the regulatory environment may go too far in correcting for market forces at times, and is an issue facing businesses situated along the value chain.

Deregulation

Global deregulation will bring increasing pressure for deregulation in Canada, where the trend to date has been more rather than less regulation. In either case, regulatory changes mean that scientists and researchers need to work directly with commercial businesses, and take account of the entire value chain throughout the entire innovation (and commercialization) process. Current/past policies and legislation are too often a barrier to innovation.

2.4 Opportunities

The opportunities for product development and value chain research arise from the aforementioned trend toward the consumer segmentation and from the opportunity to enhance market efficiency by reducing transactions cost through better coordination within the value chain.

These opportunities are not limited to just farmers and food processors, but to all actual and potential participants in a value chain, i.e. input suppliers such as packaging, seed machinery, or research suppliers. Value chain and product development research offer immense economic opportunities to individual businesses and regional economies

2.5 Issues and Barriers

Issues

Need for Industry and Research to be more consumer focused

Industry needs to react more effectively to consumer trends and demands than it currently does. North American commentators have stated for more than two decades that, through fragmenting into specialized value chains, businesses operating in the agricultural and agri-food sector may be able to create and capture greater value from the array of opportunities offered by a changing consumer market.

Inefficiency of Innovation and Commercialization

Technology has no value until it is commercialized in some way. This requires the creation of a business model that mediates between the creation of technology as an input and the creation of economic benefits as an output. Unfortunately, many innovations which make their way down the pipeline, do so slowly and with insufficient resources/coordination to extract full potential from the market and provide participants with significant commercial benefits. The challenge with research is the lead time. If research is reacting to an opportunity then, by the time there is commercialization, the market may have changed. There is a need to anticipate.

More effective commercialization could occur within a functioning value chain: particularly compared to that which would occur in the adversarial transactional-oriented environment that typifies the agricultural and agri-food/product sector. Alternative business solutions might provide an equal, if not superior, opportunity. This does not negate the possibility that innovation can occur in other forms of business organization.

Innovation will not occur unless it is profitable at all components of the value chain. Therefore, it is important that research processes allow intellectual property to be obtained and retained by those who cause the innovation.

Barriers

Business Processes

Two forms of processes occur in a value chain - Physical (product flow) and Virtual (information). The effectiveness of business processes is affected by factors that are internal and external to the individual businesses and/or the chain.
While product development is the focus of many innovation initiatives, the business-level processes that exist along agriculture and agri-food value chains can be so ineffective that they limit competitiveness.

Policy & Legislation

Traditional agricultural and agri-food related policy and legislation often acts as a barrier to innovation. Greater attention needs to be given to creating an environment that fosters consumer-focused innovation as core to the agri-food sector's development. For example, Ontario cannot afford to have situations in which a variety of wheat that was bred in Ontario for a specific food processor has to be grown in the U.S. (with a premium paid to farmers) because current legislation forbids it to be registered in Ontario or Canada.
If incorrectly aligned with the needs of the overall value chain, industry structure, policy, and legislation can have detrimental effects on enabling and motivating market-driven innovation.

2.6 Enabling Components of the Theme

For a successful value chain, the enabling components are:

Trust;
Good management skills;
Confidentiality;
Communication - constant and regular;
Market info (consumer driven information);
Strong leadership, with senior management buy-in;
All parties must benefit.

For successful product development and enhancement, the enabling components are:

A need for good science:
- What technology is available? There is a need for leadership and enablers to make a better connection and create links between science and industry.
- How are structures formalized so that this "enabler" can be efficient? Currently "enablers" for the business sector exist as brokers. The question was raised how government and science should partner within such existing processes rather than compete or negatively affect existing processes.

Market Intelligence (Knowledge of consumers and trend setters):
- How can research and organizations anticipate, rather than react to, consumer trends? It was agreed that if/when business organizations spend their own resources on research; it is more likely to be in anticipation of a consumer demand.
- "Innovation is industry led and public research supported".
- "[OMAFRA-funded] research must work directly with business if Ontario is to compete on a global scale."

Competitive Culture:
- The question was raised about how OMAFRA research, via the University of Guelph, can adapt the culture to better support an integrated system/partnership culture and, in doing so, encourage improved competitiveness.

Leadership:
- There must be visionary leadership and champions at senior levels throughout the innovation and commercialization process to ensure success.

Trust:
- Organizations in a properly functioning value chain share risk. The goal of a project cannot primarily be about a ROI for OMAFRA as this goes against the whole openness/trust issue associated with successful value chain relationships.
- A completely open dialogue between businesses and researchers is needed but difficult to achieve because of the competitive nature of business and research development.
- Openness can only exist in a managed relationship where confidentiality is guaranteed.
- How can the relationship be managed so that a retailer is able to openly translate their needs back to OMAFRA and remain confidential?

Capacity:
Relating to research and funding

2.7 Suggested Model for Product Development through a Value Chain

The following business model was developed as a useful tool for guiding product development through a value chain. It is considered a good example of the ways in which market intelligence could be gleaned and shared, and connections between new technologies from the University of Guelph might be commercialized by a business partner in a value chain.

Table 1 Product Development Business Model

Business Development	Market assessment and potential Potential costing/pricing Competitor assessment Process evaluation Value Chain evaluation (include researchers and suppliers as relevant) Final decision on project viability & strategy
Product Development	Develop formulae, attributes Prepare spec package
Packaging	Determine packaging options
Negotiation	Prepare bid package for potential manufacturers/participants in the value chain - specific contract / costing level
QA Product Development Summary	Evaluate bid sample submissions
Packaging	Finalize packaging & labelling design
Product Development	Conduct plant trials
Design	Develop & finalize package design, graphics, etc Obtain necessary label approvals
Business Development	Finalize supply agreements, contracts, licenses
QA Product Development Approval	Evaluation of first production runs
Go to Market

2.8 Dependencies and Linkage with the Theme

All the other themes need to be integrated into value chain theme, especially Emergency Management and Food for Health as they relate to product development.

3.0 Research Areas and Priorities for this Theme

3.1 The Approach

While product development and value chain research complement each other, research would best be served by creating two distinct subject areas, sharing equal importance.

i. Product Development
ii. Value Chains

OMAFRA research should have an increased focus on consumer needs in developing value chains and in creating new products as well as innovative uses for existing commodities. Examples include organics, regional agricultural promotion, natural health products and environmental goods and services.

Does this research contribute to Ontario's agri-food competitiveness?
Does this provide a sound base for relevant policy and regulation development?

3.2 Description of Research Areas

Product Development Subject Areas for Research:Following the model in Section 2 above, before specific research begins, there should be a business assessment (including an analysis on potential ROI), to best understand the benefit to Ontario by spending research dollars in any potential way. Conducting a business assessment first should also serve to clarify which research projects are of a higher priority.

Product Development and Enhancement

All product development doesn't need to create something new or trendy, but rather could relate to enhancing existing products.

Novel foods with specific health traits;
Enhancing artisanal food production;
Developing local food products;
Distribution and expanding market access;
Better ability to produce organic foods;
Non-edible horticulture;
Non-edible agriculture.

Research relating to food might also be linked to research within the Food for Health theme and Value Chain research subject areas (noted below); as they relate to trends and are consumer-focused.

1. Emerging Opportunities

Research areas included under this heading:

How to prepare for the "next big thing". The research on this topic is to examine what other jurisdictions do to understand and anticipate what consumer trends will develop or can be developed in the future.
Benefiting from new technological advancements; here the emphasis is two-fold. One part is to help make product developers aware of scientific break-through in order to alert them to potential applied research. The second is the adaptation of technology in other jurisdictions to Ontario conditions.

2. Food Safety, Traceability and Other Certifications

Research areas included under this heading considered important include:

Improve and/or streamline food safety systems;
hat are the barriers to the adoption of food safety protocols including harmonization with (international) standards?
Limiting the extent (and perhaps likelihood) of product recalls from facilitating the sharing of timely and accurate information throughout the value chain.

3. Packaging

Research areas to discover and use new technology to create innovative packaging that will:

Reduce cost;
Improve performance relating to distribution;
Reduce the waste stream effects (i.e. reduce physical packaging, biodegradable packaging);
Improve storage and/or shelf life.

4. Regulatory Modernization Research

Areas within this subject considered important include:

Understanding the cost of our regulatory system (i.e. lost opportunity cost in food processing);
Understanding how reforming legislation and the intent of legislation and related regulations from Health Canada, CFIA and/or Pest Management Regulatory Agency (PMRA) may add value to the Ontario agri-food industry (i.e. labeling interpretation and enforcement);
Risk analysis that includes cost benefit analysis, in addition to human health and environment;
How marketing legislation should/could be more value chain friendly;
Environmental regulations (i.e. nutrient management);
Labour regulations (to stimulate greater efficiency within value chains).

5. Sustainability

Research projects under this subject area that were considered important include:

Discovering functional attributes of co-products (creating something from a waste product);
Reducing waste in food processing, relating to environmental sustainability;
Waste stream utilization;
Alternative energy, energy management (environmentally friendly);
Reacting to economic factors (i.e. rising prices, lessen fuel cost impact of a certain sector);

How can we better utilize something we already have - e.g. using our land resource most effectively?
How to add value with what we have (products/capacity/resources).

Value Chains, Subject Areas for Research

Parts of the value chain, though not the entire chain, must be based in Ontario, and Ontario may or may not be the market, rather "the world is the market".

1. Competitiveness [high priority]

How can Ontario compete against the best in the world?

Productivity techniques (e.g., lean management);
What are world leaders doing? (best practice).

2. Relationship/Business Models [high priority]

Research areas defined within this subject that are considered important are:

Understanding the lifecycle of relationships;
Identifying characteristics of leaders;
Improving communications;
Understanding why some value chains fail;
Providing scope or understanding of value chain profit/business models to help current or future value chain participants (i.e. adjusting expectations);
How to improve co-operation between and/or link across ministries (develop cross sectional/inter-ministerial value chains);
As they relate specifically to rural vs. urban needs (i.e. infrastructure, distribution, scale and geographic specificity);
Business and relationship models relating to food safety and traceability systems.

3. Communications/Networking [high priority]

What communication models work? (i.e. best practice models from other jurisdictions to understand links between science and business);
Information sharing and access between ministries and industry (i.e. developing cross sector/inter-ministerial value chains);

4. Market Intelligence Opportunities [high priority]

Defining market opportunities (i.e. niche markets, food service);
Guidance and support for developing capacity in businesses and value chains to identify and utilize business/market intelligence.

5. Human Resources Capacity [medium priority]

Aligning management skills beyond individual organizations (i.e. a smaller company dealing with a larger company);
Enhancing value chain management related skills through education and training;
Food quality management (i.e. quality consistency).

4.0 Critical Success Factor

4.1 Description of Critical Success Factors

Need to access market in a timely way [high priority]

Research infrastructure needs to be proactive, give industry a concept (if businesses able to accomplish privately in conjunction with researchers, more opportunities will occur to take the concept and develop it further by commercializing findings);

Maintaining & guarantee confidentiality [high priority];
Industry owning intellectual property through commercialization process [high priority];
Ability for participants in a value chain to participate in the entire research and commercialization process (including flexibility of academic appointments) [medium priority];
Improved marketing of research and innovation capabilities to industry by OMAFRA, U of G, and associations [medium priority];
of access by industry to research) [medium priority].

5: Other Related Considerations and Recommendations

5.1 Observations

Canadian universities are industry-focussed when they rely on funding from industry rather than from public funding. By creating a sense of urgency among researchers, through challenging them to work more closely with industry, the current process will see them be more responsive to the needs of the business sector.

What kinds of IP research will assist commercialization? There needs to be flexibility in the ownership and usage of IP. If 'right of first refusal' is not the best policy, what are the merits and constraints of the alternatives?

For more information:
Toll Free: 1-888-466-2372 ext. 64554
Local: (519) 826-4554
E-mail: research.omafra@ontario.ca

Author:	OMAFRA Staff
Creation Date:	23 October 2008
Last Reviewed:	9 March 2009

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