Build, Buy or Partner Innovation: The Benefits of Buying

Innovation is a requirement in every CPG company – and it is of heightened focus for brands whose business models are facing the pressures of new incumbents, shifting consumer demand, financial changes, and new channel requirements. Last week, we kicked off our series on innovation, delving into the rationale for “building” innovation in-house. We’ve worked with many clients who have found that sourcing innovation externally is the best path forward. This week, we focus on the advantages of “Buying” or outsourcing innovation.

At a high-level, companies leveraging a “Buy” model as their primary or secondary source of innovation tend to pursue 2 approaches – using either Open Innovation or Mergers & Acquisitions. These models, as defined below, can complement Procurement or Strategic Sourcing, which typically happens later in the process:

  1. Open Innovation RFP Process: Pushing out specific public RFPs via existing networks and/or an enterprise portal to attract, identify, and enter into strategic joint agreements with new technical innovations and partners for Build, Buy, Partner, and Licensing purposes.
  1. Open Innovation Technology Scouting: Leveraging a pull technique to uncover novel, untapped new potential experts, solutions, ingredients, or manufacturing approaches by combining a technical brief and research sprints.
  1. Mergers & Acquisitions: Defining and executing Mergers & Acquisitions with companies that have typically already commercialized their products or brands and have a proven track record of success.

These differ from Procurement and Strategic Sourcing capabilities, whose aim is to secure the best terms for commodities, ingredients, parts, contract manufacturing, etc., to enable scaling.

When Did Open Innovation Become a Popular Strategy?
Open Innovation as a structured, strategic capability to identify, access, and integrate external innovation – technology, product concepts, business models, startups, research, and ecosystems – into a company’s growth pipeline can create a larger funnel and faster speed to market versus in-house development. This inflow of ideas and capabilities is intended to spark inspiration, drive greater success, and create greater competitive advantage. The concept first emerged in Consumer Package Goods when Henry Chesborough published an article in 2003 highlighting the emergent practice at Procter & Gamble. The MIT Sloan Management Review and Harvard Business Review followed with articles. P&G pilots were so successful that externally sourced innovation has shifted from 15% in 2000 to roughly 50% today.

Importantly, many companies use Open Innovation scouting to identify top talent, nascent technology, or even early-stage start-ups. Strategies that leverage Open Innovation vary. Companies typically identify technologies and brands to assess, explore, and then either pursue options to improve the base offering or to scale the technology / innovation using internal strengths. Open Innovation agreements can also be the starting point for eventual M&A transactions.

What Are the Advantages of the “Buy” Strategies?
Across the consumer products, there are numerous companies that have focused on acquiring innovative start-ups vs building in-house, including Coca-Cola and AB In-Bev. The reasons for focusing on an Open Innovation and/or M&A model are many, and include the following:

  1. Focuses on Validated Consumer Demand vs Uncertain Ideas: Harnessing a “Buy” strategy derisks investment because brands have the option of waiting until there are hard assets – like tooling and manufacturing lines – or in-market signals of success. While this comes at a significant price premium, it also reduces risk and allows organizations to focus human and financial capital, as well as precious retail discussions on proven bets.
  1. Maintains a CapEx-Light Model Until Scale is Proven: Most in-house innovation requires a significant financial “Valley of Death” while CapEx investments happen ahead of the return on the investment. This can create considerable financial strain, especially for organizations nurturing more than one innovation in start-up mode. Brands often try to manage this by dating and gating investments based on signs of success. Those willing to pay a premium can avoid this altogether, holding back on capital investment until a viable and scalable innovation proposition has been proven.
  1. Enables Faster Participation in High-Growth Opportunities: By leveraging an “outsource” model, companies with adequate cash reserves may be able to respond faster to changing market dynamics and emergent technologies or players. Breakthrough innovation can take upwards of 2 years to get to market in a best-case scenario or potentially longer, depending on the consumer habit change, manufacturing innovation, and channel complexities. Deal terms can take many shapes, and integrations are often delayed to drive speed-of-impact.
  1. Leverages Focus and Effort on Existing Strengths and Competencies: Many CPG companies have strengths in go-to-market capability and manufacturing scale, rather than innovation development. These are also critical to innovation success, regardless of the source of new ideas, IP, or incubated opportunities. Building new innovation capability takes commitment from the top, as well as time, effort, and resources. Enterprise strategies and imperatives – like a new competitive threat, financial crisis, cost structure, or sourcing disruption – can make it challenging to allocate executive mindshare and resources to this work.
  1. Higher Rates of Success, If Achieved, Can Fuel Success Narratives: While brands that develop innovation in-house can lay claim to “creating the future,” there is a lot to be said for recognizing a good thing and snapping it up to leverage one’s strengths to scale and fuel faster. 

Innovation, regardless of the source, is more critical than ever. As categories consolidate, consumer behaviors evolve, structural economics face increasing pressure, and competition continues to intensify, leaders must define the innovation capabilities that will drive sustainable success.

Want to win with innovation? Simpactful can help! Our team of Strategy, Innovation, and M&A experts can help put the right strategies and plans in place to ensure you are ready for what’s ahead. We offer deep transformation expertise in end-to-end Innovation Engine Optimization, Open Innovation, and Mergers and Acquisitions. Simpactful’s skilled practitioners have guided clients through the process of business modeling, innovation strategy development, portfolio sufficiency analyses, and Build / Buy / Partner options analysis. We’ve established Open Innovation and M&A briefs, conducted due diligence, and guided go or no-go decisions. Contact us today at contact@simpactful.com or 925-234-6394. Visit www.simpactful.com.

At a high-level, companies leveraging a “Buy” model as their primary or secondary source of innovation tend to pursue 2 approaches – using either Open Innovation or Mergers & Acquisitions. These models, as defined below, can complement Procurement or Strategic Sourcing, which typically happens later in the process:

  1. Open Innovation RFP Process: Pushing out specific public RFPs via existing networks and/or an enterprise portal to attract, identify, and enter into strategic joint agreements with new technical innovations and partners for Build, Buy, Partner, and Licensing purposes.
  1. Open Innovation Technology Scouting: Leveraging a pull technique to uncover novel, untapped new potential experts, solutions, ingredients, or manufacturing approaches by combining a technical brief and research sprints.
  1. Mergers & Acquisitions: Defining and executing Mergers & Acquisitions with companies that have typically already commercialized their products or brands and have a proven track record of success.

These differ from Procurement and Strategic Sourcing capabilities, whose aim is to secure the best terms for commodities, ingredients, parts, contract manufacturing, etc., to enable scaling.

When Did Open Innovation Become a Popular Strategy?
Open Innovation as a structured, strategic capability to identify, access, and integrate external innovation – technology, product concepts, business models, startups, research, and ecosystems – into a company’s growth pipeline can create a larger funnel and faster speed to market versus in-house development. This inflow of ideas and capabilities is intended to spark inspiration, drive greater success, and create greater competitive advantage. The concept first emerged in Consumer Package Goods when Henry Chesborough published an article in 2003 highlighting the emergent practice at Procter & Gamble. The MIT Sloan Management Review and Harvard Business Review followed with articles. P&G pilots were so successful that externally sourced innovation has shifted from 15% in 2000 to roughly 50% today.

Importantly, many companies use Open Innovation scouting to identify top talent, nascent technology, or even early-stage start-ups. Strategies that leverage Open Innovation vary. Companies typically identify technologies and brands to assess, explore, and then either pursue options to improve the base offering or to scale the technology / innovation using internal strengths. Open Innovation agreements can also be the starting point for eventual M&A transactions.

What Are the Advantages of the “Buy” Strategies?
Across the consumer products, there are numerous companies that have focused on acquiring innovative start-ups vs building in-house, including Coca-Cola and AB In-Bev. The reasons for focusing on an Open Innovation and/or M&A model are many, and include the following:

  1. Focuses on Validated Consumer Demand vs Uncertain Ideas: Harnessing a “Buy” strategy derisks investment because brands have the option of waiting until there are hard assets – like tooling and manufacturing lines – or in-market signals of success. While this comes at a significant price premium, it also reduces risk and allows organizations to focus human and financial capital, as well as precious retail discussions on proven bets.
  1. Maintains a CapEx-Light Model Until Scale is Proven: Most in-house innovation requires a significant financial “Valley of Death” while CapEx investments happen ahead of the return on the investment. This can create considerable financial strain, especially for organizations nurturing more than one innovation in start-up mode. Brands often try to manage this by dating and gating investments based on signs of success. Those willing to pay a premium can avoid this altogether, holding back on capital investment until a viable and scalable innovation proposition has been proven.
  1. Enables Faster Participation in High-Growth Opportunities: By leveraging an “outsource” model, companies with adequate cash reserves may be able to respond faster to changing market dynamics and emergent technologies or players. Breakthrough innovation can take upwards of 2 years to get to market in a best-case scenario or potentially longer, depending on the consumer habit change, manufacturing innovation, and channel complexities. Deal terms can take many shapes, and integrations are often delayed to drive speed-of-impact.
  1. Leverages Focus and Effort on Existing Strengths and Competencies: Many CPG companies have strengths in go-to-market capability and manufacturing scale, rather than innovation development. These are also critical to innovation success, regardless of the source of new ideas, IP, or incubated opportunities. Building new innovation capability takes commitment from the top, as well as time, effort, and resources. Enterprise strategies and imperatives – like a new competitive threat, financial crisis, cost structure, or sourcing disruption – can make it challenging to allocate executive mindshare and resources to this work.
  1. Higher Rates of Success, If Achieved, Can Fuel Success Narratives: While brands that develop innovation in-house can lay claim to “creating the future,” there is a lot to be said for recognizing a good thing and snapping it up to leverage one’s strengths to scale and fuel faster.

Innovation, regardless of the source, is more critical than ever. As categories consolidate, consumer behaviors evolve, structural economics face increasing pressure, and competition continues to intensify, leaders must define the innovation capabilities that will drive sustainable success.

Want to win with innovation? Simpactful can help! Our team of Strategy, Innovation, and M&A experts can help put the right strategies and plans in place to ensure you are ready for what’s ahead. We offer deep transformation expertise in end-to-end Innovation Engine Optimization, Open Innovation, and Mergers and Acquisitions. Simpactful’s skilled practitioners have guided clients through the process of business modeling, innovation strategy development, portfolio sufficiency analyses, and Build / Buy / Partner options analysis. We’ve established Open Innovation and M&A briefs, conducted due diligence, and guided go or no-go decisions. Contact us today at contact@simpactful.com or 925-234-6394. Visit www.simpactful.com.