Chapter 5: Understanding innovation in food chains – Delivering Performance in Food Supply Chains


Understanding innovation in food chains

S. Estrada-Flores,     Food Chain Intelligence, Australia


Co-innovation involves cooperation and integration of existing knowledge from different organisations across food supply chains. This chapter discusses the advantages of using a concerted approach to food co-innovation. Such an approach should recognise the highly dynamic nature of the food manufacturing industry, the benefits of market driven innovation and the usefulness of policy as an instrument to encourage innovation. It is proposed that a sustainable co-innovation framework could create a paradigm shift in the way food chain participants innovate. The transformation of supply chain relationships and innovation processes could make the food industry more resilient to recent financial and environmental challenges.

Key words

food chains


supply chain

national innovation model

5.1 Introduction

The aim of the food industry is to transform agricultural raw materials into safe, convenient, good tasting and nutritious products for consumers, in a profitable and sustainable manner. The food supply chain is defined as a set of interdependent companies that work closely together to manage the flow of goods and services along the value-added chain of agricultural and food products, in order to realize superior customer value at the lowest possible costs (Folkerts and Koehorst, 1997). Value addition in the food supply chain is generated by activities linked to primary and secondary processing, packaging, distribution and retail, as illustrated in Fig. 5.1.

Fig. 5.1 Interaction of horizontal and vertical issues in the food chain.

The industry is strongly driven by the following trends:

• Horizontal issues: global trends in ageing and health awareness, consumer trust and consumer satisfaction (convenience), food safety and traceability, financial sustainability related to costs of production/packaging/transport, innovation as an engine for growth and sustainability in production systems.

• Vertical (specific) issues: each link in the chain has particular concerns and drivers. However, some of these have a cumulative effect (e.g. acceptance of genetically modified organisms affects both growers and manufacturers).

The question of how innovation happens in food chains is relatively unexplored. Some authors attribute this to the prevalent deterministic view of food production systems in economic theories, in that agriculture and food production are determined by nature and the biological cycles of crops and livestock (Morgan and Murdoch, 2000). Others view food-related innovation as a low capital, low risk activity, with low requirements of technological novelty or specialized skills when compared to other industrial sectors such as electronics or aircraft manufacturing. Furthermore, the number of patented inventions with direct application in the agri-food sector have been historically low (Arundel et al., 1995). Yet, industries that participate in the food supply chain have successfully applied technologies developed in other sectors, such as the pharmaceutical industry, biotechnology and electronics (Beckeman, 2007).

Although the aspects mentioned above contribute to the scarcity of published research on innovation in food supply chain systems, the definition of innovation itself has been a subject of much controversy. Historically, innovation and research and development (R&D) have been used as synonyms. However, they are different in that research activities seek to increase knowledge in the areas investigated, without any expectations of the project’s outcomes. In this sense, research projects are always successful as they normally deliver new knowledge. In innovation projects, the research team has commercial expectations from the onset and therefore, these projects can fail (Environmental Innovations Advisory Group, 2006).

In the context of this chapter, innovation is a process that goes beyond theoretical conception, through technical invention to commercial exploitation (Department of Agriculture Fisheries and Forestry Australia, 2001). A similar description was used in a recent review of the public support for science and innovation in Australia, where innovation was defined as a deliberative process undertaken ‘by firms, governments and others that add value to the economy or society by generating or recognizing potentially beneficial knowledge and using such knowledge to improve products, services, processes or organizational forms’ (Productivity Commission, 2006). The challenge of adopting this wider concept of innovation is distinguishing true innovation in services, businesses and marketing activities from simple organizational changes.

5.2 Innovation as a driver of global competitiveness

The competitiveness of a firm or a country depends on its ability to generate sustainable and relatively higher revenues from the factors of production and high employment as a result of exposure to international competition (Hatzichronoglou, 1996). Therefore, firms must develop strategic advantages that allow them to maximize the capabilities that distinguish them from competitors (Porter, 1980).

A study (Grunert et al., 1995) investigated the link between innovation activity and business performance in the European food industry. The authors found a lack of conclusive evidence of the relationship between the intensity of R&D activities and business performance. These inconclusive results may be attributed to the concept of innovation itself, which extends beyond R&D to encompass a wide range of technological and business activities. Adding to this complexity, food chains involve various players, including farmers, manufacturers, retailers and suppliers of various goods and services such as information technology, ingredients, transport, storage and packaging. Further, the flow of benefits of innovations onto the supply chain partners are difficult to quantify. For example, increasing the availability of raw materials or improving the processing or sensory characteristics of plants and animals through innovation in primary production also benefits the manufacturing and retail partners by improving availability, product quality and sales.

A second European study (Wijnands et al., 2007) compared the competitiveness of the European food industry with their counterparts in Canada, Australia, New Zealand, the United States and Brazil. The study highlighted four characteristics of innovation in the food industry:

• Consumers are relatively conservative about the foods they select and many ‘new products’ are, in fact, variations of products already accepted in the market. Although these variations may not be true innovations (Moskowitz and Hartmann, 2008), they do lead to considerable market value and therefore increase the competitive advantage of food firms.

• The most significant innovations in the food industry are market driven, with consumers putting emphasis on quality and convenience. Examples include packaging, logistics, integration with domestic appliance manufacturers (e.g. coffee and domestic appliances for coffee making) and changes oriented to improve convenience at point-of-sale (e.g. the development of vending machines for schools and hospitals offering prepacked fresh fruit salads).

• The food industry frequently innovates with a focus on management and organizational processes. The integration of precision agriculture and global positioning systems to improve planting and harvesting efficiencies is an example of organizational innovation (Cutler et al., 2008).

• Agriculture and food manufacturing absorb innovations from other industries (e.g. ICT, logistics and marketing) at a fast rate. Through early adoption of potentially profitable innovations already proven successful in other industries, food companies can still achieve a ‘first mover’ advantage.

Innovation indexes used by the OECD (Organisation for Economic Cooperation and Development) and other international organizations do not capture these subtleties. For example, innovation and R&D activities in packaging, logistics, storage and food processing machinery, which are central to efficient food chains, are normally accounted for in sectors other than food manufacturing (e.g. services, chemical manufacturing, plastics products, fabricated metal products). Further, non-technological R&D expenditure is a significant component of the total business expenditure in innovation (Cutler et al., 2008).

Although the inadequacy of using R&D indicators as direct measures of innovation activity is recognized, R&D remains an important component of innovation. Therefore, trends in R&D expenditure for OECD countries are analysed in the following section.

5.2.1 Historical trends in innovation in the food industry worldwide

Figure 5.2 shows the historical business enterprise expenditure on R&D (BERD) in food, beverages and tobacco for nine OECD countries. This figure suggests significant differences in the prioritization of strategic R&D funding for the food sector, whereby most countries lag behind the investment observed in Japan and the USA.

Fig. 5.2 Business enterprise expenditure on R&D (BERD) in the food, beverages and tobacco sectors for nine OECD countries in purchasing power parity (PPP) dollars at current prices.

Figure 5.3 presents a slightly different landscape of R&D activity by using two more indicators: (a) R&D intensity using production (RDIP), which measures BERD expenses as percentages of production (gross output) in current prices and (b) R&D intensity using value added (RDIV), which measures BERD expenses as percentages of the contribution of the industry to total gross domestic product (GDP) in current prices. Figure 5.3 suggests that Denmark has the highest R&D intensity of the countries included in this comparison, both in terms of production and value addition. Finland, the Netherlands and Japan present high RDIP values. In contrast, the United States presents a lower R&D intensity than countries which ranked lower using BERD expenditure only as an indicator (Fig. 5.2).

Fig. 5.3 Intensity of R&D expenditure as a percentage of gross production output (RDIP) and as a percentage of value addition to the gross domestic product (RDIV) in foods, beverages and tobacco. Values represent an average for the period of 2000–2003.

5.2.2 Government-led initiatives focused on food innovation

The New Zealand Ministry of Agriculture and Forestry recently released a report (MAF, 2008) that outlines the basis of collaboration between government, industry and research providers to lift the long-term science base, capability, environmental performance and competitiveness of the country’s pastoral and food industries. The report highlights the similarities between the economies of Finland, Sweden, Norway, Denmark, Iceland, The Netherlands, Canada, Australia and New Zealand, which are all heavily reliant on natural resources such as agriculture, forestry and fishing.

Interestingly, the European countries mentioned have managed to develop knowledge-based industries and advanced technology sectors in parallel with their resource-based industries. These countries seem to be successful in transferring the knowledge and innovations created in the advanced industries to the rural industries.

Government-led policies on innovation have a strategic role in achieving the right balance between investment dedicated to creating and developing new knowledge from science and research and investment dedicated to increasing the capacity of enterprises to receive, absorb and commercialize such knowledge (Cutler et al., 2008). Government policies on innovation also define national priorities, remove structural impediments to innovation and create the conditions necessary to introduce new technologies and services to the market. The following paragraphs discuss some governmentled initiatives for developing food innovation in Europe, Australia and the United States. A summary of the food innovation systems in these three regions is presented in Table 5.1.

Table 5.1

Summary of food innovation systems in Europe, USA and Australia

aIncludes supermarket and foodservice sales.


The European food and drink industry encompasses about 280,000 companies and provides jobs for 4 million people. The estimated annual turnover exceeds €800 billion and is based on exports, despite extremely competitive domestic and international markets (European Commission, 2008a).

The European agro-food industry is dominated by small and medium size enterprises (SMEs), which represent 99% of the industry. The production is highly diverse and SMEs often lack resources and personnel to invest in research and innovation. Further, these companies traditionally perceive that they have low returns on investment and low profit margins. As a result, little expenditure is dedicated to cover innovation costs such as patenting (Confederation of Danish Industry, 2008).

Europe’s Framework Programme for Research and Development is the main financial tool through which the European Union supports research and development activities, covering almost all scientific disciplines (European Commission, 2008b). The programme is traditionally run in 5-year periods, but in the present FP7 programme the budget implementation period has been extended to seven years.

The current ‘Food, Agriculture and Fisheries, and Biotechnology’ research programme has been allocated more than €1.9 billion funding for the duration of FP7. The objective of the research programme for 2007–2013 is to build a European knowledge-based bio-economy (KBBE), addressing the following needs:

• growing demand for safer, healthier, higher quality food;

• sustainable use and production of renewable bioresources;

• increasing risk of epizootic and zoonotic diseases and food related disorders;

• sustainability and security of agricultural, aquaculture and fisheries production;

• increasing demand for high quality food, taking into account animal welfare and rural and coastal contexts and response to specific dietary needs of consumers.

Under a KBBE framework, life sciences and biotechnology will undoubtedly play a significant role. Areas such as the development of eco-efficient products, processes and technologies and the development of healthier, wholesome foods that respond to specific nutritional needs of consumers are particularly encouraged.

The FP7 programme aims to promote innovation in companies with low to medium technological capabilities and with little or no research capability. The programme also aims to enable the access of these companies to research institutes and universities to outsource their R&D. However, SMEs in Europe still have difficulties in accessing the various financial instruments and capital for their development, mainly owing to the lack of financial and human resources to create direct collaboration with universities and other research centres (European Commission, 2008c).

The long timeframes needed to comply with the current legislation for new product introduction into the marketplace are also considered to be a hindrance to innovation. This issue is not exclusive to Europe: similar concerns have been raised in Canada (Standing Committee on Industry Science and Technology, 2007), the Unites States (Food Directorate, 2007) and in Australia (Annison, 2008). Innovations particularly affected are those with nutritional and health claims, pre-market requirements for GMOs and novel functional foods.


The Australian government has historically placed more emphasis in preproduction and primary production research than in manufacturing and post-manufacturing research. For example, the national R&D expenditure during 2005 was AUD$1 billion in the primary production of foods (including plant and animal production and primary products), while R&D investment in food manufacturing was just below AUD$300 million (Australian Bureau of Statistics, 2005). Interestingly, the value of primary production goods trebled by the time the food reached the shelves in supermarkets in 2005, with the largest increment in value occurring at the manufacturing stage. The low levels of R&D in the food manufacturing stage are at odds with the knowledge-intensive character of the industry (Howard Partners, 2005).

The Australian Government currently supports 16 rural R&D corporations (RDCs), which are the most significant instrument of engagement between government and private primary industry. Government funding for RDCs is matched by private funding through an industry levy. The combined total annual budget for RDCs is about AUD$500 million.

The Cooperative Research Centres (CRC) programme was established in 1990 to bring together researchers in the public and private sectors with the end users. The programme has resulted in the establishment of 168 CRCs during its lifetime, operating across the manufacturing, information technology, mining and energy, agriculture and rural-based manufacturing, environment and medical science and technology sectors. About 15 CRCs have tackled particular aspects of the food chain, with more than half of these centres focusing on primary production issues.

While RDCs are strongly driven by industries through a heavy involvement in priority setting and contribution of levy funding, CRCs can be characterized as research organisations pooling their financial, human and infrastructure resources, involving industry partners as advisors and funding partners. Other past government funding initiatives for food innovation closely linked to market demands include:

• The supermarket to Asia (STA) Strategy from 1996 to 2002, which had as a main objective the expansion of Australia’s agri-food exports to Asia. The Technical Market Access Programme was created through STA and it is still used by the Australian Department of Agriculture, Fisheries and Forestry as a mechanism for enhancing market access of Australian foods exports.

• The National Food Industry Strategy (NFIS) Ltd (2002–2007) was an industry-led company funded by the Australian Government to implement most recommendations emerging from the National Food Industry Council (NFIC). NFIC was a leadership team where key food industry companies and Commonwealth Ministries were represented. Food industry grants were the most representative instrument for R&D funding from NFIS, providing funding for projects involving technical and scientific R&D with strong prospects for commercialization.

Future directions of public funding for Australian research in food chains are uncertain. A recent report discussing national research priorities for the period 2010–2020 highlighted agriculture, food security, nutraceuticals, food safety and certification and biological testing as priority areas for investment (Cutler et al., 2008). However, concerted efforts between Government, industry and research organisations to set a national agenda for food innovation have not been developed as yet.

United States

In the American system for public funding of R&D, federal funding normally flows through agencies that support research activities in universities, national laboratories and, to some extent, the industry (Lane, 2008). The United States Department of Agriculture (USDA) is the main federal agency supporting food innovation. Examples of project areas include advanced computer-aided design and manufacturing technologies for food products, processes, and equipment to enhance food safety, quality and value (Interagency Working Group on Manufacturing R&D, 2008).

There seems to be a scarcity of US government programmes that directly support food innovation developed in private industry. The US government strategy for innovation has been historically based on enacting regulations and tax reductions that ease the way for innovative companies, rather than directing federal funding to encourage innovation. This strategy has led to a flattening of government funding for food and agricultural research since the late 1980s. In parallel, private investment in food and agricultural research – especially in new technologies – has increased (Patrick, 2006). However, the private food sector in the USA has not invested enough in ‘blue horizon’ R&D, where payoffs are over long timeframes, the potential market is highly speculative, the need for investment is the highest and where the benefits are widely diffused.

In view of these facts, a new National Institute for Food and Agriculture (NIFA) was recently opened to enhance existing food research programmes. The objectives of NIFA include streamlining agricultural research into six programmes: (1) renewable energy, natural resources and environment; (2) food safety, nutrition and health; (3) plant health and production and plant products; (4) animal health and production and animal products; (5) agriculture systems and technology; and (6) agriculture economics and rural communities.

Further, an Agriculture and Food Research Initiative (AFRI) was created in 2008, with a budgeted funding of US$700 million per year. Sixty percent of appropriated funds are earmarked to fund basic research and the remaining budget will be allocated to fund applied research programmes. The creation of both AFRI and NIFA are mandates of the recently approved Food, Conservation and Energy Act (US Department of Agriculture, 2008).

5.3 Changing face of innovation in food production and manufacturing

The sophistication of the innovation supply chain has increased considerably from the ‘economic miracle’ days after the Second World War to present times. The Second World War itself prompted the industry to develop new food preservation methods (e.g. canning), packaging and logistics to supply food for the army (Goldblith, 1989).

Until the 1950s research was focused on production and the predominant innovation process followed the linear science push model (Fig. 5.4) whereby new ideas, rather than consumer’s needs, were the trigger to innovate. In the 1950s and 1960s, many OECD countries built on basic science projects, dedicating funds to support research in universities and dedicated research institutes (Arnold, 2007).

Fig. 5.4 Traditional linear science-push innovation model.

5.3.1 Producer-led innovation

In the post-war years, the key driver behind innovation in food production was the need to improve on-farm yield and productivity. The political and economic environment encouraged farmers to invest in research and development, utilizing government subsidies and the available public research institutions that were oriented to agriculture.

Farmers in the United States were particularly successful at capitalizing the opportunities for innovation between 1949 and 1999. The high levels of agricultural productivity in the USA have been attributed to four decades of innovation in seed crops and in livestock-raising practices. Table 5.2 presents some crucial innovations developed in the history of farming.

Table 5.2

Producer-led innovations in USA agricultural history

Innovation Decade of introduction Outcome targeted
Antibiotics in animal production 1950s Enabled farmers to raise large numbers of chickens in confinement
Fully automated feeding 1940s Advances allowed medication to be distributed with the feed
Selective breeding 1940s Development of higher meat yields in birds, cattle and hog production
Vertical integration 1980s Linking of breeders and growers to processors, usually through production contracts rather than by ownership. Concentration of market power in packers and processors
Hybrid seeds 1940s Improved yields and resistance to pests and infections.
Genetic modification 1980s Reduced levels of pesticide use and tillage. Businesses based on a life sciences model combining agriculture, food and pharmaceuticals around a genomics science base

Morgan and Murdoch (2000) provide an excellent review on the innovations developed in the agrochemical industry, triggered by the need to combat weeds and pests in the 1940s and 1950s. Concerns about the use of chemical control methods in turn led to the development of integrated pest management in later years (Hall and Moffit, 2002).

5.3.2 Manufacturer-led innovation

After the collapse of communism and the cold war years, the attention of science and technology policy makers turned inwards, focusing on developing solutions to pressing domestic issues. National priorities such as health care, education and social justice took the front seat and access to R&D funding increasingly required a close alignment of research objectives with these priorities (Lane, 2008).

In the 1950s, innovation projects initiated at the manufacturer’s level rarely involved food retailers and there was even less involvement of suppliers. This strategy has changed little over the past years. As a consequence, new product development (NPD) projects initiated by processors have an extensive consumer research phase but often fail to engage suppliers. This engagement is important to ensure that the raw materials have the required quality and grading expectations for the new product.

An ad hoc approach to NPD may also lead to confusion about critical supply chain conditions (e.g. time and temperature) that should be maintained throughout the distribution of the new product. Failure to maintain these conditions may lead to quality losses or can even trigger serious food safety issues. The lack of a coordinated innovation framework between supply chain partners partly explains why NPD remains a high risk activity in the food sector, where over 80% of NPD ventures fail (van der Valk and Wynstra, 2005). Table 5.3 presents some manufacturing-led innovation initiatives in the past years.

Table 5.3

Variation in manufacturer-led innovation. Bold typeface indicates innovations that overlap with retail drivers

(adapted from Linnemann et al., 2006 and Keh, 1998)

In Table 5.3, the bold typeface highlights the most common areas of collaboration between manufacturers and retailers. Innovation projects in supply chain areas create significant synergies between these two parties.

5.3.3 Retailer-led innovation

From the three major organizational forces in food supply chains (i.e. farmers, manufacturers and retailers) retail-led innovations have focused the most on improving supply chain and logistics through initiatives including Efficient Consumer Response (ECR), Electronic Data Interchange (EDI) and traceability, among others. In fact, ECR, Collaborative Planning, Forecasting and Replenishment (CPFR) and category management rely on the joint development of strategic category plans and a collaborative framework between retailers and their suppliers (Dapiran and Hogarth-Scott, 2003). Table 5.4 shows some of the retail-led innovations in the past years.

Table 5.4

Past and current retail-led innovation projects

Innovation Outcome targeted
Air conditioning control Comfort in supermarkets
Scanner systems Efficient inventory
Bar codes Traceability, supply chain management
Electronic cash register Efficiency, shopping experience
Electronic Data Interchange (EDI) Paperless management of supply chain, reduced order lead time, fewer out-of-stock situations, lower inventory costs, reducing errors in ordering, shipping and receiving, reduction in labour costs, higher service levels
Category management Vertical integration, matching of consumer’s preferences by sellers offerings and growth of categories
Cross-docking Cost efficiency in distribution
Efficient consumer response (ECR) Efficiency gains in store assortment, promotion, new product introduction and replenishment, through constant flow of product and information between suppliers and retailers
Collaborative planning, forecasting and replenishment (CPFR) Coordination of supply–demand

(adapted from Dapiran and Hogarth-Scott, 2003 and Keh, 1998)

5.4 Contemporary food innovation models

As consumers became a political force and their demands of manufacturers became more complex, a shift in power in food chains occurred. In the 1980s and 1990s, the increase in disposable income, decrease in population growth and development of global supply chain systems resulted in a deceleration in the demand for food (Costa and Jongen, 2006). Shorter product development cycles and a buyer’s market rendered the traditional technology-push approach to food innovation obsolete.

5.4.1 Influence of supply chain relationships in innovation

Table 5.5 presents the relationships that currently exist between buyers and sellers in the supply chain.

Table 5.5

Modern types of relationship between buyers and sellers in the supply chain

Type of relationship Characteristics
Quasi-vertical integration Both parties enter into a long-term contractual obligation, where the costs, risks, profits and losses are shared in a venture arrangement. Examples: joint venture, franchises, licenses
Tapered vertical integration A firm obtains a proportion of its inputs through backward vertical integration with a supplier. Examples include the acquisition of supply sources or equity in the supplier’s business
Full vertical integration One firm carries out two or more sequential stages of the food chain. Integration can occur backwards (upstream) or downwards (downstream)
Horizontally integrated networks Relationship between businesses serving similar markets or locations; the combination of forces can occur in activities such as accessing new markets, new product development and shared purchasing functions

(adapted from Fearne et al., 2001)

The past decade has seen a transformation in supply chain relationships from an adversarial, transactional-based operation into a cooperative approach. This shift has strengthened the position of the food industry in the face of disruptive external events, such as the oil crisis in the mid-1970s (Fearne et al., 2001). Collaborative approaches have also led to faster and more efficient responses to consumer’s demands.

As supply chain relationships evolve, new vertical or horizontal cooperation models can stimulate innovation by pooling existing knowledge from different organizations throughout the chain. For example, collaboration between retailers and manufacturers could lead to new retail formats that could cross over the convenience sector (Earle, 1997). As mentioned previously, modern retail-end processes rely on the joint development of strategic category plans and a collaborative framework between retailers and their suppliers.

There are three concepts that are related to innovation models in evolved supply chain relationships: market-led innovation, co-innovation and forward commitment procurement. These concepts are described next.

5.4.2 Market-led innovation

There are two distinctive types of market-led innovation in the food industry: consumer-led and user-led innovation.

Consumer-led product development was introduced in the early 1990s as a market-oriented innovation concept concerning the use of consumers’ current and future needs (Urban and Hauser, 1993). The aim of consumerled product development is to create product differentiation, leading to higher consumer satisfaction, increased levels of consumption of specific products, or increased overall value of the given level of consumption (Grunert and Valli, 2001).

User-led innovation refers to the phenomenon observed in the late 1970s, whereby customers proceeded to modify or adapt existing products according to their own needs of their own accord (Grunert et al., 2008). Customers may be intermediate users of the product or consumers. For example, the equipment and process for preparing free-flowing ice cream in the form of deep frozen beads was developed by Dippin’ Dots founder Curt Jones (Jones, 1992; Jones et al., 2001). In fact, only about 50% of the patents registered between 1991 and 2002 in the field of cryogenic freezing for food manufacturing were granted to equipment manufacturers (Estrada-Flores, 2002; Estrada-Flores, 2008a).

In a consumer-orientated approach, the development of new products, processes or services begins with consumer and market research to identify the specific characteristics required by consumers. In a user-led approach, a deep understanding of the users’ wants, needs and preferences plays a key role (Grunert et al., 2008). Therefore, market-led innovation requires an understanding of the complex social, technological and ecological connections in agri-food systems (Lowe et al., 2008). The role of social scientists and consumer researchers becomes crucial, as the ‘translators’ of descriptive and qualitative terminology in which consumers express themselves using accurate technological specifications that all collaborators can follow (Linnemann et al., 2006).

User-led innovation arguably offers the best platform for collaborative projects between suppliers, retailers and manufacturers. Consider the highly perishable fruit and vegetable category, which has a shelf life of sometimes days only. For these products, some retailers plan their resourcing more than once a day, because the potential wastage cost exceeds the savings through economies of scale in transportation and warehousing activities. In this case, the flow benefits of co-innovation can be captured through information sharing and forecasting collaboration. For less perishable items (e.g. dried or canned foods) a highly efficient supply chain depends on low inventory levels and high capacity utilization (Holweg et al., 2005).

5.4.3 Collaborative innovation

Collaborative innovation, also known as ‘open innovation’ (Sarkar and Costa, 2008) or ‘co-innovation’ (Fearne, 2007) can be particularly advantageous to small and medium-sized enterprises (SMEs), which can tap into skills and knowledge beyond their own capabilities (Grunert et al., 1995). Large manufacturers can achieve a more systematic approach to NPD, an increased emphasis on market-oriented NPD and a stronger network for product market intelligence.

Fearne (2007) proposed the model presented in Fig. 5.5, which is based on the partnership of supply chain players in three platforms: innovation, service and operations. He also pointed out that there are three drivers for undertaking co-innovation:

Fig. 5.5 Co-innovation framework (source: A. Fearne, 2007, with permission).

• It allows the development of new (value added) products/services for distinct customers and targeted consumer segments

• Process improvement occurs for existing products/services beyond organizational boundaries

• Innovation at the interfaces in the value chain are much more difficult for others to copy, thus increasing the competitive advantage.

Co-innovation often requires the development of global innovation networks, which add further advantages, such as:

• supporting collaboration between geographically dispersed teams of suppliers, manufacturers and retailers

• speeding time-to-market and reducing costs for all the parties involved in the NPD process through resource pooling and reduction of the learning curve times

• meeting customer expectations in a more accurate manner, owing to the direct input of retailers into the main purchase drivers of products

• enforcing consistency and quality of brands and innovations

• creating a compliance audit trail through sharing of quality documentation

• most importantly, creating a repository of protected know how and intellectual property, only available to the chain participants.

The challenges of co-innovating are better understood in the context of recent public hearings on the balance of market power between food suppliers, manufacturers and retailers: in Australia and in the UK, large food retailers are perceived as the parties with the greatest influence and control in the food chain. This influence received significant attention in the UK, which led to the introduction of a Supermarket Code of Practice in 2002. The Code explicitly mentions that all supply chain participants would benefit if they work together to expand the market for their products and develop a profitable and sustainable business (Fearne, 2005). The Australian Competition and Consumer Commission (ACCC) investigated the relationship between suppliers and retailers in a similar manner (Australian Competition and Consumer Commission, 2008). Although the ACCC report did not identify ‘anything that is fundamentally wrong with the grocery supply chain’, the report did not appease the concerns of grocery suppliers and the overall sentiment of a lack of transparency in the Australian grocery chain and the dominance of retailers remains (West, 2008). Therefore, creating the required level of communication, trust, commitment and interdependence required for co-innovation calls for significant political and organizational efforts.

Supermarkets are the ‘last frontier’ between the commercial food chain and the consumer. Given this fact and that retailers are often seen as the dominant power in the food chain, it would be fitting for large retailers to adopt the role of innovation leaders in the industry. Indeed, this leadership role may hold the key to improving trust and communication throughout the entire food supply chain.

5.4.4 Forward commitment procurement (FCP)

Forward commitment procurement (FCP) is another type of demand-side driven innovation, specifically led by the public sector. It is defined as ‘a commitment to purchase, at a point in the future, a product or service that does not yet exist commercially, against a specification that current products do not meet, at a sufficient scale to enable the investment needed to tool up and manufacture products that meet the cost and performance targets in a specification’ (St John’s Innovation Centre, 2006).

In an FCP model, a public sector organization commits itself to purchase a predefined quantity of a product, service or technology currently under development but not yet commercially available (Environmental Innovations Advisory Group, 2006). The commitment is for a future date and is based on a specified product performance being achieved. When the product has been developed that meets this performance specification within the agreed timeframes and framework, the organization purchases the product at a specified volume and cost, at levels that encourage supplier investment to ensure economies-of-scale. The private sector reacts by freeing investment to search for innovations that respond to those specifications. Once the product/service has entered the market, normal market conditions determine competition and price (Environmental Innovations Advisory Group, 2006).

The FCP model is one of the most promising models that can encourage environmental innovation, where the government itself acts as an early adopter. The procurement process is also supported by regulations that enhance market conditions in order to create a demand for the new products and services. Key elements of FCP processes are its focus on market needs and outcomes and a clear translation of market needs into specifications for the tendering process. A recent report (European Commission, 2005) noted the following advantages of FCP innovation models:

• Firms are given the incentive to spend money on research in the knowledge that an informed customer is waiting for the resulting innovations and thus the risk of investing in R&D is reduced.

• Competition is shifted from a sole focus on price to the provision of solutions which offer the greatest advantage to users over the whole life use of the purchase.

• FCP opens up opportunities to improve the quality and productivity of public services offered to the citizens through the deployment of innovative goods and services.

• Technologies launched in this way may then move on to further deployment in private sector markets. Other policy objectives (e.g. sustainability, food safety) may also be achieved by procurement of innovative solutions.

The European Commission has examined precommercial procurement processes for R&D services, thus suggesting its preference for this approach in Europe’s strategic sourcing of innovation (European Commission, 2007a).

5.5 A new model: sustainable co-innovation

Arnold and Kuhlman (2001) established that there are three major pillars of a national innovation system:

1. The industrial system, encompassing large, medium and small manufacturing enterprises and technology-based firms. These systems supply the demands of intermediate and final consumers.

2. The education and research system, encompassing professional education and training organizations, higher education and research organizations and public sector research. These systems supply solutions for the industrial systems sector, but also for innovation intermediaries (e.g. innovation brokers) and for final and intermediate consumers.

3. The political system, which encompasses government, governance and policies for research and technology development. The ‘clients’ of the political system are the education and research system and indirectly, the industrial system. The latter is served through framework conditions encompassing the financial environment and incentives (e.g. taxes) needed to support innovation.

These three systems are financed through banking, venture capital and public innovation funds. Although it is widely acknowledged that national innovation systems should integrate these three pillars and their financing sources to streamline the innovation supply chain in the manufacturing industries, the complexity of the task may seem daunting.

This section presents an example of how these elements could be integrated into a single innovation system. The model proposed, which has been named the sustainable co-innovation (SCOI) model, uses the concepts of consumer-led innovation, collaborative innovation and FCP to integrate the industrial, education and political structures discussed above.

5.5.1 Central innovation ‘brain’

In the SCOI model, a central overseeing organization takes on the role of innovation coordinator. The organization, established as a partnership between private and public partners (e.g. a joint venture) could be modelled after previously tested organizational models in Australia (i.e. National Food Industry Strategy Ltd) and New Zealand (i.e. New Zealand Fast Forward Ltd). In the context of this chapter, the central organization will be called NFISC. NFISC would:

• Provide a strategic framework for national food innovation, from a market-led, supply chain perspective.

• Coordinate the activities required to introduce new technology in the marketplace, following an FCP approach, by:

– engaging with government departments and food supply chain players to develop the buyer’s needs into specifications for tenders;

– acting as a technology broker, bringing venture/equity capital and innovator companies together;

– coordinating legislative activities that provide adequate market conditions for adopting innovations in the wider industry; and,

– promoting technology demonstrations and case studies to show the business case.

• Coordinate government-led food innovation activities (e.g. grants and strategic directions for public R&D), from a supply and value chain perspective. This would avoid a lack of supply chain focus and would increase critical mass in the initiatives undertaken.

• Provide timely competitive and technical intelligence for all stakeholders about the particular FCP projects targeted, bringing to the stakeholder’s attention current and emerging technologies in the targeted technology markets.

Further, the SCOI model is based on the development of three types of consortia: the buyer consortia, the supplier consortia and the legislative consortia.

5.5.2 Buyer consortia

A buyer consortium is formed by two or more supply chain partners that establish an alliance to contract/purchase the new process/ product/ service developed by a supplier consortium. Examples of alliances may be (a) a retailer and a cooperative that enjoy mutual benefits in purchasing a new retail-ready format for fresh produce that is also environmentally friendly; (b) a fast-food chain, a third party logistics provider and a food manufacturer that all mutually benefit from the use of new logistics systems that allow direct dispatch of home delivery orders from the manufacturer to the consumer. This type of consortium becomes effectively a supply chain innovation network as illustrated in Fig. 5.6.

Fig. 5.6 Buyer consortium.

5.5.3 Supplier consortia

A supplier consortium is formed by two or more organizations that seek to deliver innovation at the specifications (e.g. cost, time, performance) set by legislative consortia. Public and private R&D organizations supply solutions and showcase their R&D to innovation entrepreneurs who are hoping to develop the new product/ technology/ service, either as a start-up company or as a new product development in an established company. Universities and RTOs contribute with gap analyses of the skills required to deliver the innovation to the marketplace and build training and education programmes to address these gaps. If needed, venture capital is sought to continue R&D activities in collaboration with the public/private R&D organizations and to prepare case studies highlighting the business case. Figure 5.7 illustrates this type of consortium. A crucial aspect of the operation of these consortia is technology transfer from public R&D organizations to the new venture. Fair intellectual property arrangements should be negotiated to ensure that all parties in the innovation supply chain are rewarded.

Fig. 5.7 Supplier consortium.

5.5.4 Legislative consortia

A legislative consortium aims to increase the receptiveness of the market to new technologies/ processes/ products by introducing standards, regulations and laws that increase performance targets in certain areas. Examples may include:

• new regulations on water usage encouraging innovation in water utilization;

• improved regulations on the limits of food poisoning cases per territory or state encouraging innovation in food safety;

• new energy regulations for commercial and domestic refrigeration encouraging innovation in refrigeration systems.

Figure 5.8 illustrates a potential legislative consortium.

Fig. 5.8 Legislative consortium.

5.5.5 Innovation process

In the SCOI model, a buyer consortium (which may or may not include a public sector organization) establishes a commitment to purchase a predefined quantity of a product/technology/service, currently under development. NFISC and one or more buyer consortia agree about the performance sought for the innovation. A supplier consortium is formed and solutions are sought, based on past innovations applied to different industry fields or completely new concepts. Meanwhile, a legislative consortium develops standards, regulations and certification processes that enable fair competition and enhance the chances of the uptake of new solutions at the agreed performance specification. When the innovation has been developed, meeting all performance criteria, the buyer consortium purchases the product at a specified volume and cost, at levels that encourage other supplier consortia to enter the market. The private sector would react by freeing investment to search for innovations that respond to those specifications. The SCOI model encompasses the steps and processes shown in Fig. 5.9.

Fig. 5.9 The roles and processes of the SCOI model.

The SCOI model does not necessarily advocate a government role on becoming the early market buyer that executes the forward commitment options. This strategy may be effective in some areas with obvious links to public good, such as food safety. However, innovations with a clear commercial or industrial impact would benefit from an early intervention of food supply chain players that commit to buy the new product / service/ technology when this is developed. The drivers for such commitment should be based on (a) a superior value proposition, which may include financial, environmental and social performance parameters; (b) new regulations encouraging the uptake of the innovation; and (c) a demonstrated increase in competitiveness in the marketplace if the innovation is adopted.

5.6 Platforms for sustainable co-innovation in the food sector

In the view of this author, there are three areas where co-innovation can achieve its greatest impact:

1. Environmental co-innovation: For economies that largely depend on agricultural exports, it will become critical to demonstrate that their food supply chains are aligned with good environmental practices. A recent example of environmental co-innovation is the Sustainable Distribution Strategy, which involves 37 well-known food and consumer goods companies in the UK. It is expected that this initiative will lead to savings of 23 million litres of diesel fuel per year, through sharing of vehicles and optimising the use of warehouses (Anon, 2008).

2. New product development (NPD): Consumer-led NPD may offer the best platform for co-innovative projects between retailers and manufacturers (Grunert and Valli, 2001). In highly perishable new products, the flow benefits of co-innovation can be captured simply by information sharing and forecasting collaboration. For less perishable foods, synchronization of inventories can be an attractive proposition for the supply chain partners (Holweg et al., 2005). In a co-innovative environment, forecasting and synchronization have more probability of success than in traditional, manufacturer-led NPD efforts.

3. New services and processes: Innovation in the services sector draws elements from engineering, science and management theory. New developments in this emerging area have the potential to tackle complex problems in which coordination and collaboration between professionals in different fields is essential (Paton and MacLaughlin, 2008). Service innovations include category management, coordination of supply/demand and track and trace technologies.

Examples of specific food supply chain projects where a national system could improve the success rate of co-innovations in the market include:

• information and communication technologies in modern food supply chains (e.g. traceability systems);

• food logistics and packaging systems (e.g. retail-ready, convenience markets, ageing population);

• functional foods and nutraceutical value chains;

• emerging technologies for improvement of food safety and quality;

• sustainability of food supply chains, with emphasis on water, energy and food waste (e.g. carbon-neutral supply chains);

• food security, including planning of pandemic scenarios and contingencies.

5.7 Conclusions and future trends

It has been long recognized that co-innovation, in the form of cooperation and integration of existing knowledge from different organizations across supply chains, can lead to exciting new products and services. A concerted approach in the agricultural and food industries would go a long way towards reaching the levels of openness, communication and commitment required for modern innovation models. Such an approach should recognize the highly dynamic nature of the food industry, the benefits of market driven innovation and the usefulness of policy as an instrument for encouraging innovation in the marketplace.

A sustainable co-innovation framework can help to achieve a paradigm shift in the way food chain participants create novel products, processes and services. Furthermore, transforming supply chain relationships from adversarial, transactional-based operations, to cooperative approaches would increase the resilience of food chains to the many challenges that have plagued the industry of late. Resilient food chains can only add value to companies, their partners and the society in general.

Current disruptive events such as the turmoil of global financial markets, growing concerns about the relationship between food production and environmental footprints and the effect of increasing production costs on the affordability and security of food can lead to a profound transformation of food production systems. A fundamental question raised by these recent events is ‘Under this challenging scenario, How can the global agri-food sector become more competitive?’. The answer to this question is likely to require a holistic vision of food chains, whereby competitiveness is conceptualized as a function of the cumulative efficiency of the supply chain partners. The key role of innovation in lifting the competitiveness of the industry needs to be recognized and addressed in the strategic plans of industry and governments worldwide.

Increased urban population coupled with an increased awareness of the impact of food chains on the environment will lead to the development of new food distribution models. Examples of these trends include:

1. The rise of urban, local and regional chains. Issues such as food security,power imbalances in food chains, the environmental impact of food transport, obesity and other health issues attributed to the strategies of multinational food companies have led to some disillusion among consumers in current food systems and the growth of companies that embrace ethical sourcing and environmental awareness. Interest in local and regional distribution models that connect growers to consumers has ramped up globally since 2007 (Estrada-Flores, 2009) with examples such as the FoodConnect enterprise in Australia, the eFarm company in India and the ‘Von hier’ brand promoted in Germany.

2. Sharing distribution networks and infrastructure: Companies are now re-evaluating the way they store and move goods in the context of supporting continued economic growth, while protecting the environment. Some current examples demonstrate that enterprises are now willing to cooperate with other firms (even with competitors) to improve economies of scale and decrease logistics carbon footprints. Examples include:

 The ECR Sustainable Distribution Group initiative (UK), which aims to save food and grocery industry mileage by sharing vehicles and improving the efficiency of warehousing networks.

 The SmartWaySM Transport (USA), an innovative collaboration between the Environmental Protection Agency and the freight sector designed to improve energy efficiency, reduce greenhouse gas and air pollutant emissions and improve energy security (EPA, 2009).

 The Clean Cargo Working Group (USA), which is a multi-sector, business-to-business collaboration between ocean carriers, freight forwarders and shippers of cargo. Members of this group include Coca-Cola, Wal-Mart, Chiquita Brands and Starbuck’s, among others. Tools used to enhance communication between participants are annual environmental surveys, intermodal emission calculators and CSR performance surveys (BSR, 2009).

3. The growth of supermarket-led initiatives to optimize supply chains. Examples include:

 Woolworth’s Limited Environmental Sustainability plan (Australia), which aims to achieve a 25% reduction in CO2-e per carton delivered by 2012 through reduction in distance travelled, the introduction of new vehicle designs, the use of alternative fuels and the use of hybrid trucks (Woolworth’s, 2008).

 The Woolworths Holdings Limited initiative (South Africa) to reduce relative transport emissions by 20%, by restricting airfreight of food products and sourcing food regionally wherever possible reducing reliance on long distance road transport (Woolworths Holding Ltd, 2009).

 The Wal-Mart’s Sustainability 360 initiative (USA-global), which aims to reduce the number of trucks by redesigning the supply chain network, changing the presentation and size of food products and using auxiliary power units in their truck fleet (Anderson, 2008).

    •The redesign of the Tesco distribution network (UK), which aims to reduce 50% emissions per case by 2012. Tesco’s supply chain infrastructure includes 29 warehouses and over 2000 vehicles travelling 659 million km throughout the primary and secondary transport operations. Tesco is measuring the carbon footprint of three of its major food categories (tomatoes, potatoes and orange juice). Tesco has also committed itself to reduce packaging by 25% over the next three years (Watkins, 2008).

Other strategies that can also contribute to the sustainability of food distribution systems are:

• use of real-time telematics and computer routing and scheduling (Robson et al., 2007)

• implementation of alternative transport modes (e.g. rail and water ways)

• use of hybrid trucks, which increase fuel efficiency by 30–50% (Environmental Defense Fund, 2009)

• use of alternative energy sources for powering cold chain infrastructure, for example, the combination of grid electricity and power derived from wind (eolic) energy (TNO, 2009)

• packaging optimization and removal of excess packaging (Robson et al., 2007)

• use of hydrogen cells to power forklifts in distribution centres (DOE, 2009)

• use of supply chain network modelling as an aid to reducing food shipping carbon footprints (Robson et al., 2007).

Novel developments on these areas are likely to continue in the next decade. This author believes that innovation can successfully become the driver in transforming food supply chains. Innovation will enable the world to supply safe, wholesome and affordable food in an environmentally challenged future.

5.8 Sources of further information and advice

Readers wishing to understand innovation in the context of the Australian food industry in more detail may want to refer to recent submissions presented in response to the following reviews:

• The Garnaut Climate Change Review (2008) ( au) which discusses carbon trading schemes for Australia to be implemented by 2010.

• The Cutler Review of the National Innovation System (2008) ( which discusses a potential map from the government’s innovation investment for 2010–2020.

• The Australian Competition and Consumer Commission inquiry into the competitiveness of retail prices for standard groceries (

• The Senate’s inquiry about food production in Australia (

In all these reviews, the submissions presented by the food industry are relevant. Some comments as to how these reviews will affect the Australian food industry can be found in the Food Chain Intelligence website (

Also of particular interest are:

• Fearne et al., 2001: This chapter examines the process of globalization, the emergence of food retailers as the dominant force in the food supply chain and the relationships that are emerging from the current balance in the market. This is key reading material to understand how retailers have a unique opportunity to drive innovation in new product developent and services throughout the chain.

• Grunert et al., 1995: This is a very detailed paper that reviews the literature on the determinants of innovation and their impact on business performance. The authors propose a theoretical framework for the analysis of innovation in the food industry.

• Grunert et al., 2008: The paper provides an overview of relevant streams of research that can form a basis for research on user-oriented innovation in the food sector. The authors show the relevance of research on: (a) the formation of user preferences; (b) innovation management; and (c) interactive innovation.

• Wijnands et al., 2007: In this study funded by the European Commission, the competitiveness of the European food industry is compared to other countries (i.e. USA, Canada, Australia and Brazil). Innovation is highlighted as a key industry driver and as a potential source of solutions for increasing competitiveness. This study is one of the few which included all subsectors of the food industry and benchmarked these with important non-EU countries.

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