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Read the article, and answer the question below: 1. Characterize BBA’s traditional flavor(new product) development process.2. Characterize BBA’s proposed flavor development process. How would it affect its business model?
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9-601-061
REV: JUNE 3, 2010
STEFAN THOMKE
Bush Boake Alleen
‘‘I’’ll have tea, with
w milk and
d no sugar, pllease,’’ said Ju
ulian Boyden, chief executtive officer off Bush
Boakee Allen (BBA
A), to the waiiter serving him
h
and John
n Wright, vice president of commercee and
technology and a fellow British
h expatriate. With nearly
y six decades of experiencce at BBA bettween
them,, the two werre veterans off the flavor and
a
fragrancee industry. Over
O
lunch, Boyden and Wright
W
had been
b
discussiing whether BBA should
d increase cu
ustomer partticipation in flavor innov
vation
through a new In
nternet-based
d technology that relied on
o a half-miillion dollar machine.
m
Sun
nlight
stream
med through the window
ws of the cozy
y Saddle Riveer Inn restau
urant. This part
p
of New Jersey
J
lived up to its ‘‘Garden State’’ name
n
and lay close to whatt industry inssiders called ‘‘The Silicon Valley
V
of thee flavor and fragrance in
ndustry.’’ BB
BA had play
yed no small role in help
ping maintain
n this
reputation.
Neearly all pro
ocessed foodss had ‘‘flavo
or’’ added to
o them becau
use manufaccturing techn
niques
weakeened the ‘‘rea
al’’ flavors inv
volved. A sm
mall quantity of, say, naturral beef flavorr added to a recipe
r
for caanned beef stew made thee resulting prroduct taste ‘‘‘more like’’ beef
b
stew to th
he consumerr. But
exactlly what beeff was ‘‘suppo
osed’’ to tastte like was not
n clear——to
o beef stew manufactureers, to
consu
umers of beeff stew, or eveen to flavor development
d
c
companies
fo
ocused on creeating beef flaavors.
Theree was no onee, universal, standard.
s
Ass such, flavorr innovation itself was co
onsidered mo
ore art
than science.
s
Man
ny ‘‘flavorists’’’ had method
dological idio
osyncrasies an
nd biases they
y drew upon when
design
ning a flavo
or. This would likely never
n
change,, despite breeakthroughs in chemistry
y and
technology. The human nosee and tonguee appreciated
d nuances off flavor too subtle for hu
uman
ingen
nuity to replicate.
Mo
ost of the inn
novation risk was borne by
y suppliers lik
ke BBA, who paid for all R&D
R
expensees and
colleccted revenue only
o
after a fo
ood customerr like Nestle was
w fully satiisfied and con
nsumers eventually
bough
ht its end pro
oducts. If cusstomers themselves were able
a
to particiipate in the development
d
e
effort,
Wrigh
ht and Boydeen reasoned, that
t
might bo
oost the effective rate of flaavor acceptan
nce, which hovered
aroun
nd 5% to 10%
%. Thus, even
n if the new technology made
m
little im
mpact on the cost and speeed of
development, the system might positively affect
a
customeer relations. But how far to place conttrol in
h
of custtomers remaiined a puzzlee. A pilot machine
m
for producing
p
flaavor sampless was
the hands
alread
dy in place in
i Rotterdam
m, the Netherrlands, and would
w
hopeffully help an
nswer some of
o the
questiions. Yet eveen if the new way
w of develo
oping flavorss would provee feasible, unccertainty rem
mained
aboutt how much, if
i at all, to chaarge customerrs.
In an hour Boy
yden would host
h
a telecon
nference with
h executives from
f
BBA’s many
m
international
offices to assess su
upport for thee new projectt. Initial feed
dback had thu
us far been mixed.
m
But Bo
oyden
himseelf was no strranger to opp
position. Early in his careeer he raised eyebrows wh
hile working as an
______________________
__________________________________________________________________________________________________
Professo
or Stefan Thomke and Research Associate Ashok Nim
mgrade prepared th
his case. HBS casess are developed so
olely as the basis for
f class
discussiion. Cases are not in
ntended to serve ass endorsements, so
ources of primary data,
d
or illustrationss of effective or inefffective managemeent.
ght © 2000, 2001, 2010 President and Fellows of Harvarrd College. To ord
der copies or requeest permission to reeproduce materialss, call 1Copyrig
800-545–7685, write Harvarrd Business Schooll Publishing, Boston
n, MA 02163, or go
o to http://www.h
hbsp.harvard.edu. No part of this pub
blication
may be reproduced, stored in a retrieval sysstem, used in a spreadsheet, or transsmitted in any form
m or by any mean
ns——electronic, mecchanical,
photoco
opying, recording, or
o otherwise——with
hout the permission
n of Harvard Busin
ness School.
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[email protected] or 800-988-0886 for additional copies.
601-061
Bush Boake Allen
analyst for a chemical company when he recommended closing the firm’s Malaysian fertilizer
operation. His report collected dust. Through a twist of fate, Boyden was later assigned to head the
very same operation. The first thing he did was to lay off 80% of the entrenched personnel in favor of
outsourcing. In a shock, headquarters telephoned him. ‘‘You read my recommendations that we not
buy the place,’’ Boyden responded. ‘‘What else did you expect me to do?’’ Back came the slow reply:
‘‘Uh, oh… you’re the chap who wrote that report…’’
The Scent of Success
‘‘Bush Boake’s invisibility is nearly rivaled by its ubiquity,’’ was how one newspaper described
the firm.1 In an $11 billion industry dominated by trade secrets and not patents, this cloak of
invisibility had thus far suited all players well. BBA could trace its roots to the 1966 merger of three
British companies, the oldest of which, Stafford Allen Ltd., had started in the 1830s, as a seasoning
and distillery company. Each had a strong overseas presence, especially in British Commonwealth
nations and the United States. In 1982, Union Camp (which later merged with International Paper
Company) acquired BBA. After its initial public offering in 1994, BBA shifted its headquarters to the
Garden State (see Exhibit 1 for financials).
Key to the company’s global strategy was maintaining a decentralized structure, which allowed
local managers to make decisions swiftly and respond to regional needs while providing the
flexibility to service large customers such as Nestle and Unilever. To further strengthen and extend
its international presence, BBA launched a ‘‘Gaps in Maps’’ strategy in the 1980s. Lasting two
decades, the effort established new manufacturing sites in Thailand, China, Turkey, and Mexico,
among other countries, based on the goal of supplying consistent, locally produced ingredients and
gaining a better understanding of local preferences (see Exhibit 2).
By 2000, BBA operated as a public company in 38 countries on six continents and had nearly two
thousand employees. Flavors and fragrances accounted for about 80% of its half-billion dollar annual
revenues, and aroma chemicals for the remainder. The Americas accounted for 35% of sales, Europe
for 33%, and Pacific Asia for 16% (see Exhibit 3). The importance of the international sector was
indicated by BBA’s near double-digit growth in India, the world’s fastest growing flavor market. To
ensure its international prominence, the company pumped some $25 million annually into research
and development, not only at its three main technical facilities in New Jersey, London, and India, but
in 36 other labs worldwide.
Although BBA encouraged regional autonomy, it exercised strong central financial control, with
international managers having to provide monthly basis reports to headquarters and file for capital
expenditure endorsements. International offices also coordinated efforts, partly through a common
computer system, to share information on large multinational corporations and other key customers.
Boyden traveled frequently to different regions of the globe to keep in touch with his firm’s many
locations.
In 1999, BBA’s 10 largest customers represented one-fourth of total net sales. While most
customers did not buy all their flavors from a single source, they traditionally used only a few ‘‘select
suppliers.’’ Also, in exchange for a guaranteed amount of yearly spending, customers could extract
rebates from these select suppliers. BBA purchased its raw materials from varied sources worldwide
to ensure an uninterrupted supply. No one source accounted for more than 4% of the company’s raw
material requirements in 1999.
1 Moritz, S., ‘‘Hidden Products, Modest gains Bush Boake posts 4% earnings rise.’’ The Record, Northern New Jersey, May 8,
1997.
2
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Bush Boake Allen
601-061
BBA’s sales force operated from four offices in the United States and 50 offices worldwide. In
North America, for instance, the firm employed six marketers and 12 sales representatives; each
salesperson handled some three major customers——each generating annual revenues of $3 to $5
million, typically through a dozen or so flavors——as well as several minor customers. A large
customer might have as many as six to eight divisions that a salesperson would have to work with.
Sales representatives were responsible for maintaining an open line of communications with
customers. This entailed not only obtaining product specifications from customers but also actively
managing the customer interaction with R&D during flavor development, including keeping
customers informed about new ‘‘base’’ flavors coming out BBA’s research labs. For their work,
salespeople could potentially earn some of the highest salaries in the company thanks to bonuses and
commissions.
BBA’s earnings and revenues modestly increased every year during the 1990s, a period when
several competitors had floundered. ‘‘This company is a steady grower,’’ according to Arthur Weise,
a New York-based investment analyst. ‘‘The only double-digit growth we would have expected to see
is if they had a revolutionary flavor that would help drive up sales dramatically. It’s been primarily a
value investment. It’s a stable business not subject to great changes because they are providing
things for food. You’ll always need food.’’ 2
Given the industry’s business model, which transferred most innovation risk onto the flavor
makers, BBA sought to appear ‘‘solid and trustworthy,’’ according to Theresa Gordon-Wright,
international marketing manager, ‘‘but we are thinking about changing the way we have operated in
this traditionally low-key industry.’’ Some of these changes were being spearheaded by Boyden, who
actually started as a chemist in the detergent industry, then switched to management by getting an
MBA in the early 1970s. BBA’s parent company hired him as a senior manager to ‘‘bring a breath of
fresh air’’ into what had been a traditionally run company. In a manner unusual for a manager,
Boyden spent a considerable time in his early days learning about the mundane aspects of the flavor
industry by working several hours a week in the confectionery lab. ‘‘From the outset,’’ said GordonWright, ‘‘it was clear that he was very smart and he stood out as the clear choice for company
leadership.’’
In 1989, Boyden assumed company leadership, eventually becoming president, CEO, and
chairman of the board (see Exhibit 4 for BBA’s organizational chart). Like Boyden, several of the
company leaders came from the British working and middle class, and rose through the ranks. Partly
for these reasons, according to Wright, they remained ‘‘blind to the distinctions between the
governed and the governors . . . fostering a collegial, parliamentary type of debate and discussion
that allowed the freedom to experiment, at least in the stages before the entire company committed to
one direction.’’ American manager Debbie Johns, vice president of marketing, found her 16 years
with the company far ‘‘more open’’ than her time at her previous job, thanks, in part to Boyden’s
open-door policy, which she found ‘‘surprisingly democratic for a manager of British origin.’’
BBA went public in 1994, emphasizing product innovation, improving the company’s product
mix, expanding into high-growth markets, and increasing margins.3 Some new measures to improve
productivity, embedded in a seven-year $240 million capital investment program, included
automating certain processes and launching a new technical and sales ‘‘creativity center’’ near
2 Moritz, S., ‘‘Hidden Products, Modest gains Bush Boake posts 4% earnings rise.’’ The Record, Northern New Jersey, May 8,
1997.
3 Chemical Market Reporter, ‘‘Bush Boake Allen Aims for the F&F Big League: Bush Boake Allen’s sales may reach $500 mil in
1997.’’ August 11, 1999, page 5.
3
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601-061
Bush Boake Allen
Rotterdam. The firm also reduced headcount and improved productivity, changes that allowed it to
increase its sales and earnings to above industry averages.
By the year 2000, the company was debating ways to use e-commerce capabilities to leverage
creativity through establishing virtual teams of flavorists and managers internationally. ‘‘After
surviving for many years in the middle of the flavor and fragrance pack,’’ one industry observer
declared, ‘‘Bush Boake Allen is finally ready to play with the big boys.’’4
The Flavor and Fragrance Industry
Who could not be interested in this industry? I can’t imagine a more interesting line of work. It’s about
food, flavors, and physical attraction from drosophila to moths to humans. It’s about everything that makes the
world go around! But scents are subtle… with ingredients that may work in parts per billion concentrations we
can certainly concoct a nearly infinite variety of flavors and scents.
—–Julian Boyden, CEO, Bush Boake Allen
BBA operated in a field of over 300 competitors worldwide. Only a tenth of these, however, had
significant multinational operations. Leading the industry was the US firm International Flavors and
Fragrances (IFF), at three times the size of BBA, followed by the Swiss firm Givaudan Roure. The top
nine global companies accounted for over three-fourths of this $11 billion world market (see Exhibit
5). Although BBA enjoyed membership in this elite club, it held only about 4.7% world market share
in 1999.
The worldwide flavor and fragrance industry was split about evenly between flavors and
fragrances. The three dominating regions in order of decreasing market share were North America,
Western Europe, and Asian Pacific. In the setting of a worldwide annual growth rate in the late 1990s
of 3.2% for flavors and of 2.5% for fragrances, an industry journal noted, ‘‘One thing is sure: flavor
and fragrance companies can still grow but just not as fast as they would like.’’5
In India, whose 8% to 9% annual growth led the world, BBA enjoyed a 30% market share by
capitalizing on relationships established since British colonial times. According to Bruce Edwards,
vice president of International, ‘‘The average candy consumption in the United States is 20 kg/year
per person; in India it is 20 g/year. In fact, there are kids in places like India or even Russia who
have yet to taste their first candy. So the third world is a burgeoning market!’’
But to grow in such markets took great effort; simply producing basic flavors and arranging for
distribution proved challenging. ‘‘In India, they’re still struggling with issues such as not having
uninterrupted electricity,’’ Gordon-Wright pointed out. ‘‘In Pakistan, it’s hard weaning Pakistanis off
old flavors and onto new flavors. They’re the only ones left using some of our older flavors! Even in
Eastern Europe, where flavor development was done traditionally by the government, you end up
doing product demos right on corners of their desks!’’ To add to the challenge, competitors also
sought footholds in markets like India, often luring away local managers trained by BBA.
All flavors produced worldwide were subject to regulation by equivalents of the U.S. Food and
Drug Administration, and other state and local regulatory agencies. In some countries, one also
needed to register all samples with the government——just because two or three ingredients were safe
did not mean that combining them would prove safe. Complying with these regulations, however,
had not been problematic and had not impacted the company’s earnings or competitive position.
4 Hoover’s Online Overview, 2000.
5 Chemical Market Reporter, ‘‘F&F Financial Results Show There’s Growth in Industry.’’ January 26, 1998, p. 17.
4
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[email protected] or 800-988-0886 for additional copies.
Bush Boake Allen
601-061
In a setting where reverse engineering using even the latest technology was difficult, most
companies relied on trade secrets to protect intellectual property. Only on occasion would a firm
patent a flavor. ‘‘The entire industry is based on trust,’’ said Gordon-Wright. ‘‘If we develop a brand
new flavor for a customer, we don’t turn around and sell a small modification of it to the customer’s
competitor.’’
But things were changing rapidly. Players in the flavor and fragrance industry already faced cost
pressure and high risk given the prevailing business model. Moreover, by using new technologies
some large customers themselves were able to analyze flavors within days; not only would chemical
formulations be revealed but production cost data could also be gathered. As a result, the erosion of
flavor prices was accelerating. In Boyden’s terse assessment: ‘‘The days of attractive and stable
margins are over unless we change our business model.’’
The Art of Flavor Innovation
Taking a flavor from nature was a complex task. One could, in theory, smash a strawberry in a
beaker and summon the power of such modern analytical techniques as nuclear magnetic resonance,
chromatography, and mass spectrometry to identify all components present (see Exhibit 6).
Thereafter, one should be able to add back all these components in their respective quantities to
recreate the flavor of a strawberry. But such a reductionist scheme quickly invited complexity.
Within a strawberry, one may find 200 to 500 components in varying concentrations. Not
surprisingly, some of the ingredients identified prove incidental and some even detrimental to the
flavor, while trace elements might make a world of difference. As a result, scientific shortcuts quickly
become complex, lengthy, and expensive. But even if one decided to recreate a flavor sparing no
expense, could the flavor of strawberry be exactly reproduced? Unfortunately not. Because of
enormous variations in freshness, sweetness, ripeness, texture, size of seeds, and so on, no one, true
‘‘strawberry reality’’ existed.
People
Therefore the onus fell upon the flavorist. Different flavorists might use a slightly different blend
of ingredients based on their personal recollection of a strawberry. A superb flavorist might even
reach back to his or her very first childhood memory of savoring a strawberry——a pristine
remembrance, unsullied by all subsequent psychological associations of adulthood——to create a
flavor. The difference between excellent and good flavorists boiled down to imagination and
creativity: imagination for recreating a flavor in the ‘‘mind’s nose,’’ and …
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