Academic journal article The McKinsey Quarterly

Food Biotechnology: Can You Afford to Be Left Out?

Academic journal article The McKinsey Quarterly

Food Biotechnology: Can You Afford to Be Left Out?

Article excerpt

No. We are about to witness a revolution

The challenge: managing an R&D web with a variety of partners

But only a few major developers remain

Much of the attention paid to biotechnology in recent times has focused on applications that are a long way off, like cloning or a cure for cancer. Amid the futuristic hoopla, it is easy to overlook the fact that biotechnology has already brought important benefits through the discovery of new drugs, vaccines, and diagnostics. Moreover, a quiet revolution has gone almost unreported, even though it is generating unprecedented change in an industry that touches our lives every day. Biotechnology is revolutionizing the food chain in a way that will affect millions of people across the globe.

What media coverage this topic has received has mostly dwelt on consumers' concerns about the safety of genetically modified crops. While this issue must be addressed, the negative press obscures biotechnology's impressive potential to provide plentiful, nutritious, and novel food for the world's growing population. With innovation gathering pace as the new century dawns, biotechnology is also creating exciting opportunities for players in the food industry. The effects on its structure and economics could be profound.

Having made massive investments in new products and processes, biotechnology developers face obstacles in exploiting them fully because of the dynamics of current value delivery systems. These companies are by no means unaware that much of the industry's margins are concentrated in downstream food manufacturing - the area where conventional food and packaged goods companies operate. Traditional mechanisms for capturing value, such as seed innovation, are limited in their potential for generating income. Indeed, inputs as a whole represent 8 percent of food chain margins in the United States, whereas food manufacturing nets 30 percent [ILLUSTRATION FOR EXHIBIT 1 OMITTED].

This may change. Developers recognize that biotechnology could drive substantial growth in margins and open up new opportunities to shift value upstream. With billions of dollars at stake, they are striving to capture a larger share of these additional margins. In many cases, exclusive or preferential arrangements with forward-thinking food companies could deliver considerable value to both parties.

Food industry leaders will seek to use biotechnology to strengthen their market share, positioning themselves as natural partners to biotechnology developers - as Frito-Lay did in forming an alliance with Procter & Gamble to secure exclusive use of the synthetic fat Olestra in snack foods. For second-tier brands, biotechnology-enabled innovations may represent their only chance to change the rules of the game and vault into leadership contention.

Regardless of players and brands, biotechnology innovations will redefine the relationship between packaged food companies and their ingredient and technology suppliers. The era of arm's-length relationships is oven Food companies that fail to recognize the enormous potential of biotechnology could be left out of the coming boom in biotechnology-driven growth. Building a biotechnology strategy and restructuring supplier relationships are among the most urgent strategic tasks they face.

Innovation is accelerating

Biotechnology is reshaping the links between the participants in the food chain: the manufacturers of chemicals, seeds, and fertilizers, the growers, the processors, and the packaged goods manufacturers. Change is already taking place as first-generation biotechnology-enabled innovations penetrate the market: examples include herbicide-tolerant soybeans, slow-ripening tomatoes, virus-resistant squash, and insect-resistant potatoes, corn, and cotton.

Consider Bollgard (Bt) cotton, an innovation developed by Monsanto and commercialized by Delta & Pine Land. Bollgard cotton has been genetically modified to produce a protein that is selectively toxic to boll worms, the crop's biggest pest. …

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