Survival-of-the-Fittest Innovation a strategy+business exclusive…

Survival-of-the-Fittest Innovation




a strategy+business exclusive
by Edward Baker

08/05/2008




© 2008 Booz & Company Inc. All rights reserved.
               Survival-of-the-Fittest Innovation
               Booz & Company Partner Alexander Kandybin on why consumer products
               companies should look to the power of natural selection to break out of
               the incremental innovation trap.

               by Edward Baker
   1
strategy+business
leadingIDEAS




                                                                            S+B: Why does the corporate culture at so many CPG
                                                                            companies seem to be ill-suited to breakthrough inno-
                                                                            vation?
                                                                            KANDYBIN: At most CPG companies, research and
               D        espite launching tens of thousands of products
                        every year, the consumer packaged goods
                        (CPG) industry has struggled at length to
                                                                            major innovations they are willing to put out into the
                                                                            market. Instead, says Kandybin in this recent interview
                                                                            with strategy+business, CPG companies should take an




                                                                            S+B: What's wrong with listening to the customer?
               develop true breakthrough innovations. In the view of        evolutionary approach to product innovation by intro-
               Alexander Kandybin, a partner at Booz & Company              ducing more products, allowing more time for them to
               who regularly advises consumer goods companies on the        succeed or fail in the market, and developing products
               innovation process, it's because they are caught in a        and packaging that are much more difficult to imitate.
               vicious innovation cycle: The industry is mature and
               investments in innovation typically generate low
               returns. As a result, companies cut research and devel-
               opment investments, thus giving themselves even less
               chance of discovering breakthrough innovations. And
               the fewer big innovation successes they have, the more       development is not a strategic function. Rather, it is
               they cut R&D budgets. Instead, companies focus on            more of an execution function. CPG companies typi-
               incremental innovation, generating necessary but minor       cally believe that new-product ideation resides in mar-
               line and brand extensions -- dozens of different deter-      keting and that R&D is only loosely associated with real
               gent formulations, for instance, or cookie flavors -- that   innovation. I have heard CPG executives say, "The
               keep new products flowing into the market. Yet the           R&D team just develops what we want them to devel-
               competitive advantage they gain with these innovations       op, because we know the market." In fact, research and
               is soon lost as rivals quickly introduce their own copy-     development should be considered a strategic function
               cat products into the market.                                and an equal innovation partner with marketing. R&D
                     That approach to innovation, Kandybin believes,        should be based on the possibilities from a product and
               has led CPG companies to think of innovation as essen-       technology perspective rather than on marketing's con-
               tially a marketing function rather than as a strategic,      sumer-centric view.
               competitive advantage. Their risk-averse cultures rely
               too heavily on customer input, limiting the number of
Edward Baker
(baker@edwardhbaker.com),
former editor of CIO Insight
magazine, is a contributing
editor at strategy+business.




                                                                                                                               2

KANDYBIN: Understanding consumer needs is impor-




                                                                                                                             strategy+business
                                                                                                                             leadingIDEAS
S+B: How can CPG companies increase their chances of           S+B: Given the challenges of the competitive landscape
coming up with breakthrough ideas?                             in consumer packaged goods, how can CPG companies
KANDYBIN: This refers back to companies' overdepen-
                                                               afford to fully develop all of them. So they institute




                                                               distinguish themselves?
                                                               KANDYBIN: One big problem with innovation in CPG
tant in developing many products, but it's a difficult         processes that kill too many good ideas before they go to
way to come up with truly breakthrough ideas.                  market. The better strategy is to create a business model
Dependence on understanding consumers' own percep-             that allows you to test different breakthrough innova-
tions of their needs for innovation ideas will only lead to    tions in the market on a regular basis, kill those that
incremental innovation, and incremental innovations            don't work early on, and amplify those that do.
can't, by definition, reap large rewards.                           Think of it in evolutionary terms. Innovation is real-
     Should we involve the consumer in innovation? Of          ly a form of competition. Why do companies innovate?
course. But the question should be, What can you ask           They innovate for only one reason: to outperform their
consumers? If you ask consumers about something new,           peers, to create something that their peers don't have from
they won't know what to tell you, because they don't           which they can gain economic benefits. And because
know what they want. For example, if you had asked             innovation is a form of competition, it's subject to the
consumers in the early 1900s what improvements they            laws of evolution. If you look at the CPG sector from the
wanted in transportation, they would likely have told          macro perspective, what you'll see is lots of companies
you a faster, more reliable car and better roads. No one       introducing lots of new innovations, and it will look like
would have thought to ask you for an airplane. If you          many random events. Those that really meet consumer
give consumers a prototype of a new product, they can          expectations or change consumer expectations survive --
react to it. But it requires quite a bit of development to     those that don't, die. Ultimately, the environment choos-
get to that point.                                             es which products work and which don't.




dence on customer input. Breakthrough ideas come
from a better understanding of technology development          is that new ideas are so easily copied. A company will
and trend development, and from trying to figure out           launch a product, and within weeks or months its
potential solutions. You can never know if an idea will be     biggest competitor will launch a product that offers
successful or not, so companies should develop multiple        almost exactly the same solution in a slightly different
options as prototypes, and only then involve consumers         shape or form. Sara Lee Corporation recently launched
in the process. The customers will have something to           a line of bagged salads that include meat, which was a
react to. Even at that point, however, if your idea is truly   new product that addressed consumer needs. Soon after,
new, consumers may not appreciate all of its benefits.         Kraft Foods launched essentially the same product. The
     And even if companies do think up truly break-            result is that there's no market share gain, and the com-
through products, they often decide that they can't            pany that first introduced the new product doesn't cap-
                                                                             ference between good ideas and bad ones. +
   3




               S+B: How can CPG companies get more breakthrough
strategy+business




               product ideas into their pipelines?
               KANDYBIN: One source that CPG companies don't
               ture the value of its innovation. One consequence of this     strategy: They create a network of outside scientists,
               is that companies will find that being the fast follower to   then use those scientists to respond to the same con-
               market is often a more effective and profitable strategy      sumer needs their own departments are responding to,
               than being a market leader.                                   and to develop the same kinds of consumer-oriented,
                     Because differentiation in the CPG sector is so dif-    incremental ideas.
               ficult, companies should turn their efforts toward inno-            Open innovation should be thought of the other
leadingIDEAS




               vations that are more difficult for competitors to copy.      way around. Rather than paying outside researchers to
               Focus on product or packaging technologies that require       perform their own work, companies should make it
               a little bit more advanced science to manufacture; this       attractive for anyone in the world to come to them with
               will at least delay copying by competitors, and may buy       their innovations and ideas. Then, all of a sudden, they
               you enough time to enjoy an attractive return. When           increase leverage a thousand times. Procter & Gamble
               H.J. Heinz Company began selling crispy microwave-            Company is particularly good at this. If a researcher in
               able French fries that tasted good, they began to fly off     the Philippines or Australia or Japan comes up with a
               the shelf. That may not sound like a major break-             breakthrough product that relates to oral care, for




                                                                             Resources
               through, but it does require some science, in both the        instance, the best way for him or her to monetize the
               product and the packaging, to actually make these             innovation is to call P&G. Once that happens, a com-
               French fries microwaveable. No one else has matched           pany's innovation leverage increases dramatically. After
               them yet, and it's been a while since they launched.          all, companies still have to have the ability to tell the dif-




               depend on enough is fundamental research. They typi-
               cally do their R&D and innovation within business units
               instead of a central organization, and that's another rea-
               son their innovation efforts are focused on the incre-
               mental. The problem, of course, is that if you create a
               central organization that is detached from the market, it's
               likely to end up being a comfortable place for R&D sci-
               entists to spend lots of money and time simply thinking.
                    But such organizations can work well if their efforts
               are attached to a market mechanism. For example, they
               might be expected to produce a business plan along with
               their new ideas and sell that business plan to the appro-
               priate business unit. If none of the business units wants
               to buy it, they could be allowed to sell it outside the
               company. Or they could be given the option of devel-
               oping ideas internally or sourcing ideas from the outside
               and paying market rates for those ideas. Once you force       J. Baldwin, "The Case for Long Shots," s+b, Autumn 2006: Why the
               central innovation groups to develop ways to attach           innovations that seem like the biggest gambles are those that have the
               themselves to the market, they begin to work better.          biggest payoffs. www.strategy-business.com/press/article/06303

                    There has also been a lot of talk about looking out-     Barry Jaruzelski and Kevin Dehoff, "The Customer Connection: The Global
               side the corporation, to universities and the govern-         Innovation 1000," s+b, Winter 2007: The third annual overview of the
                                                                             world's high-leverage innovators reveals that innovation strategy is as impor-
               ment, for new ideas and sources of innovation -- in part
                                                                             tant as customer insight. www.strategy-business.com/press/article/07407
               because of CPG companies' lack of fundamental
               research. That kind of open innovation can work, too,         Alexander Kandybin and Martin Kihn, "The Innovator's Prescription:
                                                                             Raising Your Return on Innovation Investment," s+b, Summer 2004:
               but it has to be handled properly. Too many companies         Describes how to increase the effectiveness of a company's innovation
               run their open innovation efforts the same way they run       spending. www.strategy-business.com/press/article/04205
               innovation in their own departments. It's really a "push"
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