Far from firing on all cylinders, most consumer packaged goods innovation engines are sputtering. Successful innovation turns new ideas into measurable value creation opportunities for both companies and their customers. Yet only 26% of CPG companies believe that their innovation efforts deliver sustainable competitive advantage. Despite high levels of R&D investment — home and personal care companies, for example, typically spend as much as 2.3% of revenues on R&D — significant revenue growth from innovation remains elusive.
Not so, however, for industry leaders. By abandoning the traditional single-engine approach to innovation in favor of a new, dual engine strategy, a few top companies have been able to power ahead.
The reality is that most CPG “innovations” are actually renovations — incremental changes to existing products. Given recent history, that’s scarcely surprising. Against a background of rising SKU counts and ever more rigorous regulation, rather than strive for the game changers that deliver new value for consumers, 67% of CPG companies tend to pursue the safe option: maintaining market share through line extensions.
Over the past three decades, the number of products available in the average supermarket has more than quadrupled. However, today’s shoppers don’t want more choices, they want better choices. Irritation runs especially high in developed markets, where most products debut. In the U.S., the majority of new CPG products record less than $10 million in sales in their first year. In Europe, only 7 out of 12,000 product introductions generate more.
Renovate better to innovate better
The inefficiencies of the current product renovation approach have driven leading players to seek improvements, largely by leveraging digital technologies to streamline and simplify their processes.
Such efforts have exposed an unexpected symbiosis. More efficient renovation doesn’t just accelerate speed to market for existing products. It also frees up both financial and human resources to focus more effectively on true innovation. In addition, it delivers those innovations to new markets a lot faster.
Two complementary innovation engines — one focused on renovation, the other on true innovation, working in tandem, and enabled by digital technologies — are proving significantly better than just one.
Two engines are better than one
Instead of combining their renovation and innovation engines, leading companies have separated them. The two engines share common goals: maximize return from the company’s innovation investment while building and sustaining competitive advantage. But they approach these goals differently. Furthermore, the measurement and management of innovation, speed, risk, and product portfolio, as well as the skills required to run each engine, are interpreted differently — in subtle yet critical ways.
The concept of speed is critical for both engines, but with important distinctions. For the renovation engine, which needs to maximize revenues, the essential performance indicator is speed to market. A successful renovation engine leverages digital technologies to reduce the time that R&D resources spend on low-tech, low-value, low-risk activities cutting product iterations to a minimum. On the flip side, an innovation engine is built around rapid experimentation and refinement with a cross-functional and increasingly external team working in concert towards the outcome.
The renovation engine needs to minimize risk — hence the importance of applying a traditional stage-gate approach to minimize (and even remove) development risk. For the innovation engine, however, which needs to embrace risk in order to drive break-through product, service or solution development, risk management is the critical consideration.
Efficiency is key to the success of the renovation engine. Operational KPIs such as cycle time and stage-gate adherence predominate. For the innovation engine, however, quality factors are more important: the novelty of new ideas and their potential as drivers of long-term value.
Traditional portfolio management processes and dashboards can help optimize the product mix in renovation portfolios, which are geared toward managing a large number of smaller initiatives. But the innovation engine, which functions as a platform for taking fewer, bigger bets, needs to be managed with a higher degree of executive focus. It requires integration across functions and the strategic agility to enable either course correction or the expansion of original concepts.
Because the renovation engine focuses on process and execution, it needs skilled and efficient operators. But the innovation engine requires additional skills: creativity, integration and flexibility among them. Crucially, however, R&D resources need to be balanced in order to ensure the complementarity that’s key to the success of the two-engine approach.
Most CPG companies have yet to recognize that the traditional, single-engine approach to innovation has had its day — let alone to adopt the radically new, two-engine approach that is more fit for purpose. By transforming their R&D processes into accelerators of both more efficient product renovation and more effective product innovation, companies could create more value for customers and drive new growth for their companies and shareholders.