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Innovate or perish!

October 26, 2005 10:58 IST

It is universally recognised that the single most important determinant of a company's shareholder value is its perceived ability to grow its future profits.

Today, perhaps no industry has to confront this challenge more powerfully than the FMCG business. It's finally emerging from a prolonged period of stagnation on the back of rapid growth in rural markets.

But such exogenous factors cannot consistently guarantee higher-than-expected revenues. This is an issue FMCG companies urgently need to ponder.

Delivering consistent excellence has become critical given the challenging competitive environment in which FMCG companies operate. Hyper-competition has presented the consumer with an explosion of choice; for the first time established players have had to tackle the problem of down-trading as traditional value equations changed.

Accelerated lifestyles and increasing awareness are making it harder to please consumers, thereby shortening product life-cycles drastically. A fragmented and proliferating media adds to the complication of targeting consumers as effectively as before.

All this means that generating value on a consistent basis will require much more than just doing things better; it will require doing things differently.

Producing soap more cost-effectively, for instance, may no longer be enough; it is more important to produce soap with a novel usage proposition -- just as, say, single-serve sachets revolutionised the shampoo market in the early 1990s. Innovation can no longer be considered an exception; it needs to become an integral driver of growth.

In fact, innovation is increasingly becoming a metric by which corporate performance is being measured. For instance, a Fortune magazine study put "degree of innovativeness of the company" as the strongest predictor of investment value. Hard data corroborates this.

Take the case of Reckitt Benckiser, where close to 40 per cent of the revenues are generated from products introduced in the past three years.

According to Bart Becht, CEO, Reckitt Benckiser, a company's ability to innovate is about much more than R&D. In an interview, he said, "We measure innovation by the percentage of net revenues coming from new products launched in the past three years. That's a measure of output, not input. There is no correlation between the percentage of net revenue spent on R&D and the innovative capabilities of an organisation -- none. That's not to say that R&D capacity isn't important, but at the end of the day, innovation is generated by new ideas, not by messing around in the lab."

The results are for everyone to see.

Since the formation of the merged entity in 1999, Reckitt Benckiser has more than doubled its net profit, and its operating margin has soared from just shy of 12 per cent in 1999, to over 19 per cent in 2004. In fact, it is one of a mere handful of companies that meet Accenture's definition of a high performance business globally.

Most CEOs recognise the strategic potential of innovation, and it remains a key strategy to lever competitive advantage. It is no surprise that in an Accenture study, 83 per cent of senior executives surveyed said innovation was vital to the future success of their company.

But the surprising point, as another Accenture survey of the readers of Chief Executive magazine showed, most companies are able to commercialise less than one in five promising ideas; only one in eight executives felt strongly that their companies excelled at implementing innovative ideas.

Indeed, the ability to innovate successfully presents FMCG companies with unique challenges, principally in terms of approach and organisational readiness. For many of them, new product development has become synonymous with mere product extensions or variations.

This has partly been a result of the traditional brand management organisation. Eager to put consumer-responsiveness at the heart of a company's operations, too many resources are typically funneled to product variations that brand managers can easily fit in their portfolio, or which are in their comfort zone.

Since these objectives are harder to reach with radically new products, these projects inevitably suffer or are put on the backburner.

Unlike product industries such as pharmaceuticals, automotive or chemicals, the R&D function plays a limited role in the innovation process within FMCG companies. The critical success factor for innovation in FMCG companies is not the technological breakthrough it represents -- this is limited by nature in any case.

What matters is the degree to which the entire organisation can be aligned to make the innovation a success . It means getting the linkage between product development and the supply chain right, since that is where speed-to-market is achieved or destroyed.

In short, to work, innovation must be a collaborative initiative in which top management takes conspicuous ownership. According to Bart, "At Reckitt Benckiser, innovative ideas are generated from consumers, from suppliers, from creative shops. In fact, everybody in this organisation is there to generate ideas as well and to bring them to the table. The more ideas I have, the better my chances of finding a winner."

Another Accenture study on entrepreneurship showed that the common barriers to innovation are, in order of importance, aversion to risk and failure, lack of innate entrepreneurial skills, slow decision-making, lack of resources and little readiness to change.

The same study showed that the common enablers for effective organisational innovation are exchanging and sharing information and knowledge, working collaboratively and having an entrepreneurially-inclined leadership that actively leverages technology.

For winning FMCG companies, innovation becomes a holistic issue focused on building the company-wide capability to develop a constant stream of innovative products and bringing them to market faster.

One way of achieving this is to create a structured process involving cross-functional teams with distinct phases built on the themes of strategy, execution and capability-building.

The first phase should typically be planned around a number of key questions such as:

Which consumers do we want to serve and what do they value and need?

What is the current portfolio and does it optimally align with overall strategy and consumer needs?

Where do innovation opportunities exist that meet consumer needs and are in line with the portfolio strategy?

What innovation stream is required to meet shareholder value-creation targets?

Next, the target innovation stream and the required capabilities should be viewed in conjunction to define a two-pronged execution plan. In this, a distinction must be made between the specific capabilities needed to realise particular innovations and the generic capabilities to become inherently more innovative.

This distinction allows the management to initiate a parallel process of implementing the short-term aspects of the strategy -- getting the product to market, for instance -- and distilling the learning from the exercise into a robust capability-building programme that invests in people and knowledge management systems.

In recent years, the ability of firms to innovate is creating significant differences between the best and the rest. A study of over 200 companies entitled "Winning New Products" conducted by the Kellogg Graduate School of Management shows that successful innovation firms were more likely to generate growth rates of 20 per cent or more compared with less successful ones.

And as Robert Cooper points out in Product Leadership: Creating and Launching Superior New Products (Oxford University Press), while 46 per cent of resources are spent on unsuccessful products, the best 30 per cent of companies have a success rate of 80 per cent.

As Steve Jobs once pointed out "innovation distinguishes between a follower and a leader." For FMCG companies, innovation is no longer a luxury; it holds the key to survival.

The writer is Senior Manager, Accenture.
Ashish Nanda
Source: source