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The Innovation Imperative in Consumer Products 4 October 2004
"We are growing market share in 70% of our businesses. That doesn't happen unless you have strong innovation." Clayton Dayley, CFO of Procter & Gamble, in Business Week
Two news events in the last several weeks have underscored the importance of innovation in consumer products. First, Interstate Bakeries, the largest baker in the United States, filed for bankruptcy on 22 September. According to analysts, one of the prime causes for the company’s failure was its lack of innovation. The maker of Wonder Bread and Hostess Twinkies, with annual sales of $3.5 billion, couldn’t introduce the kinds of new products that would preserve its margins and keep its sales growing.
Bankrupt after 77 years
During the same week, Procter & Gamble, buoyed by a string of successful new product introductions, forecast a 14% annual increase in its third quarter earnings. Both Unilever and Colgate Palmolive, on the other hand, reduced their earnings forecasts for the second half of the year – quarterly earnings are expected to drop at both companies.
Now more than ever, successful new products are vital to the health of consumer products companies. Raw materials prices are rising, pushing costs up, while Wal-Mart and other large retailers strive to keep consumer prices as low as possible, keeping revenues down. Successful new products give some leverage back to manufacturers in this buyers’ market.
Over the last five years, Procter has done a better job at major consumer product innovations than anyone else in the business. Each year, market researcher Productscan gives its “better mousetrap” awards to the consumer products that it judges to be most innovative. From 1998 to 2003, P&G has won five of these awards, more than any other company (SC Johnson was second, with four awards over the same period).
In the last five years, P&G has launched products like Crest Whitestrips™, the Spinbrush™ electric toothbrush, and the Swiffer™ cleaning system. These products have either created new categories (mass market teeth whitening) or grown categories that were small (low-priced electric toothbrushes). At the same time, the company has very active product and brand maintenance efforts, resulting in new packaging and flavors in core products like toothpaste, personal care, and detergents.
While some companies, like Interstate Bakeries, fail because of a lack of innovation, other companies run into trouble because their rate of return on innovation is too low – they spend too much on innovation and get too little in results. When Joseph Galli Jr., became CEO of Newell Rubbermaid in 2001, for example, he promised 15% earnings growth by turning out a range of new products in consumer brands such as Graco car seats and Sharpie pens. Newell lost money in 2002 and again in 2003, and investors have pushed the stock down from a high of over $50 in 1999 to under $25 today.
P&G has not always been such a strong innovator. As recently as the late 1990s, a number of critics saw P&G as slow and out-of-touch. Bernd Shmitt, a marketing professor at Columbia University, had this to say about the company in The New York Times in June 2000: “When you look at the products in the supermarkets that are on the cutting edge … this entire culture is missing at P&G. There's very little product innovation.” No one is making those comments about P&G today. How did P&G make such a dramatic turnaround in this area? As with any company this big and complex, there were a number of major initiatives aimed at achieving this improved performance. When P&G management talks about the change, two things stand out:
1. A consistent CEO focus on innovation. Improving innovation performance needs to be a consistent and ongoing priority of senior management. This has been true at P&G for more than six years now. A.G. Lafley emphasizes the importance of innovative new products, and so did his predecessor, Durk Jager.
Senior management focus is necessary but not sufficient for success, however, as Newell Rubbermaid’s experience shows. For new products to contribute systematically to success and growth, the quality of the idea and its delivery to customers must be better than that of its competitors.
2. A new approach to the innovation process. P&G has adopted a number of “open innovation” approaches, which enable new ideas and technologies to come from outside the company as well as inside.
For example, P&G has created a formal position of “technology entrepreneur.” These are highly skilled research employees whose specific task is to look at intellectual property outside of P&G and see whether there are any applications that may help P&G innovate. As a result, P&G has taken proven electro-static technology, used for painting cars in the auto industry, and applied it to the application of cosmetics on the skin. They have taken plasma technology designed to repel dirt from plastic bumpers and applied it to the inside of Tide detergent containers to enable customers to “get the last drop out” of their detergent bottles. And they have brought in promising new products, such as their low-priced electric toothbrush, from outside entrepreneurs.
This approach has enabled P&G to reduce its R&D investments by 20% over the past three years. It currently obtains 35% of its ideas, products, and technologies from outside the company, up from 20% three years ago. The company’s target for this measure is 50 percent – it wants to source half of its innovation outside of the company.
Unilever and Colgate Palmolive will undoubtedly come back. Colgate was lionized several years ago for its dynamism, and will surely be on top of its game again. The last several weeks, however, have provided examples of how successful innovation can make a huge difference in the performance of consumer products companies.
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