Opportunities for Action in Consumer Markets

A Disciplined Approach toBreakthrough Innovation

A Disciplined Approach toBreakthrough Innovation

Most major consumer-goods companies spend heavilyon innovation—as much as 5 percent of sales. Trulyinnovative products create value for consumers, ex-tend the category, generate higher margins, andstrengthen the brand. Moreover, in an age of increas-ingly powerful retailers, innovative products boostcompanies’ bargaining power for shelf space andretail displays.

Yet for all the resources that companies pour into the innovation funnel, surprisingly few truly break-through products emerge at the other end. Over andover, we see pipelines clogged with inconsequentialprojects while potentially valuable ones expire forlack of resources. As a result, most product launchesrepresent only minor variations on existing SKUs.

The remedy for ineffective innovation, however, isn’tnecessarily more spending. Indeed, when we analyzedmore than 20 of the top packaged-goods manufactur-ers, we found that the total dollars they spent rarelycorrelated with the number of innovative productsthey launched (see Exhibit 1).

We define innovative products as those that offer con-sumers significant new benefits through advances intechnology, formulations, or applications, or throughmore convenient packaging. Some companies maydiscover that they do need to increase their overallinvestment in innovation in order to achieve break-throughs. But the first step for ensuring a consistentflow of innovative products is to understand why thecurrent process is failing.

The Black Hole of Innovation Spending

In working with global companies to diagnose theirinnovation problems and rebuild their systems, werepeatedly encounter the same obstacles: weak portfo-lio management, clogged pipelines, “ghost” projects(flawed projects that won’t die), and fragmentedresources. Refocusing a company’s efforts on solvingthese problems can yield far greater results than sim-ply increasing spending.

Weak Portfolio Management. One fundamental causeof innovation breakdown is a lack of disciplined port-folio management. Although most companies distin-guish core from noncore categories and brands, theirinnovation portfolios rarely reflect those priorities. At

Exhibit 1. More Spending Won’t Guarantee More Innovations

SOURCES: Marketing Intelligence Service; company reports.

Innovativeproductlaunches

R&D spending ($billions)

25

20

15

10

5

00 1 2 3 4 5

Performance at top packaged-goods companies from 1997 to 1999

one company, noncore brands accounted for roughlyhalf of the past three years’ product developmentprojects. At another company, nearly one-third of allprojects were authorized by brand managers three tofour levels below the CEO. Because the brand man-agers didn’t have a comprehensive view of consumers’needs or the company’s priorities, the resulting port-folio failed to align with corporate strategy.

Such mismatches of resources and strategy nearlyalways point to a project initiation process that is notwidely observed. In theory, most of the companies wehave worked with had tracking systems that requiredestimates of investment and sales growth for eachproject. In practice, more than half the projects atthese companies were initiated without such basicbusiness justification. Disciplined portfolio manage-ment, which is how many pharmaceutical companiessucceed with innovation, enforces crucial decisionsand eliminates wasted effort.

Clogged Pipelines. Breakthrough innovations thatdeliver valuable benefits to consumers bring in tensor even hundreds of millions of dollars in incrementalsales. But such growth requires more than minor SKUmodifications or product-line extensions. Unfortu-nately, most product pipelines are clogged with “proj-ect sludge”—a backlog of low-return projects that aredesigned merely to tweak an existing product.

How does project sludge get into the pipeline in thefirst place? In most companies, incentive systems andshort-term rotational programs reward a brand man-ager for initiating any project—regardless of its size orreturn on investment—during the manager’s brieftime in his or her position. As a result, managers feelenormous pressure to load the funnel with as manyprojects as possible. Several senior management teams

told us that they approved a list of 50 to 100 projectsonly to find one year later that there were three timesas many projects in the pipeline.

At most companies, breakthroughs are expected todrive at least 60 percent of the organization’s growth.We have found, however, that only 20 to 30 percent of the innovation investment in most companies isdevoted to truly innovative projects. That gap repre-sents a serious misallocation of resources.

Ghost Projects. Ailing projects siphon off valuableresources, but no one wants to be the executioner.That’s why at most companies fewer than 10 percentof the projects active at the beginning of the year arekilled by the end of the year, despite the fact that 30to 40 percent fail to clear hurdles. Frequently, thechampions of these lost causes take their pet projectsunderground or into the skunkworks to escape thehatchet. One R&D director described his company’sinnovation pipeline as being “haunted by ghosts—completely hopeless projects that refuse to die butcontinue to suck the lifeblood from healthy ones.” Tocreate organizational awareness of the use—and mis-use—of resources, a pharmaceutical company weworked with instituted “liberation parties,” at whichemployees celebrate the resources freed up by abort-ing a project.

Fragmented Resources. Companies with a glut ofinsignificant or ailing projects force their scientistsand technicians to spread themselves thin, fragment-ing their valuable time. At several consumer compa-nies, we found that the average project received lessthan half of any scientist’s time. That may be suffi-cient for a minor change in packaging or a new flavoror fragrance, but it will not drive significant innova-tion at the pace required today. Without dedicatedresources to provide focus and continuity throughout

an innovation project, the time to market stretchesout well beyond the best practice of 12 months.

Getting More from Each Dollar

Innovation is the future. It excites consumers andprovides an outlet for creativity and insight. Com-panies that are dedicated to successful innovation andgrowth adhere to the following five principles.

Employ an investment portfolio approach. An objec-tive portfolio-review process is essential for managinga successful pipeline. The goal is to have the right mixof line extensions, category improvements, and break-through ideas that will deliver consistent returns overseveral years.

Some companies create a senior-level, cross-functionalportfolio review committee to ensure a good balanceof projects. In most instances, this group’s meetingscan be tucked into other scheduled events to avoidbureaucratic delays. Such committees should includesenior executives, who have the clout to make the inevitable tradeoffs among strategic priorities, re-sources, launch timing, and consumer and financialhurdles. Once the committee has approved a portfo-lio of projects, it can meet quarterly to review thecompetitive environment and other factors that mayhave changed since the last meeting. Many commit-tees develop templates that help them make timelyand informed decisions.

Revamp the innovation process. Great ideas are oftenhard to sell early on, and premature demands fornumbers and analyses can kill creativity. Nevertheless,consistent breakthrough innovation is impossiblewithout an explicit process of business justification,especially as an idea approaches the development

stages. The best process requires some justification ateach stage of the project. Requirements at variousstages might include

• consumer research to verify the market for aninnovation

• consistent development and commercializationsteps with well-defined timelines

• financial, operational, and consumer hurdles thatare monitored consistently and unemotionally

• project postmortems to provide timely feedback

Such a process—if followed in a disciplined man-ner—will speed the development of the best ideas.And it will mercifully eliminate the doomed ones.

Marshal experience and cumulative knowledge. Mostconsumer companies have launched hundreds ofproducts in recent organizational memory, yet therecord of that experience is little more than anecdo-tal. An organization must record, track, and analyzeits knowledge to reap the most value from it. Projectsshould not be allowed to move through the pipelinewithout thorough documentation that includes re-ports on consumer-testing methodology and results,investment and time allocations, and predicted versusactual sales. We recommend a database of projectreviews to create a multiyear history.

Dedicate resources to breakthrough projects. Lookbehind the most valuable innovations and you arelikely to find sufficient resources. Good innovatorsmake sure their budgets are commensurate with theopportunity. They also dedicate full-time R&D andmarketing staff to ensure that the focus remains onthe breakthrough idea. Often these companies form

cross-functional “assault teams” that work on the pro-ject throughout the development and commercializa-tion stages (see Exhibit 2). Such teams, whose mem-bers may change as the project progresses, are usuallyled by an R&D or marketing person.

Leverage external partnerships. Increasingly, externalpartnerships are essential for speed, economy, andsuccess. R&D departments need to develop relation-ships with vendors that rise to the level of collabora-tion. With such arrangements, new technical capa-bilities can incubate over time without substantialresources.

Getting Results

Companies that revamp and refocus their investmentin innovation have demonstrated surprisingly dra-

Exhibit 2. The Assault Team

Project captain(from R&D ormarketing)

• Assesses technical abilities• Develops and refines the product• Identifies attractive partners

• Conducts consumer testing• Develops and refines the consumer

proposition

• Positions the product in the marketplace• Develops marketing and promotion plan• Develops plan for product volume

• Conducts detailed financial analysis• Conducts postmortem reviews

• Plans in-store merchandising• Develops promotion schedule• Trains sales force• Oversees trade sell-in

• Assesses technical requirements• Determines degree of outsourcing

Technology

Participationincreasesover time

Consumer research

Marketing

Finance

Sales

Engineering andoperations

matic improvements within 36 months—and manywithin half that time (see Exhibit 3). What follows is ashort list of questions, amounting to an instant audit,to help your company get started on its own innova-tion revival.

• How many truly breakthrough products have youlaunched in the past five years? We define a break-through product as one that generates incrementalsales that are greater than 1 percent of a businessunit’s total sales.

• How many active projects are in the pipeline? Whatis the average commitment of scientists’ time toeach project?

• Are there clear points at which appropriate metricsand reviews are required?

SOURCE: The Boston Consulting Group.

Exhibit 3. The Results of Refocusing Innovation

Improvements at major packaged-goods companies within18 to 36 months

Metric Before After

Number of 200–350 125–175active projects

Percentage of 20–30% 35–50%innovation budgetdevoted to breakthrough projects

Development time 18–26 12–16for new products months months

Number of 0.5–0.7 1–1.2breakthrough productlaunches per year

• How many projects failed to clear the hurdles inthe past year? How many of these projects wereactually killed?

• What proportion of your innovation dollars isdevoted to breakthrough projects rather than lineextensions?

The answers may surprise you. The lesson will beclear: before throwing more dollars into the innova-tion process, make sure your company is achievingmaximum returns on its current investment.

Katrina HelmkampRichard Lesser

Thomas Lutz

Katrina Helmkamp is a vice president in the Chicago officeof The Boston Consulting Group. Richard Lesser is a vicepresident in the firm’s New York office. Thomas Lutz is avice president in BCG’s Atlanta office.

You may contact the authors by e-mail at:

helmkamp.katrina@bcg.com

lesser.rich@bcg.com

lutz.tom@bcg.com

We invite you to post comments and questions to the authors

online at www.consumer.bcg.com. Or just visit the site to see what

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within three days. We hope to generate a lively discussion and wel-

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© The Boston Consulting Group, Inc. 2000. All rights reserved.

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