The Many Faces of Innovation

As part of its 2006 Global CEO Study, IBM interviewed 765 CEOs from around the globe, 49 of whom were from the CP industry. Overall, the IBM study found that CP companies have a narrower focus on innovation. Nearly 60 percent of the CP CEOs ranked product innovation as their top priority, with less than 10 percent ranking business model innovation as a priority. Yet the companies who achieved greatest financial performance were those who had focused not only on product but also on business model and business process innovation. Our survey also identified internal issues as the main barriers to successful innovation. Clearly, a more broad-based approach to innovation is needed with the following elements at its core:
Establishing executive commitment to drive innovation as a strategic priority
Embracing external collaboration and improving internal coordination
Improving technology and business integration, particularly in the areas of insights and new product development

Multi-Faceted Approach

The traditional product, market/channel and services facets of innovation will remain the lifeblood of a CP company. However a continued emphasis on incremental product and service improvements is generating predictably mediocre results. The study showed only 13 percent of CP company innovations represent "fundamentally new offerings." According to Information Resources Inc, the consequence is that, in the United States, only 10 percent of the products introduced in 2005 exceeded sales of $20 million. Incremental product innovation delivers incremental results. To deliver real growth CP firms must also address business model, operations and regulatory innovation.

4Business model: Leading CP firms such as PepsiCo and Procter & Gamble focus their business models on selected growth segments and category-leading brands. In addition to maximizing scarce resources, these actions increase CP company relevance with consumers and gain leverage with retailers. CP firms are adopting a similar approach as they restructure their organizations and value chains, retaining and investing in the core and differentiating components of the business while finding alternative ways of managing their other activities. The survey found a connection between emphasis on business model innovation and faster operating margin growth.

4Operational: To fully realize the benefits of business model innovation CP firms are also transforming operations by prioritizing investment in market-differentiating capabilities, such as customer and channel management, marketing and supply chain, and forging new partnerships to access additional capabilities. Non-differentiating activities such as HR administration and IT services are candidates for outsourcing.

4Regulatory: Growing concerns about the impact of consumer products on society, health and the environment are driving sweeping changes in the regulatory arena. Although many CP companies reflexively aim for minimal regulatory compliance at the lowest cost, in some cases a different perspective can reveal unique growth opportunities, particularly in the areas of health and wellness.

4Executive Leadership: Although an enabling culture is critical for innovation, CP CEOs cited an unsupportive culture / climate as their primary barrier to increased innovation. Overcoming cultural biases against innovation requires strong executive leadership and a corresponding commitment of time and energy.

Collaborate and Coordinate

4External collaboration: Historically, innovation had to be kept inside the business. Leading companies now recognize that innovation requires extensive external collaboration. CP companies such as Procter & Gamble and Kimberly-Clark leverage an extensive innovation network to identify and source the best ideas and insights.

4Internal coordination: Arguably bringing new products and services should be a CP company's core competency. However, many CP companies continue to suffer from long product development cycle times, indecisiveness over whether to "cut" initiatives and ineffective internal coordination across functions at launch. More than 63 percent of CP companies surveyed cited improving the new product development process as the No. 1 action they will take to innovate in the products and services area.

Those companies with an acknowledged new product development expertise demonstrate the following: Senior leaders take an active role in the decision making and portfolio management process; ideas flow actively across the organization; processes are executed in parallel; and measures are highly visible.

"Integration Gap"

CP companies must realize the importance of integration, versus reaping the benefits. Critical innovation enabling activities such as insights generation, product development and launch management can be supported by technology. However, the 2006 IBM/GMA IT Spending Study found that, while CP companies state that growth as their main priority and view technology as a key enabler and asset, only 10 percent of technology investments are allocated to growth initiatives.

Deploying New Approaches

Innovation must be a key component of a CP company's growth strategy, and it is clear that traditional approaches are no longer enough. To drive real growth, CP companies need a multi-faceted innovation strategy with the CEO as its strongest advocate. It is also essential that CP firms build the culture and management systems to nurture and sustain innovation. Ultimately, we believe that only those CP companies that embrace multi-faceted innovation as a core competency will be successful in the global marketplace.