R&D is a key factor of sales growth in the CPG industry. However, returns from investments in R&D and innovation have been falling. This has led to further cuts to R&D budgets, making breakthrough innovations (which typically have higher returns than incremental innovations) even less likely, leading to lower returns still.
This downward spiral in R&D investment isn’t the only problem. A rigid adherence to orthodox approaches towards innovation, which once served the industry well, are now holding back innovation as they lead to large numbers of undifferentiated innovations hitting the shelves of retailers.
The Details: Innovation
However, major changes are afoot. The advent of open innovation seems to provide a magic bullet solution; it can both improve innovation and simultaneously reduce costs. Certainly the larger, global, players have been quickest of the mark in adopting open innovation approaches, and smaller companies risk being left behind. But open innovation itself is that part of the puzzle – it needs to fit in with a consistent set of innovation strategies and approaches in order for it to serve in the long term.
The multitude of approaches available also makes deciding upon innovation strategy (and surprisingly this basic step is seldom given adequate attention), approaches and processes increasingly difficult. This report examines what the latest strategies and approaches are, what is needed in order to execute them effectively and crucially assesses the areas where companies need to tailor approaches to fit their own company’s needs and drive future success.
Review and appreciation of the strategic innovation options that CPG companies should examine. Crucially, this analysis also covers the need to establish a coherent innovation strategy across categories and platforms and for alignment with overall corporate strategy.
Failings with current CPG innovation approaches and how these are holding back innovation are examined.
Analysis of open innovation and its potential benefits for the CPG industry is provided. Crucially the steps needed in order to effectively approach open innovation are covered.
A framework for managing innovation pipelines is developed which enables it to be seen if an innovation portfolio contains enough of the right types of innovations in the pipeline in order to obtain a flow of innovative products in not only of the short-term, but also the medium to longer-term.
Early research on innovation tended to address the organization’s capacity to respond and adjust to external and/or internal changes (Burns and Stalker) (Hull and Hage). Subsequent work on innovation stressed more on proactive innovation and distinguished between the kind of innovation. There are three types of innovation (process, strategy, and product/service), each of which can range from incremental to radical and from sustaining to discontinuous.
Emphasis was on the ability of the organization to promote both process and product innovation, irrespective of an immediate need for change (Kanter).
Evaluate all the strategic options available to a CPG company in order to begin the processes of deciding upon how to update innovation strategy to lay the foundation for future growth.
Understand the crucial actions and approaches required, with a view to execute strategic decisions effectively – from updating corporate cultures and skills sets to establishing more effective innovation processes.
Identify flaws in current innovation practices and understand why these are holding back product innovation. Use this to be in a position to select only the best, most useful practices for use in the future.
Innovation budgets are under pressure as a consequence of current innovation approaches resulting in lower returns than before. Companies need to innovate to keep their sales. However, new approaches are needed in order to achieve the gains sought.
Opening up innovation teams and practices to people outside the company (open innovation) is a hot new topic. Yet most firms are only in the early days of their open innovation programs and need help in optimizing their approaches.
Many companies can improve their innovation practices and approaches by incorporating, where appropriate, best practices found in other firms. Yet to do this effectively they must first analyze exactly what their overall innovation strategies are and how these fit with overall corporate strategy.
Orthodox approaches to innovation in CPG companies are leading to most new launches being incremental innovations which are poorly differentiated from other outputs in the market.
The CPG industry invests relatively little (as a percent of sales) in R&D compared to many other industries. This is despite breakthrough innovations (which typically require greater levels of investment than incremental innovations) offering higher returns.
A changing innovation environment is creating many challenges to innovation. One major change is the incoming Health Claims Regulation in Europe which will both increase the expense of healthy product innovation and challenge current innovation practices.