The development of a vibrant innovation strategy is a prerequisite for a successful consumer product business. That’s a fact of business life, regardless of the prevailing economic conditions. However, in the current global economy, just about every pressure that could be brought to bear on consumer product R&D programmes or those of suppliers in the value chain is in play; and this goal is as challenging as it has been in recent history. Competing forces are all pulling on resources and making for very difficult priority calls.
In the constraints category, the depressed economy has made reduced R&D budgets and resource counts the norm, which should lead to reduced capacity. However, at the same time, R&D demands have escalated due to a host of marketdriven factors. Raw material cost uncertainty, lower margins and sales and store brand growth all drive continuous cost management and reformulation programmes. Add the search for sustainable materials, product proliferation due to demanding consumer segments – the baby boomers, for example – and continuing global expansion of consumer product markets, and you have a formula for stretched R&D organisations.
This formidable set of competing forces has led to an R&D capacity Imbalance between demands and constraints with two predictable results. The first is that R&D organisations find themselves not idea-constrained, but capacity-constrained, with more R&D initiatives than they can handle. The second result is more ominous for future business growth. With many demands falling into the urgent, short term category, innovation productivity suffers; expert resources are diverted to short term work, such as aesthetic changes, incremental formula optimisation and cost management, and longer term innovation programmes get delayed or suspended for lack of expert resources to staff them. The inevitable outcome is incremental innovation programmes.
Data show that very few new products are having a large market impact. Recent Times and Trends data show less than 3% of new products are meeting the $50m sales hurdle and more than 90% of new products are line extensions.1
There is no doubt that these short term demands must be addressed; the dilemma is how to maintain the capability for breakthrough innovation that is at the foundation of a strong consumer product business.
The reality is that no single strategy choice will solve this dilemma. Success, defined as a balanced pipeline of innovative products over a sustained period while managing current business requirements, demands a series of interdependent, concerted choices and decisions to balance and focus R&D programmes and the associated resource management strategy.
This has always been the case; however, in today’s dynamic and uncertain economic environment the need for disciplined choices is critical. Some say we are operating in the ‘new normal’2 - a term used since the 1930s to describe the new economic equilibrium that typically follows major economic downturns. It seems that the only certainty is more uncertainty and we must plan for innovation with this climate as the norm. Few commercial R&D organisations can afford to waste resources on unproductive avenues of research or work that can be outsourced, modeled, simulated or automated. Success calls for disciplined R&D management and innovation strategy decisions so that every element of R&D is functioning optimally and synergistically and innovation productivity is maintained. This is the basic tenet of ‘Smart R&D’.
As shown in Figure 1, the key Smart R&D decision phases fall into five key areas: portfolio creation, portfolio management, core capability strategy, partner strategy and innovation balance. None of these concepts are new; the essence of Smart R&D is the use of these concepts in a concerted sequence on the path to market to drive principle-based decisions. I also include a decision to invest in Smart Lab technology – modeling, simulation and high throughput technology – in this set as it is a key approach to reducing the capacity imbalance.
It all begins where business strategy meets R&D strategy in portfolio creation and management (PCM). Poor PCM choices lead to many of the ills that can befall commercial R&D. This is where ‘project creep’ happens and R&D organisations find themselves stretched beyond their capability and capacity to develop significant innovation. Creation must focus on value and risk/return balance but many issues come in disciplined choices of what not to work on and in the ‘management’ phase as newdata or issues surface. In a recent McKinsey report,3 74% of corporations polled claimed that they have trouble stopping projects at the right time; 42% say that an improvement in the PCM process would have profound difference in innovation performance. The requirement is for a disciplined ‘weed and feed’ process that continuously challenges the presence of a project based on defined success criteria and alignment with the business vision.
With a PCM system in place, the questions critical to managing the capacity imbalance are: ‘Do we have the both the capability and/or capacity to deliver to the portfolio?’ Or better put, ‘what has to happen to deliver the portfolio?’ ‘Can or should we take this on internally or with the help of others?’
An objective core capability assessment is an excellent principle-based approach to answer these questions. I’ve concluded that translation of such an assessment into actions that cover current, near- term and future needs, requires that core capability be divided into three categories; existing, extended and emerging capability.
Existing capability is the capability that has brought the company to this point, that is, world class capability that differentiates it from its competitors.4 Objective assessment of existing capability can lead to two important outcomes and action areas. First, it identifies those areas of capability that must be protected, nurtured and made accessible to multiple businesses. Secondly, it identifies capabilities that fall better into the core capability of others and would be best in-sourced, outsourced or worked through partners, thereby freeing up internal resources to work on areas that truly leverage existing core capability.
Extended core capability is core to the business over the long term, but is the world class capability of a partner; a good example would be enzyme technology for the cleaning product business. This is an area of long term strategic partnership and typically requires a small expert group within the consumer product company to define direction and liaise with product development strategy. Careful partner choice is critical. Mistakes hinder innovation productivity and take a long time to unravel.
Emerging core capability is capability that is probably not yet commercially available but which has the potential to be game changing. Diligence here is absolutely critical for the establishment of future business possibilities. As its potential becomes more defined, this category could either transition into extended or existing categories or be replaced by another choice. Classical examples would be in sustainable technologies currently in the venture mode.
With these three capabilities defined, a more focused picture of resource deployment will emerge that will balance the portfolio. An important question is this category is whether to invest in Smart Lab technology, that is, increasing experimental efficiency by the use of modeling, simulation and high throughput technology. This decision can radically impact the capability imbalance caused by the use of expert resources on routine technology and formulation screening.
With portfolio and core capabilities defined, partnership strategy can be assessed. Does your partner have the extended or emerging capabilities that you need? Do you know them well enough to answer that question? If not, a comprehensive assessment of partner capabilities is called for. The key is to separate simple, but necessary, business relationships, usually characterised by on-demand deliverables on a relatively short timeline, from strategic partnerships that may lead to co-development, co-creation and breakthrough innovation over a sustained period. Strategic partners share long term business visions and often approach game changing developments together, treating the outcome as a single business.
If portfolio solutions don’t come from known sources, consider an external search. This enters the innovation balance phase of Smart R&D, that is, balancing internal development effort with wide ranging external searches for business or technology answers via open innovation (OI).5 For many, OI is now an integral and important part of the R&D process. However there are some starting assumptions and requirements that are critical to success.
OI isn’t an abdication of internal R&D capability or necessarily a route to cheap R&D. The latter is a common misperception. Its value comes from opening up possibilities for more diverse solutions that conventional networking would exclude. It requires an organisational structure and commitment from all levels. Top down leadership and alignment is required but in my experience, resistance can more often come from lower levels.
A decision to develop an OI strategy cannot be made in isolation. It stems from the portfolio, core capability and partner assessment processes described in the Smart R&D chain and working through fundamental strategy questions.
Is it clear why OI makes sense for your company? The decision and strategy should be based on deep knowledge of internal capabilities, partner capabilities and the gaps versus delivery of the business vision. Put simply, you have to know what you are looking for. OI is not a random search process in which ideas flow in after you declare you’re ‘open’. It is a strategy that is integrated into the business and portfolio planning process, not one that stems from R&D technology push.6
Key questions that will help the decision include: ‘Are you organised for a disciplined network search? Are you willing to train or hire OI experts who understand the techniques? Are you prepared to share your needs with a much wider audience than in the past? Alignment with the corporate legal strategy on sharing information is essential and is often the most significant barrier.
Smart R&D encourages the sequencing and synchronisation of strategy tools that have proven themselves independently into a rigorous approach to critically important R&D decisions and choices. Following the sequence and the questions using these concepts maximises the effectiveness of internal and external resources, and also increases the probability that solutions will come from diverse and unexpected sources.
Keith Grime is president of JKG Consulting and adjunct professor at Northwestern University, US. He is currently president of American Oil Chemists’ Society (AOCS).
1. Times and Trends, Information Resources, March 2010, 5-6.
2. Roben Farzad, Bloomberg Business Week, 20 December 2010-2 January 2011,16.
3. Innovation and commercialization 2010, McKinsey Quarterly, August 2010.
4. C.K. Prahalad and G. Hamel, 'The core competence of the corporation', Harvard Business Review, 1990, 68, 79.
5. H. Chesebrough, Open innovation: the new imperative for creating and profiting from technology, Harvard Business School Press, 2003.
6. S. Lindegaard, The open innovation revolution, John Wiley & Sons, 2010.