Adjusting to Incremental Innovation Portfolios: Avoiding the Erosion of Company Profits and Market Position

As companies prioritize incremental innovations over new products innovation managers need to adjust their innovation portfolio management and adopt new tools in order to avoid eroding profits, threatening their company’s market position and enabling new threats to their long-term success.

Despite increasing their commitment, funding and organizational accountability for innovation, many CEO’s are expressing disappointment in the returns from their company’s new product introductions.  Their reaction has been to rebalance their company’s innovation portfolio away from new products or breakthrough innovations, and towards incremental innovations or refresh/renewal projects.

The majority of corporate executives recognize that innovation as important because it connects strongly with their company’s long-term performance.[i][ii]  But, corporate executives continue to prefer short-term, incremental, innovation to others.  Companies are no longer as committed to pursuing opportunities that carry risk, require time and cost resources; the disruptive products, services, and business models that, when successful, deliver significant returns.  Instead, corporate innovation portfolios have become increasingly weighted towards incremental and renewal projects; those that require taking little risk and a have a rapid time to market.  The problem with these incremental innovation projects is that they deliver little, if any, return or growth to offset the costs of tooling, launching and marketing them.

New Data Reinforces The Trend To Incremental Innovation

The results from Accenture’s 2013 state of innovation executive survey (link) will be a disappointment for proponents of breakthrough innovation and blue ocean strategies.  Accenture found that the trend is definitely away from new product innovations.  In a decrease from their 2009 results, Accenture found that 46% of the executives they surveyed have become more risk averse in considering new ideas and 45% see their company pursuing a portfolio of smaller, safer opportunities rather than seeking the next breakthrough.[iii]

This research from reinforces Robert Cooper’s, of Stage-Gate International, benchmark work showing that corporate product portfolios are becoming significantly less innovative since the 1990’s.  Cooper’s study showed that over a fourteen-year period, and over a broad range of industries, the proportion of innovative products in corporate portfolios has decreased by 43% while the proportion of simple upgrades in portfolios has increased by 80%.[iv]  The shift to incremental innovation portfolios has also been reflected in business revenues, with new product sales as a percentage of revenue falling from 32% in 1990 to 28%.[v]

This data has been reinforced by P&G’s experience with reliance on incremental innovation. In recent years (2010 to 2013) its product pipeline has been focused on reformulation and line extensions of existing products, typical incremental innovation activities.[vi]  This allowed the company cut R&D spending to 2.4% of sales in 2012, down from 3% in 2006.  However, it also left the company without new product categories to pioneer.  Without the higher margins and growth found in new products, P&G found itself under increasing pricing pressure from competitors in established categories.  The company experienced slow revenue growth and its performance lagged its peers.  P&G’s sales growth averaged 2% from 2010 to 2013, compared with 8.7% for Unilever.[vii] In March of 2013, P&G’s reliance on incremental innovation resulted in replacing the CEO; Bob McDonald, with the prior CEO; A.G. Lafley.

The Effect on Innovation Portfolios:

The trend to incremental innovation has important implications for innovation portfolio management.  The goal of innovation portfolio management is to provide an uninterrupted stream of new products aligned with the company’s strategic goals.  The best practices of contemporary innovation portfolio management, as practiced by Newlogic for example, promotes a balanced approach between short, medium and long terms projects with concessions made for pursuing disruptive and strategically important opportunities.[1]

Incremental to Balanced Charts

 

However, the Cooper and Accenture reports reveal that fewer businesses are following the best practices of innovation portfolio management. The approach currently pursued by the majority of respondents, 64%, can be classified as incremental innovation, renovation and line extensions.[viii]  As P&G experienced, a portfolio of incremental innovation has the appearance of quickly delivering results though cost savings in research and development, but the company’s performance will soon fall behind its competitors.

The effect of incremental innovation has been to compress and translate downward the portfolio profile.  There are more projects closer to the ‘origin’ of these portfolios; immediate short-term project for existing brands. At the topmost of the portfolio profile is medium term ‘invention’ within established categories.  By making adjustments to risk profile of the company’s portfolio management software[2], long-term and high risk projects no longer meet the strategic criteria. However, to make up for the revenue shortfall from an absence of ‘big-hit’ opportunities, the portfolio must be balanced with significantly more incremental projects.  This can be challenging to achieve without requiring additional resources.

One way companies are increasing the number of incremental projects in their pipeline is through mining their existing inventory of design and concepts. Finding an idea in their possession that only requires incremental development can significantly reduce the cost of new product introductions.  Innovation management software, which is a separate category from traditional innovation capture and evalutation applications, is a growing category.  InnoEngines is an example of an innovation management tool designed for new product development professionals.

The Conundrum:

The conundrum to this push towards incremental innovation, is that it’s easier than ever to launch a new product, regardless of how breakthrough, or not, it is.  Today, two friends can conceive, prototype and launch an entirely new product category without any of the resources available to a corporation.[3]  Large companies could do the same, except they would be able to execute faster and grow the segment much larger.  In essence, a company can turn what is a breakthrough effort for an entrepreneur, into an incremental project for themselves.

How large companies can be structured for innovation has been a subject of many books.[4]  However, from an innovation portfolio management perspective, these opportunities are no different from any other.  Often the reason companies do not pursue a disruptive opportunity, one that requires only incremental innovation efforts, is they were excluded from the pool of available options to begin with.  This could be due to a number of factors, including eliminating the idea by a screening committee, requiring overly specific data at ‘phase zero’, or a company culture that doesn’t encourage employees to present their ideas in the first place.  The trend is towards innovation portfolios with reduced risk-profiles and lower costs.  However, this does not prevent companies from launching new products or pioneering new categories, it requires using the best practices innovation portfolio management.

Conclusion:

There’s little chance of stopping the trend towards incremental innovation in the near term. The influence of Wall-Street and the low levels of consumer spending make taking risks with new products unattractive to executives.  Innovation professionals need to adjust the way they make portfolio decisions to match the company’s new profile without reducing projected revenues, this means the company cannot only eliminate long-term projects, but must also find more incremental projects to make up for lost revenues.  Innovation teams also need to adopt new technologies, such as innovation inventory management software, that can speed their time to market and reduce risk during product development.

 


[1] Two leading texts on innovation portfolio management are Roussel, Saad and Erickson’s Third Generation R&D, and Cooper, Edgett, and Kleinschmidt’s Portfolio Management for New Products.

[2] Newlogic POPS is one example of portfolio management software for innovation departments.

[3] One of many examples is Booty Pops, founded by two friends, Lisa Reisler and Susan Bloomstone in 2008.

[4] One of the leading book on this subject is Building the Innovative Organization by James Christiansen


[i] The Boston Consulting Group’s 2006 Innovation survey ranks innovation as the top strategic priority for 40% of senior executives and among the top 3 strategic priorities for 72% of these executives.

[ii] Wouter Koetzier and Adi Alon. “Why “Low Risk” Innovation Is Costly:  Overcoming the Perils of Renovation and Invention”. Accenture Consulting. 2013. Available at: http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-Why-Low-Risk-Innovation-Costly.pdf

[iii] Wouter Koetzier and Adi Alon.

[iv] Cooper, Robert G. “Your NPD Portfolio May Be Harmful to Your Business’s Health,” Visions 29(2): 22-26 (April 2005).

[v] PDMA Foundation’s 2004 Comparative Performance Assessment Study (CPAS);  “PDMA foundation CPA’s study reveals new trends,” Visions Vol. XXVII; No.3 July 2004. Pp 26-29

[vi] Business Week article on Innovation at P&G: At Proctor and Gamble, the Innovation Well Runs Dry: http://www.businessweek.com/articles/2012-09-06/at-procter-and-gamble-the-innovation-well-runs-dry#p1

[vii] Lindsey Rupp and Lauren Coleman-Locher. “P&G Reorganizes Into Four Industry Groups Under New CEO”. http://www.bloomberg.com/news/2013-06-05/p-g-reorganizes-into-four-industry-groups.html. Retrieved12 July 2013.

[viii] Wouter Koetzier and Adi Alon.

photo credit: * Cati Kaoe * via photopin cc

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