Innovation: Where are all the new ideas?

Genuine innovation and its potential rewards has been sacrificed in favour of brand extensions, as companies bow to the lower-risk model of new product development.

Innovation has gone the way of many a social climber's friend. Used to get started, then largely discarded as companies put profit first, it is now ignored, as firms steer away from the potentially more rewarding risks of new product development in favour of the safer returns of simpler extensions.

Just 2% of marketing directors believe new brands will be at the heart of their product development strategy in the coming years, according to Research International, and as little as 15% of volume-forecasting tests are done on entirely new brands.

'Tracking back over a number of years, we found that 65% of new products were line extensions in the same broad category as the parent brand,' says Research International's global innovation director, Helen Wing. 'About 17% of new products were brand extensions, with just 15% being totally new brands.'

Of all innovations, 86% are accounted for by line extensions or incremental improvements, according to the authors of Blue Ocean Strategy, Chan Kim and Renee Mauborgne, with just 14% being true, bold innovation. This is a major problem. Line extensions account for 62% of total revenue, but contribute just 39% of profits. 'Real' innovation, meanwhile, represents 38% of revenue and 61% of profit.

'It is easy to be fooled into thinking you are innovating, when you are actually offering no differentiation,' says Wing. Line extensions may produce a short-term sales uplift by raising interest in a category or brand, but most consumers are unenthusiastic about lines that fail to offer any real added benefit.

Hugh Davidson, visiting professor at Cranfield School of Management, and author of Even More Offensive Marketing, suggests marketers are either deluding themselves or trying to hoodwink customers by passing off 'useless line extensions for short-term volume' as innovation. Their other sin, he believes, is imposing 'expensive and unwanted technological bells and whistles' on consumers in the name of NPD.

Innovation is a matter of corporate life and death, adds Davidson. 'Western businesses are high-cost operators compared with countries such as China, India and Korea,' he says. 'Our only hope of remaining competitive is through better innovation and service.'

Chief executives recognise this challenge. According to a survey by the Economist Intelligence Unit ('Business 2010 in Europe: Embracing the challenge of change'), innovating products and services is one of the top three issues global executives expect to concern themselves with over the next five years.

Short-term mindset

The problem is that firms are struggling to discard an ingrained short-term, bottom-line focus. 'I have been to a lot of meetings where radical innovation was turned down because it won't deliver in 12 months,' says Peter Shaw, director of Corporate Edge.

Tim Jones, principal at innovation and insight consultancy Innovaro, says the UK's record on innovation has shown little change in the past 20 years. 'Only one in 10 new products has ever really justified the term,' he says.

Shaw, though, believes there is more innovation now than 10 years ago.

'Think of how the internet has revolutionised our lives, the impact a business such as Starbucks has had on the food and drink market, the product and service innovations a retailer such as Tesco has delivered, and rapidly evolving technologies such as mobile phones and the iPod,' he says.

However, he adds that in the FMCG sector, many companies stopped thinking about innovation 10 years ago. A focus on cost-cutting and efficiency meant research and development (R&D) departments were decimated and innovation became 'a sideshow, with a few people messing with ideas generation and customer observation on a Friday afternoon, but achieving nothing of any real significance'.

While the anti-innovation climate begins with chief executives, marketers have played their part by lacking the confidence to back big ideas, according to Claire Nuttall, consumer brands director at consultancy Dragon. 'The pressure to get things right means marketing directors don't leave much to chance or take many risks these days, and lots of innovation pipelines are in total drought,' she says.

Nuttall adds that the fashionable quest for 'insights' is leading marketers down the wrong track. 'Many don't know what sorts of insights they need, where to look, or what to do with them when they get them,' she says.

'They churn out reams of data but can't translate it into information or wisdom.'

Marketers also spend too much time looking backward. 'About 70% of the time companies spend on insights is internally-focused, looking at products and services they already have and how to develop them, rather than looking at the outside world to see how consumers and their needs are changing,' says Nuttall.

Solutions research

David Thorp, head of insights at the Chartered Institute of Marketing, says the difference is between research based on consumers and research based on solutions. 'The best research is already solutions-based, but the majority is not,' he says, adding that a shift from one to the other is the best way to generate innovation. 'The problem is the way research is conducted. Rather than asking a customer what they think of a product or service, ask what they like about a particular experience.'

When Borders asked consumers about their reading experiences, it discovered that they felt rushed, wanted more time to enjoy reading and didn't have enough peace and quiet at home. The book chain responded by installing sofas and coffee bars, playing classical music and staying open until 11pm.

Another problem is that marketers often use research as a crutch, killing off ideas because consumers give them the thumbs-down and not daring to back hunches. But, as Henry Ford once said, if he had listened to his customers, he would have ended up giving them a faster horse. There are many products that have failed at the research stage, including Baileys liqueur and Impulse body spray, which went on to become successful.

Potential rewards

According to Innovaro's Jones, the risk and investment involved in breakthrough innovation is 100 times greater than for incremental innovation, while the chances of it succeeding are a tenth. The profits, however, are 10 times greater. 'So it is an even bet what you do with your million pounds,' he says.

Though most companies go for the ostensibly low-cost, low-risk option, Research International says that marketers are failing to get it right even when it comes to supposedly straightforward line extensions. 'Line extensions are actually more likely to fail than new products,' says Wing.

There are three key reasons: they are not as distinctive as they should be, the products are not good enough, and they are not given the right kind of marketing support.

'People say they will buy extensions because they trade off the heritage of the brand, but this can too easily serve as an excuse to bring below-par products to market,' says Wing. 'It can also have repercussions for the parent brand. An extension launch may seem like a low-risk exercise, but really it's a gamble; the stake is its parent's precious equity.'

Though some argue that line extensions such as the flavour variants spawned by Kit Kat or Coca-Cola help sustain interest in a brand, Michael Willmott, co-founder of the Future Foundation, believes that innovation 'for the sake of it, with no evidence that consumers want it', is a waste of time and money.

'Short-termism and pressure to deliver mean too many marketers launch a bright orange version, accompanied by a national ad campaign, which will have only a short-term impact, just to be seen to be doing something,' he adds.

However, innovation does not have to involve 'eureka' breakthroughs, such as the iPod. 'Good innovation can be mundane and simple - like the ring-pull on cans, or cat-food pouches; both developments add value to people's lives which they are prepared to pay for,' points out Willmott.

Davidson, too, is an advocate of incremental innovation that moves the company forward 5%-10% a year. People often forget that innovation in business systems is as important, if not more so, than R&D, he adds, citing budget airlines and computer company Dell as examples.

Small-company mentality

Many of the best instances of innovation are found in small companies - Green and Black's and Innocent Drinks, for example - or challenger brands, such as Ryanair and Dell. For bigger companies, developing an innovation mindset means replicating a small company mentality.

It is a challenge GE chairman and chief executive Jeffrey Immelt is tackling head-on. His mission over the past three years has been to transform the hard-driving, process-oriented company into one steeped in creativity.

Among the strategies he is using is linking bonuses to new ideas, customer satisfaction and sales growth, with less emphasis on bottom-line results.

The company is investing billions in 'imagination breakthrough' projects that will take it into new lines of business or markets. Immelt is also rotating executives less frequently and bringing in a higher proportion of outsiders to create 'industry experts', rather than professional managers.

Procter & Gamble provides an object lesson in how to develop an innovation culture. Five years ago it was struggling to come up with ideas liked by consumers, so it decided to tap into the ideas of 1.5m scientists worldwide, who it believed had relevant expertise, and renamed its research and development efforts 'connect and develop'. P&G claims the concept has revolutionised its innovation process and contributed to products such as teeth-whitening strips Crest Whitestrips, which created and now dominates a segment of the oral care market.

Further keys to the company's renewed success include putting consumers - rather than clever ideas - first, getting closer to them to identify unarticulated needs, making design part of the process, rather than an afterthought, and creating an environment where ideas flow.

Separation process

Corporate Edge's Shaw believes that to give innovation the focus it needs, companies should separate it from day-to-day concerns, put their best people on it, and ensure the lines of reporting lead to the chief executive.

Marketers should play a pivotal role, supported by R&D, the creative team and finance. 'If their job is not to identify and fulfil consumers' needs, then what is it?' he asks.

Companies also need to be less short-termist and scatter-gun in their approach. 'If you understand the brand parameters and where you want to go with it, you can create hot spots to focus innovation on,' says Nuttall.

'A driving insight must be supported by product, consumer, brand and sector insight. You then need to drill down to the level of need and assess the commercial likelihood of success.'

Marketing timescales need to be longer, too. 'It takes at least a year, usually longer, to achieve genuine innovation,' says Innovaro's Jones, who adds that typically, a brand manager remains in a position for just nine months, and a marketing director for 18 months; they want to make an impact and move on. So innovation should be a corporate, not a personal, initiative.

Jones also advocates a change in reward systems. 'Reward sales people against product delivery, rather than ordering, and marketers against time to profit, rather than time to market,' he says. 'It is subtle stuff, but it has a big impact on attitudes.'

FMCG markets may be flat, and investors may be screaming for growth, but that is no excuse to come out with irrelevant line extensions or price promotions that weaken the brand. 'Market share must be increased or new growth segments created, and innovation is the only way to do that,' says Davidson. Incremental innovation is vital, he adds, but space must also be afforded for bigger, more expensive and riskier breakthrough projects.

'You cannot rely on one or the other for innovation success; you have to do both,' he says.

2% of marketing directors say new brands will be at the heart of their development

65% of new products are line extensions in the same broad category as the parent brand

BREAKTHROUGH INNOVATION

Apple launched the iPod in 2001. Since then, it has sold more than 10m units, making it the world's most popular digital music player.

P&G launched anti-ageing moisturiser Olay Regenerist in 2003. Containing an ingredient that stimulates the regeneration of skin cells, it has become the top-selling moisturiser in its price category.

Since its entry to the UK in 1998, Starbucks has set up more than 430 stores and is the market leader, with a 25% market share of the coffee bar market.

INCREMENTAL INNOVATION

Tesco's Finest range launched in 1998. It covers more than 1300 items, including non-food. It claims the range is 'incredibly successful', but offers no hard evidence.

Walkers low-fat Potato Heads crisps, which are free from artificial colours, flavours and preservatives, launched in February and have already become the fourth-biggest crisp brand in the UK.

Dove's range of skincare firming lotions, launched in 2003, have seen a 700% sales uplift on the back of last year's 'Real women' campaign. The line helped boost turnover to EUR3bn (£2bn) at the end of 2004.

86% of innovation applies to line extension or incremental improvements.

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