The Innovation Death Spiral How Companies Get Stuck Throwing Good Money After Bad Ideas—And What That Mistake Is Costing Them Table of Contents

The Innovation Death Spiral How Companies Get Stuck Throwing Good Money After Bad Ideas—and What that Mistake Is Costing Them Table of contents Introduction 2 The Three Principal Kinds of Innovation 3 Understanding the Innovation Dealth 5 Spiral The Unilever Example 8 The Path out of the Innovation Spiral 11 into Successful Innovation The Innovation Engine 13 Conclusion 14 Far too many companies are now finding the downward spiral. Moreover, once exciting innovation. It is now clear themselves trapped in a phenomenon the company is perceived as less than that the gap between these two we will refer to as the “innovation innovative, it suffers both strategically kinds of companies—the ‘innovation death spiral.” The spiral begins when and operationally. For companies challenged’ and the ‘innovation a company’s new products, developed caught in this spiral, increasing savvy’—is inexorably widening. and launched with high hopes, end innovation budgets only make things up yielding only disappointing results. worse by putting more non-differentiating For companies in the first category Nonetheless, once those products are products out into the market. to break out of the innovation death out in the field, they soak up valuable spiral, it is essential to understand very resources, including manufacturing Meanwhile, in contrast, companies that clearly what is going on, and then to and purchasing capacity, marketing take a bolder, more balanced, and more make critical interventions and radical budgets, warehouse space, back office far-sighted approach to innovation are changes in the way the company operates. systems and management attention. on the opposite trajectory: becoming So the company has fewer resources a high-performing organization. Here, we first set the stage by defining to invest in other initiatives that may They trace a virtuous cycle in which the three main kinds of innovation, prove more successful, including the a balanced portfolio of successful then lay out the characteristics of bold, truly game-changing innovations innovations—including incremental, the innovation death spiral, how that alone can provide sustainable platform, and sometimes breakthrough companies get trapped in it, and competitive advantage and fuel profitable innovations—reinforces customer the approach they need to make to growth. As a result, the company is loyalty; wins new buyers; grows the transition to the upward spiral. constrained to limit its investments to market; attracts valuable suppliers, “safer,” merely incremental extensions partners, investors, and employees; of existing products and services, and generates lots of cash, which the which again prove disappointing and company can then invest in even more absorb undue resources, accelerating 2 | The Innovation Death Spiral Exhibit 1 The Three Principal Kinds of Innovation Accenture distinguishes among three Figure 1. Competitive innovation matrix main types of innovation: incremental, platform, and breakthrough (see Figure High 1). Innovations in these three categories deliver different benefits in terms of consumer value and competitive Breakthrough advantage. Ideally, companies should maintain balanced portfolios that contain, at a minimum, both Competitive incremental and platform innovations. Advantage Platform The pursuit of breakthrough innovations requires acquiring or developing breakthrough-specific capabilities and therefore requires a significant strategic decision and commitment. Incremental Low Incremental Innovation Low Consumer Valued Benefit High These are “running to stand still” innovations. Because they do not Size represents market impact offer customers superior benefits, they don’t create additional demand for the company’s products. Nonetheless, incremental innovation plays a necessary Platform Innovation Breakthrough Innovation role in defending the company’s These are “share of market” innovations. These are market-changing innovations. baseline against competition; it can By delivering superior customer benefits, By delivering new benefits to customers, be seen as a form of maintenance, they drive some market growth, often they create a new market that the more renovation than innovation. in terms of heightened value thanks to innovator can dominate for some time. Many consumer goods companies premium pricing rather than in terms A common misunderstanding is that spend over half their innovation of expanded volume. But their main breakthrough innovations are necessarily budgets on incremental innovations, function is to grow the innovator’s large technological inventions. In fact, generally because they lack the ability market share by giving customers a breakthrough innovations often use to systematically scan the market for reason to switch from a competitor existing technology in novel business the most attractive opportunities and brand. Companies that create platform models. Innovators need to establish firm develop winning ideas to capitalize innovations must be sure to secure protection for their large investments on them. sustainable competitive advantage in this type of innovation. A successful through brand, technology, customer breakthrough innovation is of course lock-in, etc. Examples of platform Apple’s iPad. An example of a break- innovations are Vanish and Coke Zero, through innovation that was not both of which drove some market adequately patented is Senseo coffee growth but primarily increased their pads by Sara Lee, where competitors innovators’ share of market. were quickly able to start selling cheaper pods, undercutting Sara Lee’s potential market. 3 4 | The Innovation Death Spiral Understanding the Innovation Death Spiral Innovation is all about allocating scarce resources to projects of which the outcome is uncertain. In deciding which projects to invest in, companies must assess not only actual out-of-pocket costs but opportunity costs. In our experience, companies tend to The innovation spiral consists of two versions of their products. This results be reasonably familiar with the need types of negative spirals: strategic and in further reductions in R&D budgets to address market opportunity costs operational. These spirals are interrelated and again less product differentiation. and technological opportunity costs. and reinforce each other; companies The descent along the spiral begins. But they tend to systematically ignore that are trapped in one are likely to be the strategic, operational, and systemic caught in the other as well. Both are Similarly, less-innovative companies opportunity costs associated with the exacerbated by the systemic negative find themselves in a weak position innovation spiral, and therefore to effects of ineffective innovation. toward potential partners and suppliers. overvalue their merely incremental— For example, in the automotive and apparently safer—innovation The Strategic industry several years ago, when development projects. Yet the innovation U.S. automotive manufacturers were spiral engenders very real costs that Negative Spiral in decline, their ability to attract these companies will surely incur by Unsuccessful innovation not only cuts top-notch suppliers and partners was failing to invest in platform and break- into profitable growth but also affects fairly limited. In contrast, Toyota and through innovation. market positioning. For instance, Honda were able to attract strong companies that have relatively partners, which played an important undifferentiated products are forced role in helping them build their to play a cost game and are prone to capabilities—in Toyota’s case, to lose market share to private labels, develop hybrid vehicles. or even have to produce private-label 5 Financially, companies simply do not Figure 2. R&D spending vs. organic revenue growth (2005 through 2009) generate the growth premiums with incremental innovations that they 10% do with platform or breakthrough innovations. In many industries, it is possible to identify the value premiums Company 3 that innovative companies earn in their stock prices, relative to companies that Compound are not innovative. The delta between Annual the two is the opportunity cost that Growth the latter are paying. Rate (CAGR) 5% Revenue A recent Accenture analysis of ten large Growth Company 2 players in the global foods industry 2005- over a three-year period—2005 through 2009 year-end 2009—provides evidence of the strategic costs of failure to innovate successfully. Notably, the Company 1 study found that there is little correlation between R&D spending and revenue 0% growth (see figure 2). Although 0% 1% 2% 3% Company 2 and 3 invested the lowest R&D Spending as % of Revenues 2005-2009 percentage of their revenues in R&D compared to the peer group, they Source: Accenture Innovation Performance Monitor – Foods & Non-Alcoholic Beverages Industry 2010 achieved good revenue growth. In contrast, Company 1 spent a relatively large percentage of its revenues on R&D but was unable to convert this into organic revenue growth. Figure 3. Organic revenue growth vs. number of product launches (2007 through 2009) When we plot revenue growth against the number of product launches, it 100% Leading Average performance becomes evident that while Company 1 launches more products than Company Company 3 2 and 3, these are clearly not contributing to organic revenue growth (see Figure 3). Company 1 launches primarily Company 2 incremental innovations, whereas Company 10% Revenue Company 2 and 3 launch a balanced Growth portfolio of incremental,

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