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, platform and ($) as % breakthrough innovations that are of Peer perceived by the market as adding value. Group’s Revenue Growth 1%

Company 1

0% Lagging 0% 1% 10% 100% Company’s Product Launches as % of Launches by Peer Group

Source: Accenture Innovation Performance Monitor – Foods & Non-Alcoholic Beverages Industry 2010

6 | The Innovation Death Spiral Successful product innovation can also Figure 4. Future value premiums contribute to future value premiums1. Future Value Premium Performance innovation leads to 16% 47% 59% Current Value higher-than-market organic growth that is profitable and capital efficient. Shareholders are willing to pay a premium on the share prices of companies that consistently achieve this kind of growth, because they expect those companies to continue to outperform the market in the future. Our study reveals that Company 1 Company 2 Company 3 Company 2 and 3 earned future value premiums that far outstripped that of Source: Accenture Shareholder Value Analysis 2010 Company 1, demonstrating the market’s confidence that they will continue to grow their revenues through innovation (see Figure 4). Further amplifying the impact of failed Systemic Negative Impacts innovation on operations is the inability Also contributing to the innovation The Operational of many organizations to quickly death spiral are some significant manage themselves out of failure. Negative Spiral negative impacts on the company as Companies invest a great deal in a whole. These include a large human Once a company has launched a launching new products into the resources cost: the less innovative a new generation of offerings into the market, but rarely give the same company is, the less attractive it is to market, those offerings immediately consideration to taking them out first-rate employees and innovators. place demands on the company’s value of the market. Instead, they allow So the company can no longer hire or chain, from the sourcing team and non-value-generating offerings to retain the top-notch people who are the operational support groups (e.g., persist in consuming valuable resources excited by innovation and good at it. finance and human resources) through and organizational attention, while Moreover, the lackluster performance manufacturing, sales, distribution, diluting the company’s margins and of the company’s new products affects service, and reverse logistics. Whether market position. This failure to manage the company’s reward structure, they turn out to be successful launches out unsuccessful innovations exacerbates increasing the difficulty of attracting or complete failures, new offerings the downward spiral by limiting the great people and thus accelerating the place equal burdens on a company’s amount of capacity the organization downward spiral. operational resources. We have seen has to test and add new innovative innumerable companies struggle with offerings, while continuing to maintain Perhaps the most profound impact of the multiple impacts of launching too a bloated portfolio. many offerings, including increased inadequate innovation is the shift in the company’s culture. A company that costs, longer-than-projected lead For companies to mitigate the effects has made only incremental changes times, and dissatisfied customers. And of the innovation death spiral and in its products for a number of years yet, 44 percent of the respondents to begin to reverse its direction, they need will have diluted its development a recent Accenture study reported that to consider the operational impact of resources, marketing spending, and their companies gave limited or no new and innovative offerings on the other operational aspects of the firm consideration to the costs associated entire value chain as they are launched. so thoroughly that incremental change with new product introductions or with This means assessing both the real cost 2 is the only thing it can do. In effect, continuing to produce loss leaders. of their introduction and the quickest such a company will have fallen The net result is a perpetuation of the and most efficient path for removing into the innovation death spiral. spiral, with new offerings grabbing them from the market if necessary. This dysfunctional vicious cycle will resources and old offerings holding Companies also need to have a clear affect all the company’s functions— their position in the portfolio. process for actively managing their strategic, financial, operational, and portfolios of offerings, to make sure organizational—and will in turn be they create enough head room to allow driven by them, as described above. for new launches and enough clarity to prevent blind proliferation.

7 When a company finds Exhibit 2 itself caught in this downward spiral, its only hope Managing Out of the Death is to break out by adopting a fundamental commitment Spiral: the Unilever Example to groundbreaking Over the past five years, Unilever, To address this situation, Unilever CEO innovation. The Anglo- which produces and sells such Patrick Cescau launched the “One Dutch company Unilever established global brands as Lipton, Unilever” program to simplify the provides an excellent Heartbrand (Magnum), Knorr, company’s organization, leverage Dove, Cif, and Axe, has successfully its scale, and deliver growth. This example of a company transformed its business by simplifying program’s objective was to liberate that has done just that. its organization and focusing on its the company for growth by creating core brands and products. This trans- a more interconnected and flexible formation has affected every aspect organization—while also achieving of Unilever’s business, including its cost savings. R&D organization. As part of the One Unilever program, In 2000 Unilever launched its “Path to the separate Foods R&D and HPC Growth” program, which was designed (Household & Personal Care) R&D to focus on rationalizing its portfolio. organizations were consolidated into However, that program fell short of the global One Unilever R&D organization. delivering the required 5-6 percent The company also expanded its R&D top-line growth rate. The company activities in Asia to profit from local was spending a large share of its knowledge and expertise and to ensure revenues on R&D and generating an the relevancy of its innovations to enormous number of product launches. emerging markets. Importantly, to But because its portfolio still contained emphasize the importance of R&D to so many brands, its R&D program the company’s future, Unilever created focused primarily on incremental the new position of Chief R&D Officer. innovation and line extensions, and marketing efforts fell short. While The One Unilever program streamlined there were some successes, overall the company for speed and revenues weren’t growing as expected. competitiveness to ready it for Increased investments in R&D just the next phase in its transformation: generated more and more non-value- the journey back to growth. Paul Polman, adding incremental innovations. Unilever who took over the CEO position in found itself stuck in the negative spiral 2008, launched this phase with a described in this document, in danger relentless focus on demand-led of losing ground in an increasingly growth in sales and growth of market competitive industry. In 2004 Unilever share, as well as hands-on involvement had to issue its first profit warning in in the major operating companies. its 75-year history. Under his leadership the company has been focusing on fewer, bigger innovation projects, including some long-term, big-win ‘Genesis’ projects3. Moreover, the company’s top 25 innovations will all be launched in all of its 40 largest markets, compared to an average of 3 markets per innovation in the past.

8 | The Innovation Death Spiral In 2010 Unilever found itself better Figure 6. Unilever revenues and revenue growth positioned than ever before: revenues rose 10 percent (see Figure 6) and volume grew faster than it had in 30 +4.5% years. The company also performed 44 relatively well through the recent economic downturn, despite rising +1.8% commodities costs and mounting 40 41 pressure on prices. The number of 40 40 category innovation projects shrank 38 from more than 5,000 in 2005 to 700 in 2009 while average project size increased by 104, and the first Genesis 2005 2006 2007 2008 2009 2010 projects are expected to hit the 5 market in 2011 . All this good news Source: Unilever annual reports is not yet reflected in the Future Value Premium (see Figure 7), as this usually happens only when a company shows strong results over a longer period.

Unilever has recently made an ambitious commitment to growing as a truly sustainable business, as articulated in its Compass Strategy and Sustainable Living Plan. A large portion of the planned growth will come from emerging markets. Unilever has a flying start there, as it has a very strong position and knows how to win Figure 7. Unilever future value premium and current value in emerging markets, thanks to one % 5 ¤ bn of its most successful subsidiaries, 100 80 Hindustan Unilever, which has 50 23 28 35 23 16 80 successfully tapped into India’s emerging 60 middle class for more than a decade. 60 40 Unilever’s learning from that experience 40 has proven a key success factor for 20 growth and will likely be a driver of 20 expansion in emerging markets. 0 0 Dec ’04 Dec ’05 Dec ’06 Dec ’07 Dec ’08 Dec ’09 Dec ’10 2011 is an important year for Unilever Future Value Premium Current Value as it may confirm that Unilever has Current Value Future Value Premium succeeded in turning around and is moving onto the upward spiral of Source: Accenture Shareholder Value Analysis successful innovation.

9 10 | The Innovation Death Spiral The Path Out of the Innovation Spiral into Successful Innovation As the Unilever example illustrates, strong leadership is essential in creating and driving a successful innovation program. Once the company’s leaders have communicated the overall strategy and the role of innovation within that strategy, they need to ensure that the organization focuses on Doing the Right Things and Doing Things Right, and they also need to continuously monitor performance.

Essentially, the process consists of Doing the Right Things Doing Things Right six steps: We are certainly not advocating that Companies need to create an 1. Define top-level ownership of companies jettison all incremental institutionalized innovation capability innovation and clear accountabilities change. Nor do we suggest that that is fast, disciplined, and reliable. any company should focus its entire The challenge for companies that are 2. Create an innovation strategy innovation portfolio on a handful of in the innovation death spiral, and aligned with corporate strategy high-risk, high-gain, “big bet” projects. those that are approaching it, is to 3. Identify white spaces and must-win Companies should strive for a portfolio move from a position of constrained battles (Doing the Right Things) that is balanced not only in terms of resources, in which they must attempt 4. Reduce time to market (Doing risk and reward, but also in terms of to mitigate the inherent uncertainties Things Right) incremental and platform innovations, of innovation by doing as little of together with breakthrough innovations it as possible, to a position of bold, 5. Increase innovation efficiency as desired. Toward that end, they need foresighted commitment to effective (Doing Things Right) to develop the capabilities to identify innovation. Only by mobilizing all their 6. Continuously measure and improve the white spaces they should play resources through an effective innovation innovation performance in—those market areas in which they engine can they embrace those expect growth and in which they want uncertainties, manage them, and to compete and can win. They also turn them to their advantage. need the capabilities to identify winning propositions in those areas. And they need the vision to use innovation effectively as a driver of top-line growth.

11 Toward that end, strong, focused leadership is absolutely critical. Specifically, the role of the CEO with respect to innovation is ever more important and needs to evolve from communicating vision and setting direction to enabling and driving execution.

But the CEO cannot do that alone. For innovation to become part of the organizational fabric, it must be managed with as much discipline as every other aspect of the business. A survey conducted by the Economist Intelligence Unit on behalf of Accenture revealed that organizations that have established a single point of accountability for innovation reported innovation performance and capabilities that are twice as high as those of their peers.6

12 | The Innovation Death Spiral Exhibit 3 The Accenture Innovation Process

Accenture developed the Performance helps a company invest in the most Innovation Engine, which is unique to promising mix of projects. Execute the extent that it covers the end-to- helps to drive an idea or briefing to end innovation chain and addresses market launch at speed, with efficiency frequency, speed, and consistency and meeting the requirements of the of innovation results. Figure 8 shows briefing. Commercialize maximizes Accenture’s Innovation Engine, with the market coverage of the innovation the three main phases Discover, post launch, and aims to drive up Execute and Commercialize. Discover margin and generate new innovation to sustain the competitive advantage over time.

Figure 8. Accenture’s Performance Innovation Engine

High Performance Innovation

The Front-end The Center The Back-end of Innovation of Innovation of Innovation

“Do the Right Things” "Do Things Right”

Innovation Strategy Discover Execute Commercialize ROI

Building Growth Driving Results Reaping Rewards

Manage Innovation

Fast Differentiated Successful Predictable Efficient

13 Conclusion Many companies are skewing their innovation portfolios toward the low risk, merely incremental end of the scale with their existing mature market spaces, rather than aiming for truly transformational, game-changing innovation in their growth spaces. As a result, they incur strategic, operational, and systemic impacts that they may not be aware of until they have entered the innovation death spiral.

Companies can emerge from that spiral only by radically transforming their organization. We have seen that Unilever is currently experiencing this transformation, and we are eager to see what impact this will have on its competitive position in 2011 and beyond. The path out of the negative spiral is one where leadership drives innovation by setting a clear direction, where “white spaces” and “must win” battles are defined, and where innovation is institutionalized as a fast, disciplined and reliable capability. Such a transformation program will not come easy, and requires significant effort, investment and a change in mindset throughout the entire organization. However it is the only way a company can get back on track to sustainable value-creation and profitable growth through innovation.

14 | The Innovation Death Spiral About the authors Wouter Koetzier is the global lead for Innovation in Accenture Process and Innovation Performance. [email protected]

Soren Kristensen is the managing director for Innovation in North America for Accenture Process and Innovation Performance. [email protected]

Adi Alon is a senior executive in Accenture Process and Innovation Performance. [email protected]

End notes 1 A future value premium is defined 3 “Unilever R&D Chief Seeks a Swiffer as the value the market believes Repeat for Polman,” Bloomberg a company will generate from (November 16th, 2009). its investments in its future. It is calculated by deducting the present 4 “Q2 and First Half 2009 Results Roadshow,” Unilever (2009). value of current operations (NOPLAT divided by WACC) from the total 5 “Unilever May Post Fastest Annual enterprise value (market capitalization Sales Growth of Polman’s Reign,” plus net debt). Bloomberg Businessweek (February 1st, 2011). 2 “Managing the Challenge of Product Proliferation,” The Economist 6 For a more complete discussion Intelligence Unit (2007). Managing the of the role of the Chief Innovation challenge of product proliferation is a Officer, see Accenture’s report: survey and executive summary created Overcoming Barriers to Innovation: by The Economist Intelligence Unit Emerging Role of the Chief Innovation and sponsored by the George Group, Executive. now part of Accenture.

15 About Accenture offerings and capabilities across seven About Accenture service lines: Customer Relationship Management Consulting Management, Finance & Performance Accenture is a global management Accenture is a leading provider of Management, Process & Innovation consulting, technology services management consulting services Performance, Risk Management, Talent and outsourcing company, with worldwide. Drawing on the extensive & Organization Performance, Strategy, more than 215,000 people serving experience of its 13,000 management and Supply Chain Management. clients in more than 120 countries. consultants globally, Accenture Accenture Process & Innovation Combining unparalleled experience, Management Consulting helps clients Performance consulting services comprehensive capabilities across all move from issue to outcome, with pace, help clients to embed continuous industries and business functions, certainty and strategic agility. We enable business improvement in an and extensive research on the world’s companies and governments to achieve organization’s operational, process, most successful companies, Accenture high performance by combining broad and innovation capabilities to enhance collaborates with clients to help them and deep industry and functional long-term profitability. become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.

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