Is Innovation Dead in Consumer Packaged Goods?

I was having an interesting discussion this morning with a couple of innovation colleagues of mine. One is an entrepreneur with an outsourced “skunk works” business. The other is a creator and inventor who led disruptive innovation efforts at a major office products company. We came to a sad conclusion, at least for us innovation-oriented types.

Innovation is dead in Consumer Packaged Goods (CPG) Corporate America.

Well, maybe dead is too strong a word. Morbidly thin, perhaps. To be sure, there are some notable exceptions. But as we looked around in today’s economy, we concluded that in spite of corporate leaders’ recognition of the importance of innovation, the focus tends to remain on incremental, “safe” projects. Failure is not tolerated (let alone encouraged), and employees are rewarded equally for changing the color of an existing product or changing the dynamics of the marketplace.

Is this gloomy assessment accurate? If so, what should be done about it? Is this just the result of trying to weather the economic storm, or is this an ongoing trend?

Fortunately, innovators are not going extinct. Their habitat, though, seems to be changing. Would Thomas Edison survive an annual performance appraisal in a typical 21st century CPG company?

Manager: Tom, you know, I’m not seeing a great deal of progress on this “Project Lightbulb.” You’ve failed to make anything we could possibly sell, and the fiscal year ends next week.

Edison: I haven’t failed. I’ve just found 10,000 ways that don’t work.

Manager: We’re paying you to find ways that do work, not ways that don’t. I think it’s about time we gave up on this.

Edison: Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.

Manager: Sorry, Tom, but our stockholders think our greatest weakness lies in not launching this product in time for the Walmart shelf reset. All I see in your lab is a pile of junk.

Edison: To invent, you need a good imagination and a pile of junk.

Manager: No, what you need is to get some revenues out of all this money we’re spending on you. Your research is like a black hole! Money goes in, but never comes out. You’ve spent a fortune, with no sign of a fortune coming back

Edison: Good fortune is what happens when opportunity meets with planning.

Manager: Well, I think you ought to start planning on updating your resume.

Companies that really want to innovate, and not just pay lip service to innovation, need to do a few things:

1. Encourage good failure
• As Jeffrey Meshel said in his book One Phone Call Away, “Good judgment comes from experience. Experience comes from bad judgment.” Good failure comes from trying to achieve, not quite getting there, and learning something in the process that will lead to future success. When failure is punished, risk acceptance and employee effort are stymied. Find ways to reward “good failures,” and provide public recognition for such things, so people know that trying, failing, and getting up to try again is not only acceptable, but encouraged. The Apollo 13 mantra, “Failure is not an option,” is a great motivator, but I am certain that the engineers who famously modified the CO2 filter with plastic bags, cardboard, and duct tape had several failures on the way to their eventual solution. Not tolerating failure leads to Homer Simpson management: “You tried your best and failed miserably. The lesson is: never try.”
2. Change accounting practices
• I know that there are Generally Accepted Accounting Principles established, but at least one of those principles is wrong (at least in the US). Forcing all R&D expenditures to be expensed distorts the value of R&D spending. R&D is like any investment – you spend money now in the hopes of excess future returns. In fact, some project evaluation models are now based on options valuation theory. Many, if not most, R&D expenditures should be capitalized. Studies in countries outside the US have shown the value of this treatment (e.g. The Canadian Academic Accounting Association study). Economic Value Added accounting does this, with the result that investment in innovation is recognized for its true worth, and is encouraged accordingly.
3. Implement innovative compensation systems
• Metrics for innovation are always tricky, but this is a problem that firms must tackle if they are to genuinely encourage innovation. The rewards for incremental innovation and breakthrough innovation should not be the same. Measures such as percent of revenue from new products or number of new product launches can be gamed – what constitutes a “new” product? Venture capitalists are rewarded for finding the diamonds in the rough. Innovative employees should be as well. An internal royalty system is one intriguing possibility.
4. Manage for cash flow rather than short-term profitability
• Sometimes, the pressure to meet short-term profitability targets cause companies to look for spending to hack away. All too often, this spending comes from what should be seen as investment in the future. Evaluate your present and future cash flow, and keep the company healthy from that perspective, even if it means missing profits now. Maintain sound R&D investment, and the present value of the future rewards will compensate for the current profit shortfall. Warren Buffet avoided the dot com bubble burst by sticking to a long term investment strategy that skillfully avoided the rush to find someone, anyone, in the dot com world to invest in. Short term pressures can lead to suboptimal business decisions. When possible, remember to think long-term.

All of this, of course, is not to say that deadlines are unimportant, spending should be unrestricted, or managers should not drive for achievement. Going back to the Apollo 13 engineers, they had absolute deadlines and minimal resources with extremely serious consequences that could not be ignored. Their success came from combining that urgency with a willingness to do what it took to get the job done. Corporate business practices should also encourage such willingness, and will find greater innovation and financial success by doing so.

So, what are your perspectives on the state of innovation in the CPG world?

Brad Barbera is the founder of KAB Business Research, a consultancy focusing on Innovation Training, Ideation Facilitation and Management, and Business Intelligence.