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 / Summer 2004 / Issue 35(originally published by Booz & Company)


The Innovator's Prescription: Raising Your Return on Innovation Investment

A true sales forecasting capability is also critical. It’s rarely done right, in part because incentive structures often encourage marketing personnel and field representatives alike to be too optimistic in their projections.

The breadth of internal capabilities required to deliver best-in-class innovation and above-average return on innovation investment is wide indeed. But no company can be superior at everything. Hence, the final pillar of innovation:

Pillar Three: Don’t Do It All Yourself
A company does not have to master all innovation capabilities itself. Just as best-in-class companies manage increasingly extended supply chains, superior innovators are learning to outsource segments of the innovation value chain.

A close look at some of the recent breakthrough innovations in the consumer product world will reveal that very few of them were developed inside the largest consumer product companies. Consider Procter & Gamble’s Crest SpinBrush, a battery-operated toothbrush that sells for about $5 in Wal-Mart, Walgreen’s, and other major retailers. Since its launch in 2000, the SpinBrush has become the best-selling toothbrush in the U.S., manual or electric, contributing a robust $200 million in sales to Procter & Gamble in its last fiscal year. Yet, despite P&G’s $200 million annual R&D budget, the idea for the product did not originate with the Cincinnati behemoth. It came from a quartet of Cleveland inventors whose previous claim to fame had been a motorized lollipop. Pfizer’s ubiquitous Listerine PocketPaks — the film-thin strips of breath freshener that overshot their first-year sales target by a factor of three — similarly did not originate in the company’s suburban New Jersey R&D labs. The PocketPaks design was based upon a confection technology long marketed in Japan.

Although some consumer companies continue to believe that innovation can come only from within, a growing body of evidence from other industries and researchers supports an alternative view. One study launched by the consulting firm Delphi Pharma in 2002 looked at the return on R&D investment in the pharmaceutical industry; large pharma companies are among the biggest development spenders on the planet. The study confirmed our research: In this industry as in all others we’ve explored, higher R&D spending did not correlate well with higher new product sales. But this study went further, advising pharma companies to rely more upon outsourced, third-party-generated innovation as a means to increase ROI.

As Harvard Business School Professor Clayton Christensen has observed, there are significant structural reasons that large companies often miss market developments: New markets are too small, at first, to interest major players; margins tend to be lower than they might like; new products often cannibalize a company’s established cash cows. Moreover, as London Business School professors Costas Markides and Paul Geroski have pointed out, large companies, so successful at scaling up mass markets, often lack the skills to pioneer a new market from scratch. (See “The Innovator's Prescription: The Art of Scale,” Summer 2004.) There also is a flaw in the methods by which most companies go about developing new products. Focus groups and surveys elicit consumer opinions, but people can’t know what they don’t know. In a world where Coke is the only beverage, what consumer is going to say that he or she really wants a little blue-and-silver can with taurine in it (i.e., the blockbuster Red Bull energy drink)? “There will always be advantages to size and scope,” strategist and author Gary Hamel has said, “but the industrial company was built for optimization, not innovation.”

Nevertheless, recently some forward-thinking companies have shown unprecedented openness to new ideas. P&G CEO Alan G. Lafley said he would like to see half the new ideas in his company come from the outside, up from the current 20 percent. A new company-wide initiative called “Connect & Develop” was designed to rev up Procter’s innovation engine and allow the company to access external ideas. P&G is explicitly trying to replicate the success of the SpinBrush on a larger scale. P&G’s working methodology at present is to focus on “network nodes,” which are natural communities of idea sources, linked by affinities. P&G alumni form one such node; Web-based idea exchanges such as InnoCentive and NineSigma form another.

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  1. Costas Markides and Paul Geroski, “Colonizers and Consolidators: The Two Cultures of Corporate Strategy,” s+b, Fall 2003; Click here.
  2. “Why the Pace Has to Pick Up: Special Report on Innovation,” Business Week, August 31, 1998
  3. Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press, 2003)
  4. Clayton M. Christensen and Michael E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful Growth (Harvard Business School Press, 2003)
  5. Charles I. Jones and John C. Williams, “Measuring the Social Return to R&D,” Stanford University Department of Economics Working Paper Number 97-002; Click here.
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