Mars Inc. faced a challenge that was anything but sweet. Founded more than a century ago in a kitchen in Tacoma, Wash., the chocolate giant seemed to have lost its Willy Wonka–like touch. It was the 1990s, and consumers were beginning to question the wisdom of a diet high in candy bars and other sources of sugar, and were getting interested in nutrient-added alternatives such as energy bars. Sales growth slipped into the single digits for the first time in the company’s history.
But introducing major new products wasn’t easy for Mars. The company had had a hard time launching even minor additions to its Snickers, M&M’s, Starburst, and other core lines. Its R&D culture was geared to “making no mistakes,” as one insider put it. And any idea that managed to slip through that filter was subjected to consumer tests and panels that took years, cost millions of dollars, and tended to weed out anything bold and different. The result? The 1990s came and went without a significant successful launch in Mars’s snack food lines. Its core categories of confectionary and pet foods were getting long in the tooth, and analysts wondered aloud if the privately held firm’s best days were behind it.
This is an all-too-common story in mature, slow-growth industries such as food and consumer products. Companies in these industries often spend relatively little on R&D, and in many cases their innovation results are marginal. An analysis of products introduced in the food and beverage industry in 2005–06 showed that just one in five new products earned more than US$7.5 million during its first year.
Why do mature businesses struggle with innovation? Much of the problem can be traced to conventional wisdom, which goes something like this: The secret to growth in the consumer goods arena is to develop new products based on consumer needs, which are discovered through consumer research and focus groups. And what if a new idea is not great? No big deal. Marketing and advertising can always step in, turning a so-so concept into a hit. And the first to market, goes the reasoning, will capture most of the profits. This kind of thinking leads to innovation cultures that deliberately develop a long list of line extensions — new flavors of an established soda brand, say — rather than the kind of game-changing innovations that can make a real difference to the bottom line.
There is an alternative, one that can help rejuvenate a tired portfolio or a worn-out brand in a slow-growing industry. Rather than thinking about new products as a way to get customers excited for a little while, companies need to think about their innovation strategy as a way to build a high, hard wall between those customers and their strongest competitors. This means shifting some investment away from marketing and advertising toward the development of different kinds of new products. The most important thing about these game-changing new products is that they be difficult to copy. Meeting consumer needs is a necessary but no longer sufficient condition of sustainable innovation. New products that stand alone longest in the marketplace, without serious competition, bring in the highest returns.
The Habits of Mis-investment
Mature industries are beset by underlying dynamics that make it difficult for them to invest their money in the kinds of innovation that lead to long-term success. Companies such as Campbell Soup Company, General Mills Inc., and Kellogg Company spend an average of 1 to 2 percent of sales on R&D. Although a number of studies have shown that higher R&D spending does not guarantee success, a minimum innovation investment is required for breakthrough thinking. Without it, companies tend to fill the pipeline with the “base hits” of line extension. They fall into a self-created loop of low investment, low returns, and steady but slow growth. In the end, the slow growth is not enough to keep them from falling behind competitors because everyone is in the same boat; but it does provide the illusion that the company is succeeding — or at least not shrinking — which is then taken as proof that this strategy is smart.