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(originally published by Booz & Company)


Survival-of-the-Fittest Innovation

And even if companies do think up truly breakthrough products, they often decide that they can’t afford to fully develop all of them. So they institute processes that kill too many good ideas before they go to market. The better strategy is to create a business model that allows you to test different breakthrough innovations in the market on a regular basis, kill those that don’t work early on, and amplify those that do.

Think of it in evolutionary terms. Innovation is really a form of competition. Why do companies innovate? They innovate for only one reason: to outperform their peers, to create something that their peers don’t have from which they can gain economic benefits. And because innovation is a form of competition, it’s subject to the laws of evolution. If you look at the CPG sector from the macro perspective, what you’ll see is lots of companies introducing lots of new innovations, and it will look like many random events. Those that really meet consumer expectations or change consumer expectations survive — those that don’t, die. Ultimately, the environment chooses which products work and which don’t.

S+B: Given the challenges of the competitive landscape in consumer packaged goods, how can CPG companies distinguish themselves?
One big problem with innovation in CPG is that new ideas are so easily copied. A company will launch a product, and within weeks or months its biggest competitor will launch a product that offers almost exactly the same solution in a slightly different shape or form. Sara Lee Corporation recently launched a line of bagged salads that include meat, which was a new product that addressed consumer needs. Soon after, Kraft Foods launched essentially the same product. The result is that there’s no market share gain, and the company that first introduced the new product doesn’t capture the value of its innovation. One consequence of this is that companies will find that being the fast follower to market is often a more effective and profitable strategy than being a market leader.

Because differentiation in the CPG sector is so difficult, companies should turn their efforts toward innovations that are more difficult for competitors to copy. Focus on product or packaging technologies that require a little bit more advanced science to manufacture; this will at least delay copying by competitors, and may buy you enough time to enjoy an attractive return. When H.J. Heinz Company began selling crispy microwaveable French fries that tasted good, they began to fly off the shelf. That may not sound like a major breakthrough, but it does require some science, in both the product and the packaging, to actually make these French fries microwaveable. No one else has matched them yet, and it’s been a while since they launched.

S+B: How can CPG companies get more breakthrough product ideas into their pipelines?
KANDYBIN: One source that CPG companies don’t depend on enough is fundamental research. They typically do their R&D and innovation within business units instead of a central organization, and that’s another reason their innovation efforts are focused on the incremental. The problem, of course, is that if you create a central organization that is detached from the market, it’s likely to end up being a comfortable place for R&D scientists to spend lots of money and time simply thinking.

But such organizations can work well if their efforts are attached to a market mechanism. For example, they might be expected to produce a business plan along with their new ideas and sell that business plan to the appropriate business unit. If none of the business units wants to buy it, they could be allowed to sell it outside the company. Or they could be given the option of developing ideas internally or sourcing ideas from the outside and paying market rates for those ideas. Once you force central innovation groups to develop ways to attach themselves to the market, they begin to work better.

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  1. J. Baldwin, “The Case for Long Shots,” s+b, Autumn 2006: Why the innovations that seem like the biggest gambles are those that have the biggest payoffs.
  2. Barry Jaruzelski and Kevin Dehoff, “The Customer Connection: The Global Innovation 1000,” s+b, Winter 2007: The third annual overview of the world’s high-leverage innovators reveals that innovation strategy is as important as customer insight.
  3. Alexander Kandybin and Martin Kihn, “The Innovator’s Prescription: Raising Your Return on Innovation Investment,” s+b, Summer 2004: Describes how to increase the effectiveness of a company’s innovation spending.
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