accenture the innovation death spiral

8/3/2019 Accenture the Innovation Death Spiral

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The Innovation Death SpiralHow Companies Get Stuck Throwing Good Money AfterBad Ideasand What that Mistake Is Costing Them


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Far too many companies are now findingthemselves trapped in a phenomenonwe will refer to as the innovationdeath spiral. The spiral begins when

a companys new products, developedand launched with high hopes, endup yielding only disappointing results.Nonetheless, once those products areout in the field, they soak up valuableresources, including manufacturingand purchasing capacity, marketingbudgets, warehouse space, back officesystems and management attention.So the company has fewer resourcesto invest in other initiatives that mayprove more successful, including the

bold, truly game-changing innovationsthat alone can provide sustainablecompetitive advantage and fuel profitablegrowth. As a result, the company isconstrained to limit its investments tosafer, merely incremental extensionsof existing products and services,which again prove disappointing andabsorb undue resources, accelerating

exciting innovation. It is now clearthat the gap between these twokinds of companiesthe innovationchallenged and the innovation

savvyis inexorably widening.

For companies in the first categoryto break out of the innovation deathspiral, it is essential to understand veryclearly what is going on, and then tomake critical interventions and radicalchanges in the way the company operates.

Here, we first set the stage by definingthe three main kinds of innovation,then lay out the characteristics of

the innovation death spiral, howcompanies get trapped in it, andthe approach they need to make totransition to the upward spiral.

the downward spiral. Moreover, oncethe company is perceived as less thaninnovative, it suffers both strategicallyand operationally. For companies

caught in this spiral, increasinginnovation budgets only make thingsworse by putting more non-differentiatingproducts out into the market.

Meanwhile, in contrast, companies thattake a bolder, more balanced, and morefar-sighted approach to innovation areon the opposite trajectory: becominga high-performing organization.They trace a virtuous cycle in whicha balanced portfolio of successful

innovationsincluding incremental,platform, and sometimes breakthroughinnovationsreinforces customerloyalty; wins new buyers; grows themarket; attracts valuable suppliers,partners, investors, and employees;and generates lots of cash, which thecompany can then invest in even more

2 | The Innovation Death Spiral

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Table of contents

Introduction

The Three Principal Kinds of Innovation

Understanding the Innovation DealthSpiral

The Unilever ExampleThe Path out of the Innovation Spiralinto Successful Innovation

The Innovation Engine

Conclusion


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Accenture distinguishes among three

main types of innovation: incremental,

platform, and breakthrough (see Figure

1). Innovations in these three categories

deliver different benefits in terms

of consumer value and competitive

advantage. Ideally, companies

should maintain balanced portfolios

that contain, at a minimum, both

incremental and platform innovations.

The pursuit of breakthrough innovations

requires acquiring or developing

breakthrough-specific capabilities

and therefore requires a significant

strategic decision and commitment.

Incremental Innovation

These are running to stand still

innovations. Because they do not

offer customers superior benefits,

they dont create additional demand

for the companys products. Nonetheless,

incremental innovation plays a necessary

role in defending the companys

baseline against competition; it can

be seen as a form of maintenance,

more renovation than innovation.

Many consumer goods companies

spend over half their innovation

budgets on incremental innovations,

generally because they lack the ability

to systematically scan the market for

the most attractive opportunities and

develop winning ideas to capitalize

on them.

Platform Innovation

These are share of market innovations.

By delivering superior customer benefits,

they drive some market growth, often

in terms of heightened value thanks to

premium pricing rather than in terms

of expanded volume. But their main

function is to grow the innovators

market share by giving customers a

reason to switch from a competitor

brand. Companies that create platform

innovations must be sure to secure

sustainable competitive advantage

through brand, technology, customer

lock-in, etc. Examples of platform

innovations are Vanish and Coke Zero,both of which drove some market

growth but primarily increased their

innovators share of market.

Exhibit 1

The Three Principal Kinds of Innovation

Breakthrough Innovation

These are market-changing innovations.

By delivering new benefits to customers,

they create a new market that the

innovator can dominate for some time

A common misunderstanding is that

breakthrough innovations are necessarily

large technological inventions. In fact,

breakthrough innovations often use

existing technology in novel business

models. Innovators need to establish firm

protection for their large investments

in this type of innovation. A successful

breakthrough innovation is of course

Apples iPad. An example of a break-

through innovation that was notadequately patented is Senseo coffee

pads by Sara Lee, where competitors

were quickly able to start selling

cheaper pods, undercutting Sara Lees

potential market.

Figure 1. Competitive innovation matrix

Consumer Valued Benefit

CompetitiveAdvantage

Low High

High

Low

Incremental

Platform

Breakthrough

Size represents market impact


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In our experience, companies tend tobe reasonably familiar with the needto address market opportunity costsand technological opportunity costs.

But they tend to systematically ignorethe strategic, operational, and systemicopportunity costs associated with theinnovation spiral, and therefore toovervalue their merely incrementaland apparently saferinnovationdevelopment projects. Yet the innovationspiral engenders very real costs thatthese companies will surely incur byfailing to invest in platform and break-through innovation.

The innovation spiral consists of twotypes of negative spirals: strategic andoperational. These spirals are interrelatedand reinforce each other; companies

that are trapped in one are likely to becaught in the other as well. Both areexacerbated by the systemic negativeeffects of ineffective innovation.

The Strategic

Negative Spiral

Unsuccessful innovation not only cutsinto profitable growth but also affectsmarket positioning. For instance,companies that have relatively

undifferentiated products are forcedto play a cost game and are prone tolose market share to private labels,or even have to produce private-label

Understanding the InnovationDeath Spiral

versions of their products. This resultsin further reductions in R&D budgetsand again less product differentiation.The descent along the spiral begins.

Similarly, less-innovative companiesfind themselves in a weak positiontoward potential partners and suppliers.For example, in the automotiveindustry several years ago, whenU.S. automotive manufacturers werein decline, their ability to attracttop-notch suppliers and partners wasfairly limited. In contrast, Toyota andHonda were able to attract strongpartners, which played an important

role in helping them build theircapabilitiesin Toyotas case, todevelop hybrid vehicles.

Innovation is all about allocating scarce resources to projectsof which the outcome is uncertain. In deciding which

projects to invest in, companies must assess not only actualout-of-pocket costs but opportunity costs.


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Companys Product Launches as % of Launches by Peer Group

CompanyRevenueGrowth($) as %of PeerGroupsRevenueGrowth

Company 3

Company 2

Company 1

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

0%

0%

10%

1%

100%

1% 10% 100%

Leading

Lagging

Average performance

Financially, companies simply do notgenerate the growth premiums withincremental innovations that theydo with platform or breakthroughinnovations. In many industries, it ispossible to identify the value premiumsthat innovative companies earn in theirstock prices, relative to companies thatare not innovative. The delta betweenthe two is the opportunity cost thatthe latter are paying.

A recent Accenture analysis of ten largeplayers in the global foods industryover a three-year period2005 throughyear-end 2009provides evidenceof the strategic costs of failure toinnovate successfully. Notably, thestudy found that there is little correlationbetween R&D spending and revenue

growth (see figure 2). AlthoughCompany 2 and 3 invested the lowestpercentage of their revenues in R&Dcompared to the peer group, theyachieved good revenue growth. Incontrast, Company 1 spent a relativelylarge percentage of its revenues onR&D but was unable to convert thisinto organic revenue growth.

When we plot revenue growth againstthe number of product launches, it

becomes evident that while Company1 launches more products than Company2 and 3, these are clearly not contributingto organic revenue growth (see Figure3). Company 1 launches primarilyincremental innovations, whereasCompany 2 and 3 launch a balancedportfolio of incremental, platform andbreakthrough innovations that areperceived by the market as adding value.

Figure 2. R&D spending vs. organic revenue growth (2005 through 2009)

R&D Spending as % of Revenues 2005-2009

Compound

nnualGrowthRate(CAGR)RevenueGrowth2005-2009

Company 3

Company 2

Company 1

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

0%

0%

5%

10%

1% 2% 3%

Figure 3. Organic revenue growth vs. number of product launches (2007

through 2009)


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Company 2

47%

Company 1

16%

Company 3

59%Current Value

Future Value Premium

Source: Accenture Shareholder Value Analysis 2010

Figure 4. Future value premiumsSuccessful product innovation can alsocontribute to future value premiums1.Performance innovation leads tohigher-than-market organic growththat is profitable and capital efficient.Shareholders are willing to pay a premiumon the share prices of companies thatconsistently achieve this kind of growth,because they expect those companiesto continue to outperform the marketin the future. Our study reveals thatCompany 2 and 3 earned future valuepremiums that far outstripped that ofCompany 1, demonstrating the marketsconfidence that they will continue togrow their revenues through innovation(see Figure 4).

The Operational

Negative Spiral

Once a company has launched anew generation of offerings into themarket, those offerings immediatelyplace demands on the companys valuechain, from the sourcing team andthe operational support groups (e.g.,finance and human resources) throughmanufacturing, sales, distribution,service, and reverse logistics. Whetherthey turn out to be successful launchesor complete failures, new offerings

place equal burdens on a companysoperational resources. We have seeninnumerable companies struggle withthe multiple impacts of launching toomany offerings, including increasedcosts, longer-than-projected leadtimes, and dissatisfied customers. Andyet, 44 percent of the respondents toa recent Accenture study reported thattheir companies gave limited or noconsideration to the costs associatedwith new product introductions or with

continuing to produce loss leaders.2The net result is a perpetuation of thespiral, with new offerings grabbingresources and old offerings holdingtheir position in the portfolio.

Further amplifying the impact of failedinnovation on operations is the inabilityof many organizations to quicklymanage themselves out of failure.

Companies invest a great deal inlaunching new products into themarket, but rarely give the sameconsideration to taking them outof the market. Instead, they allownon-value-generating offerings topersist in consuming valuable resourcesand organizational attention, whilediluting the companys margins andmarket position. This failure to manageout unsuccessful innovations exacerbatesthe downward spiral by limiting the

amount of capacity the organizationhas to test and add new innovativeofferings, while continuing to maintaina bloated portfolio.

For companies to mitigate the effectsof the innovation death spiral andbegin to reverse its direction, they needto consider the operational impact ofnew and innovative offerings on theentire value chain as they are launched.This means assessing both the real costof their introduction and the quickestand most efficient path for removingthem from the market if necessary.Companies also need to have a clearprocess for actively managing theirportfolios of offerings, to make surethey create enough head room to allowfor new launches and enough clarityto prevent blind proliferation.

Systemic Negative Impacts

Also contributing to the innovationdeath spiral are some significant

negative impacts on the company asa whole. These include a large humanresources cost: the less innovative acompany is, the less attractive it is tofirst-rate employees and innovators.So the company can no longer hire orretain the top-notch people who areexcited by innovation and good at it.Moreover, the lackluster performanceof the companys new products affectsthe companys reward structure,increasing the difficulty of attracting

great people and thus accelerating thedownward spiral.

Perhaps the most profound impact ofinadequate innovation is the shift inthe companys culture. A company thathas made only incremental changesin its products for a number of yearswill have diluted its developmentresources, marketing spending, andother operational aspects of the firmso thoroughly that incremental change

is the only thing it can do. In effect,such a company will have falleninto the innovation death spiral.This dysfunctional vicious cycle willaffect all the companys functionsstrategic, financial, operational, andorganizationaland will in turn bedriven by them, as described above.


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Over the past five years, Unilever,

which produces and sells suchestablished global brands as Lipton,

Heartbrand (Magnum), Knorr,

Dove, Cif, and Axe, has successfully

transformed its business by simplifying

its organization and focusing on its

core brands and products. This trans-

formation has affected every aspect

of Unilevers business, including its

R&D organization.

In 2000 Unilever launched its Path to

Growth program, which was designedto focus on rationalizing its portfolio.

However, that program fell short of

delivering the required 5-6 percent

top-line growth rate. The company

was spending a large share of its

revenues on R&D and generating an

enormous number of product launches.

But because its portfolio still contained

so many brands, its R&D program

focused primarily on incremental

innovation and line extensions, and

marketing efforts fell short. Whilethere were some successes, overall

revenues werent growing as expected.

Increased investments in R&D just

generated more and more non-value-

adding incremental innovations. Unilever

found itself stuck in the negative spiral

described in this document, in danger

of losing ground in an increasingly

competitive industry. In 2004 Unilever

had to issue its first profit warning in

its 75-year history.

To address this situation, Unilever CEO

Patrick Cescau launched the OneUnilever program to simplify the

companys organization, leverage

its scale, and deliver growth. This

programs objective was to liberate

the company for growth by creating

a more interconnected and flexible

organizationwhile also achieving

cost savings.

As part of the One Unilever program,

the separate Foods R&D and HPC

(Household & Personal Care) R&Dorganizations were consolidated into

the global One Unilever R&D organization.

The company also expanded its R&D

activities in Asia to profit from local

knowledge and expertise and to ensure

the relevancy of its innovations to

emerging markets. Importantly, to

emphasize the importance of R&D to

the companys future, Unilever created

the new position of Chief R&D Officer.

The One Unilever program streamlinedthe company for speed and

competitiveness to ready it for

the next phase in its transformation:

the journey back to growth. Paul Polman,

who took over the CEO position in

2008, launched this phase with a

relentless focus on demand-led

growth in sales and growth of market

share, as well as hands-on involvement

in the major operating companies.

Under his leadership the company

has been focusing on fewer, bigger

innovation projects, including some

long-term, big-win Genesis projects3.

Moreover, the companys 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.

Exhibit 2

Managing Out of the DeathSpiral: the Unilever Example

When a company findsitself caught in this down-ward spiral, its only hopeis to break out by adoptinga fundamental commitmentto groundbreaking

innovation. The Anglo-Dutch company Unileverprovides an excellentexample of a companythat has done just that.


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In 2010 Unilever found itself better

positioned than ever before: revenues

rose 10 percent (see Figure 6) and

volume grew faster than it had in 30

years. The company also performed

relatively well through the recent

economic downturn, despite rising

commodities costs and mounting

pressure on prices. The number of

category innovation projects shrank

from more than 5,000 in 2005 to 700

in 2009 while average project size

increased by 104, and the first Genesis

projects are expected to hit the

market in 20115. All this good news

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 anambitious 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

in emerging markets, thanks to one

of its most successful subsidiaries,

Hindustan Unilever, which has

successfully tapped into Indias emergingmiddle class for more than a decade.

Unilevers learning from that experience

has proven a key success factor for

growth and will likely be a driver of

expansion in emerging markets.

2011 is an important year for Unilever

as it may confirm that Unilever has

succeeded in turning around and is

moving onto the upward spiral of

successful innovation.

Source: Unilever annual reports

2009

+1.8%

+4.5%

2010

44

40

2008

41

2007

40

2006

40

2005

38

Figure 6. Unilever revenues and revenue growth

Figure 7. Unilever future value premium and current value

100

80

60

40

20

0

80

60

40

20

0

Source: Accenture Shareholder Value Analysis

Dec 04

5

Dec 06Dec 05 Dec 10

28 35

Dec 08 Dec 09

2350

Dec 07

1623

% bn

Current Value

Future Value Premium Current Value

Future Value Premium


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Essentially, the process consists ofsix steps:

1. Define top-level ownership of

innovation and clear accountabilities2. Create an innovation strategyaligned with corporate strategy

3. Identify white spaces and must-winbattles (Doing the Right Things)

4. Reduce time to market (DoingThings Right)

5. Increase innovation efficiency(Doing Things Right)

6. Continuously measure and improve

innovation performance

Doing Things Right

Companies need to create aninstitutionalized innovation capability

that is fast, disciplined, and reliable.The challenge for companies that arein the innovation death spiral, andthose that are approaching it, is tomove from a position of constrainedresources, in which they must attemptto mitigate the inherent uncertaintiesof innovation by doing as little ofit as possible, to a position of bold,foresighted commitment to effectiveinnovation. Only by mobilizing all theirresources through an effective innovation

engine can they embrace thoseuncertainties, manage them, andturn them to their advantage.

Doing the Right Things

We are certainly not advocating thatcompanies jettison all incremental

change. Nor do we suggest thatany company should focus its entireinnovation portfolio on a handful ofhigh-risk, high-gain, big bet projects.Companies should strive for a portfoliothat is balanced not only in terms ofrisk and reward, but also in terms ofincremental and platform innovations,together with breakthrough innovationsas desired. Toward that end, they needto develop the capabilities to identifythe white spaces they should play

inthose market areas in which theyexpect growth and in which they wantto compete and can win. They alsoneed the capabilities to identifywinning propositions in those areas.And they need the vision to useinnovation effectively as a driverof top-line growth.

The Path Out of theInnovation Spiral intoSuccessful Innovation

As the Unilever example illustrates, strong leadership isessential in creating and driving a successful innovationprogram. Once the companys leaders have communicatedthe overall strategy and the role of innovation within thatstrategy, they need to ensure that the organization focuseson Doing the Right Things and Doing Things Right, and theyalso need to continuously monitor performance.


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Toward that end, strong, focused leader-ship is absolutely critical. Specifically,the role of the CEO with respect toinnovation is ever more important and

needs to evolve from communicatingvision and setting direction to enablingand driving execution.

But the CEO cannot do that alone.For innovation to become part ofthe organizational fabric, it must bemanaged with as much discipline asevery other aspect of the business. Asurvey conducted by the EconomistIntelligence Unit on behalf of Accenturerevealed that organizations that

have established a single point ofaccountability for innovation reportedinnovation performance and capabilitiesthat are twice as high as those oftheir peers.6


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Accenture developed the Performance

Innovation Engine, which is unique tothe extent that it covers the end-to-

end innovation chain and addresses

frequency, speed, and consistency

of innovation results. Figure 8 shows

Accentures Innovation Engine, with

the three main phases Discover,

Execute and Commercialize. Discover

helps a company invest in the most

promising mix of projects. Executehelps to drive an idea or briefing to

market launch at speed, with efficiency

and meeting the requirements of the

briefing. Commercialize maximizes

the market coverage of the innovation

post launch, and aims to drive up

margin and generate new innovation

to sustain the competitive advantage

over time.

Exhibit 3

The AccentureInnovation Process

Figure 8. Accentures Performance Innovation Engine

High Performance Innovation

Manage Innovation

Building Growth Driving Results

Discover Execute CommercializeStrategyInnovation

ROI

Reaping Rewards

Do the Right Things "Do Things Right

Differentiated Successful Predictable EfficientFast

The Front-endof Innovation

The Centerof Innovation

The Back-endof Innovation


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Companies can emerge from that spiralonly by radically transforming theirorganization. We have seen thatUnilever is currently experiencing this

transformation, and we are eager tosee what impact this will have onits competitive position in 2011 andbeyond. The path out of the negativespiral is one where leadership drivesinnovation by setting a clear direction,where white spaces and must winbattles are defined, and where innovationis institutionalized as a fast, disciplinedand reliable capability. Such a trans-formation program will not comeeasy, and requires significant effort,

investment and a change in mindsetthroughout the entire organization.However it is the only way a companycan get back on track to sustainablevalue-creation and profitable growththrough innovation.

ConclusionMany companies are skewing their innovation portfoliostoward the low risk, merely incremental end of the scalewith their existing mature market spaces, rather thanaiming for truly transformational, game-changing innovation

in their growth spaces. As a result, they incur strategic,operational, and systemic impacts that they may not beaware of until they have entered the innovation death spiral.


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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


[email protected]

Adi Alon is a senior executive

in Accenture Process and


[email protected]

About the authors

End notes

1 A future value premium is definedas the value the market believes

a company will generate fromits investments in its future. It iscalculated by deducting the presentvalue of current operations (NOPLATdivided by WACC) from the totalenterprise value (market capitalizationplus net debt).

2 Managing the Challenge ofProduct Proliferation, The EconomistIntelligence Unit (2007). Managing thechallenge of product proliferation is asurvey and executive summary createdby The Economist Intelligence Unitand sponsored by the George Group,now part of Accenture.

3 Unilever R&D Chief Seeks a SwifferRepeat for Polman, Bloomberg(November 16th, 2009).

4 Q2 and First Half 2009 ResultsRoadshow, Unilever (2009).

5 Unilever May Post Fastest AnnualSales Growth of Polmans Reign,Bloomberg Businessweek (February1st, 2011).

6 For a more complete discussionof the role of the Chief InnovationOfficer, see Accentures report:

Overcoming Barriers to Innovation:Emerging Role of the Chief Innovation

Executive.


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Copyright 2011 AccentureAll rights reserved.

Accenture, its logo, and

High Performance Deliveredare trademarks of Accenture.

About Accenture

Accenture is a global managementconsulting, technology servicesand outsourcing company, withmore than 215,000 people servingclients in more than 120 countries.Combining unparalleled experience,comprehensive capabilities across all

industries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to help thembecome high-performance businessesand governments. The companygenerated net revenues of US$21.6billion for the fiscal year endedAug. 31, 2010. Its home page iswww.accenture.com.

This document makes descriptive reference to

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use of such trademarks herein is not an assertion

of ownership of such trademarks by Accenture

and is not intended to represent or imply the

existence of an association between Accenture

and the lawful owners of such trademarks.

This document is produced by Accenture as general

information on the subject. It is not intended to

provide advice on your specific circumstances.

About Accenture

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