Businesses need to grow and when it comes to growth, new products are essential. Campbell Soup is hoping their new product portfolio will help them turn around a sagging soup category. However, as P&G is finding out, it takes more than line extensions or product reformulations. Most consumers don’t want more product features. It takes a steady stream of big innovations too. But research shows there are a great many companies struggling to align their portfolio to achieve growth because of three big issues: balancing projects with resources, driving innovation fast enough and making effective decisions without going back and forth.
So, what’s a business to do? Well, what you can’t afford is to do nothing. Take the toy industry, for example. Every year, nearly 80% of the SKUs in the product portfolio are new. In order to avoid a runaway SKU count, protect themselves from eroding their margins and increase the probability of achieving the revenue growth they set out to achieve, they need to aggressively manage and align the portfolio with their overall business strategies and financial plans.
To do this, businesses must implement three strategies for a successful Idea to Market™ process (I2M™). The first strategy in I2M™ is to Activate the Gates. The second strategy is to Align the Portfolio. Here are three broad steps to make that happen.
Distinguish Between Innovation Types
There are really two broad types of innovation (check out P&G’s presentation to analysts in 2010 referenced in this blog post) and they each need to be managed differently. There are business-sustaining innovations which include most line extensions like flavors, reformulations, most packaging changes, seasonal varieties, and the like. These are usually managed in the business unit at a lower level. But there are also market-disrupting innovations. These are the big ideas that create new markets, new categories (e.g., Swiffer) or are based on different business models. These need senior leadership oversight.
Align Objectives and Strategies
This is done to create strategic clarity around the business needs and the role of I2M™ in achieving it. Alignment is created when leadership understands and commits to the sustaining and disruptive innovation objectives and strategies. Sustaining innovations are usually necessary to abate the leaky bucket/revenue attrition syndrome, create category “news” or provide tactical response to competitors, but they are usually not sufficient. Some level of market disrupting innovation is needed too. How much depends on the business objectives and strategies.
Balance Resources and Risks
There are almost always too many business-sustaining projects in the pipeline and not enough disruptive (this is the problem P&G is currently experiencing). As a result, resources end up being consumed by things that don’t move the performance needle enough. Projects need to be selected to create the appropriate overall risk profile first. This is essentially an actuarial task that is based on the data generated in the “activate the gates” strategy. Projects are selected to optimize revenue (net of cannibalization) and earnings (usually margin contribution) vs. investment (capital and expense) and marketing spending. Then a resource deployment strategy is developed to make it all happen.
Aligning the portfolio is not a one-time event. It’s required on an ongoing basis to keep the business on track. Consequently, it needs to be embedded into the business with strong linkage into the strategic and financial planning process as well as S&OP/BPI and other major processes. It’s an ongoing senior leadership responsibility in getting ideas to market.