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Three lessons in CPG innovation value creation

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Data analytics have never been more important for obtaining a deep, real-time understanding of market activity. CPG companies that embrace and utilize the knowledge gained from market data will be far more likely to develop and execute product strategies than their competitors.

COVID-19 may soon move into an endemic phase. Health experts worldwide seem to believe that we will continue to have variants like Delta and Omicron, but that many places in the world are in a much better position to tolerate surges. Consequently, the patterns of the past two years are likely to fade away and society should return to more regular and predictable patterns. There is a big caveat and a big unknown to this position, however. The caveat is the unpredictability of COVID-19. We won’t really know for sure if we are in an endemic until sometime after we are in and experiencing it. The unknown is what the future “regular and predictable patterns” will be, and if they will look anything like the patterns of two years ago.

Caveats and unknowns aside, this is encouraging news for everyone. For businesses, it’ll be easier to forecast, plan and innovate. A recent report from McKinsey highlights key areas where CPG companies, which recently have been focused on short-term survival over sustainable growth, should  focus as they “reorient their strategies and return to the fundamentals of long-term growth.”

This encouraging report with objective evidence behind it provides good and implementable suggestions around consumer goods innovation value creation. Here are three key lessons that McKinsey identified:

Lesson 1: Growth does not have to come at the expense of profit

Think of this as a portfolio balance decision. CPG companies need to establish portfolio targets and splits around growth and margin. From there, the ability to immediately and continually identify which innovation is oriented toward growth and which is oriented toward margin is crucial. Innovation that is not contributing to either of these dimensions needs to be trimmed. Each company should actively define where they want to be in terms of these two dimensions and rebalance their innovation investments accordingly.

The link of how and why individual CPG innovation projects contribute to company goals must be clear. Good innovation management systems will be key for establishing and constantly communicating the link between corporate strategies and innovation projects. Targets and splits will shift and change, just as they always have but perhaps at a faster pace, driven by disruption as well as by consumer demand. To achieve top success CPG companies must be able to adjust their innovation quickly in response. This requires excellence in the out-executing the competition.

Lesson 2: It’s not who you are; it’s what you do

The McKinsey report illustrates that company size and location does not matter. What matters is the company’s ability to drive organic growth and lower their margins.

Larger companies may have more resources to devote to innovation, including disruptive innovation, than the established smaller companies. But smaller companies are often more nimble and able to react faster to changing markets.

New entrants are often the disruptors and represent a challenge to both large and small established companies. They’re not held down by outdated technologies and processes.

Regardless of size and location, all CPG companies must operate with agility and speed to adjust to external market changes. As noted by McKinsey, the way to win is to achieve real organic growth and positive change in EBIT margin. That’s easier said than done with all the market pressure and disruptions that exist today. Organizations that navigate these waters well will be the winners while the others will be left behind.

Lesson 3: Growth is about out-executing your peers

Data analytics have never been more important for obtaining a deep, real-time understanding of market activity. CPG companies that embrace and utilize the knowledge gained from market data will be far more likely to develop and execute product development strategies than their competitors.

This is where the link between corporate strategies and product innovation comes into play. There must be a process for ensuring that the market drivers uncovered by the data team find their way into their innovation systems, decision-making processes and culture. A good innovation management system is essential as the foundation for enabling good decisions and for keeping everyone on the same page.

Historical momentum is not a practical driver for success. There are countless examples. For instance, Blackberry’s early dominance of the mobile phone market did nothing to lock in future success. Apple and Android left Blackberry in the dust ages ago. Why? Innovation execution.

No matter the activity, CPG companies must be committed to doing everything exceptionally well - with an unyielding focus on the company’s strategies. This includes careful scrutiny of innovation and new product development projects. Lean and effective processes are a must. Innovation governance must be solid, but not burdensome. And both processes and governance must have the flexibility to change.

New products will need to be launched in months. Digital products and digital commerce will be key. You need to be able to test and learn and then pivot on a dime with the results. As for failure, it’s inevitable. Keep moving forward. To paraphrase Thomas Edison, you aren’t failing, you’re just finding out what doesn’t work.

Finally, awareness, measurement, and evidence across all levers of CPG innovation and new product development will be critical success factors.

Innovation strategies are grounded by an innovation management system that serves as a single source of truth, thereby ensuring optimal decision making. Companies who share this approach often “out-execute” their competition, expand market share and experience profitable growth. As CPG companies return to the fundamentals of long-term growth, they’ll be well served by a system that manages innovation and progress.

For more information on how to boost growth initiatives in your CPG organization, I invite you to take a look at the Sopheon e-book: 4 Ways to Accelerate CPG Innovation Growth. Download it now

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