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02/11/2015

Transforming the Innovation Engine in CPG

Consumer packaged goods (CPG) companies tend not to economize when it comes to R&D spending. For example, producers of home and personal care goods surveyed by Accenture in 2014 on average invest 2.3 percent of their total revenue in R&D. Yet their heavy investment in innovation does not necessarily bring heavy payoffs in revenue growth – other, lower-spending categories of CPG business enjoy faster growth. According to market researchers IRI in their 2013 report on new product launches, most new CPG products fail to capture more than $10 million in sales in their first year.
 
The innovation engine for many companies is clearly sputtering. While improving consumer insight and portfolio management discipline is a clear necessity, Accenture believes equal focus should be put on improving R&D operations to become more effective and efficient.  Over the past decade, as SKU counts have increased with global growth, CPG companies have faced an environment with more complex supply chains and heightened regulatory activity in most markets. This has naturally driven product changes to very high levels.

Anecdotal evidence suggests that upwards of 60 percent of  R&D spending is directed to product renovation and maintenance, rather than genuine innovation for growth. In the aforementioned Accenture survey, just 35 percent of consumers in developed markets felt that consumer healthcare companies frequently address their needs by developing radically new products, as opposed to simpler line extensions. Further eroding value, our experience suggests that R&D staff can spend up to half of their time on low-value activities such as re-keying of data, redundant designs and experimentation.  This saps R&D creativity and reduces the effective capacity for innovation. 
 
All this points to the need for  transforming R&D operations in the CPG industry. The opportunity is to ensure that R&D operations are designed to meet today’s global challenges, as well as to boost cost-efficiency. By rethinking the operating model to better distinguish innovation from renovation and maintenance, the cost of the latter can be reduced by up to  50 percent. Just as importantly, this transformation can free up funds and capacity to allow reinvesting in genuine product innovation.
 
Achieving such a transformation is likely to involve four related sets of imperatives:
  • Moving to a global/multi-local operating model. CPG companies can use virtual global R&D networks thanks to the wealth of digital collaboration technologies. This will help balance global best practices with regional centers of excellence and market-specific needs.  Like other parts of the business, R&D can benefit from global project management to help ensure process consistency and efficiency across locations while reducing costs.
  • Digital Product Lifecycle Management (PLM). Digital technologies will exercise a major role across the product lifecycle from insights and ideation to development, scale-up and commercialization activities.  PLM is moving from a linear to a network design, with the product definition data at the center of the model. It is accessible to the relevant parts of the business at any time, removing the inefficiencies of the traditional linear methodology by introducing interconnected processes. It is built upon social, mobile, analytics, and cloud technologies to provide a robust platform. Moving beyond databases for collecting historical experience to applying advanced analytics will allow companies to better ‘design right first time’ by combining consumer, sensory, formulation and market data in a way that has never been possible.  We see PLM as a critical enabler for these organizations to become more intelligent, more scalable, faster and more connected on a global basis than ever before. It will also help them to retain critical knowledge as an ageing workforce nears retirement.
  • Operational excellence. R&D operations can achieve greater speed, quality and efficiency through continuous and relentless process improvement. This begins with bringing needed structure to this creative function, defining common models that segment work, creating KPIs and employing a culture of continuous improvement. For many organizations, greater structure and discipline is perceived as an impediment to creativity. While some areas (for example, ideation) will naturally be less structured, we believe that parts of this innovation engine (development, commercialization, etc.) stand to benefit greatly by reducing inefficient working practices.
  • Shared services for R&D. Companies will drive greater specialization of tasks through the use of shared services and outsourcing, which should serve to reduce costs as well as improve flexibility. Rather than blindly reducing headcount and losing key skills, the R&D function can be disaggregated in smarter ways that help remove less vital tasks from key scientists and specialists and consolidate in centers built for more repetitive activities.

Pursuing these four imperatives for R&D transformation should enable companies to gain an operating advantage by maximizing the return on every dollar or euro of R&D spending. The competitiveness of CPG companies depends on it.

Brian C. Doyle is managing director of consumer goods and services industry – strategy and transformation with Accenture.