Shrouded in the secrecy of marketing services, at the heart of the manufacturing industry, innovation has today established itself as the ultimate solution, illustrated by insolent successes despite a challenging environment. Sometimes defined as the encounter between an invention and a market segment, innovation seems to generate alternatives, growth drivers, and even crisis products that allow companies to bounce or to renew themselves. So how are the necessary opportunities to be found? Is there a recipe for large FMCG companies? A recipe? Certainly not. But some methods, yes. And also plenty of flawed strategies.
Strengthened by decades of growth, consumer goods international groups, accompanied by powerful distributors, have managed to impose brands, products, and even consumer uses. Globalization has brought important growth drivers to the most internationalized players, allowing them to spread their power. Accesses to markets and organizations have been identified, and most of them have reached the masses, generating economies of scale and other competitive advantages, which in turn constitute as many barriers for any new entrant desiring to play ball. Nonetheless, there are strategic mistakes looming above these great firms, and some have paid dearly for not avoiding them.
The core-core gravity
Recently, leading groups like Kodak or Nokia have seen their core business collapse due to the arrival of new products carried by actors that they would never, ever have perceived, five years earlier, as potential competitors. Whether this was due to an inadequate appreciation of the needs of their clients, to drooping during a favorable context of growth, or to missing out on a technological shift, the reasons given later more often boil down to an inability to revive the pioneering spirit of their early days. These firms have failed to allow their “cash cow” to evolve: they have failed to break with the patterns established by previous successes. This is easily understood: in-house, teams have divergent needs, old ideas take up much space, and whatever technologies are currently being used are also the easiest to use. The vital need for innovation is not sufficient to push aside that kind of “exit barriers” that all too often stand in the way of major projects.
Such inertia is, in a sense, easily understood. Yet we its reasons want to be investigated by examining the weight of the present organization, its structure, and even its job definitions. Strategic marketing is an excellent example at that: while it is generally considered a key resource for innovation, it frequently revolves around product lines sold by the firm. Thus one will find “yogurt” product managers in companies that make small household equipment, or “heavy duty fastener” marketing managers in companies that make building products. These situations channel long-term marketing themes and “bind” them to product renewal, technical improvement, and into taking into account an ever finer use of its own products. Even though they are otherwise essential, these continuous and time-consuming tasks drag firms towards what some strategists have called “the core-core gravity”, thus illustrating the difficulty to move on to something different. Shown in the following matrix, the “core-core gravity “ leads organizations to solely focus on their “core offer” for their “core customer” (see Figure 1).
The suction of resources by the “core-core gravity”
“Core” tasks trigger defensive activities. They are often designed to make things last, to consolidate positions, to take care of existing customers. The markers for such activities are easy to recognize: a low differentiation with competition, a product that is technically very accomplished, cost reduction projects, very frequent renewals, low additional sales. The financial implications are very real, with losses of market share due to intra-brand attacks (by its own distributors), as well as intellectual property disputes and increasing legal fees. Owing to time constraints, with teams fully focused on the core, offensive activity is neglected, and the know-how to innovate dries up, at the very time the need for innovation is growing.
Reconnecting with the end-market
Let’s take an example that shall allow us to specify a central concept in this reflection: the end -market. The “yogurt maker machine” product manager knows his product range like the back of his hand. Ranging from 20 to 60 €, he is certain to cover all the market with a dozen references, under three fine brands. Despite his strong positions, he decides to lower his prices to reach more customers, through his favorite retailers. The R&D teams are then asked to bring down the cost. Competitors arrive, and thanks to lighter structures, are able to further lower already low prices, imposing a new “market price”. To counter this negative spiral, the product manager sets out to find “free novelty” to bring to his products so as to differentiate them. However, these products, which have been constantly improved for several decades, are already very advanced technically.
The product manager thus decides to add yogurt pots to his yogurt makers, to increase their capacity. Confident that his idea will work, he brings together a “price per pot” blurb over competing yogurt makers which then have two less pots to boast. To be sure to sell as many new models as the one to be replaced, and lacking space in the department, he decides to move closer to his low-cost competitors and lowers the selling price of his new product a bit. R&D pressures its suppliers, and eventually takes the weighty decision to relocate and to buy a product in China to meet the demand of the product manager. At the same time, the “fryer” product manager achieves a 5% decrease in the cooking time for French fries, and the “vacuum cleaner” product manager increases the consumed Watts of his devices by 10% so as to boast higher-end performances. These few lines obviously take a few years to happen...
When the new yogurt maker is ready, a bad turn of events has weakened the project and its participants. A marketing manager decides to test the product with consumers. Consumer response is shy but nevertheless, manages to raises a concern: by augmenting from 8 to 10 pots, one liter (quart) pack of milk usually used to make eight 125 g pots is no longer enough! One must open two bottles of milk to make a series of pots. Several meetings are then organized to find a solution. The Director suggests 10 pots of 100 g, at which point R&D reports that the heating system must be modified, which upsets some of the investment. Meanwhile, the market situation is tense. The “10 pots” project has become a strategic staple of this product range, which is enjoying rapid growth, and which is more, is the only one in the pipeline. Postponing its launch? Not an option...
During these few years, the market for ultra-fresh products (see Figure 2), which is the niche for the famous homemade yogurt and the yogurt maker, has seen real change. Danone’s bifidus yogurt is all over the place, the variety of available dessert recipes keeps increasing and is giving value to this market. New segments appear, even, with probiotic dairy drinks for breakfast. These changes are experienced by the product manager in his daily life, yet he doesn’t see any point or relation with his line of business, or finds they are too remote from him: “This is for the Foods department, we're in Appliances!” He prefers to focus on developing projects that should not be polluted by considerations that are external for the yogurt maker market.
This classic confusion between his product line and the end-market (in this case the ultra-fresh market) is what’s blinding our product manager. The yogurt maker machine can’t be eaten and there is no such thing as a market for yogurt maker machines… but the product manager doesn’t know that.
The market for the yogurt maker machine properly contextualized in its end -market
Companies that dominate the market are more prone to this type of risk. Ignorance of end -market and product renewal habits drag the firm into an “inside –out” mode, when it’s precisely the opposite that should be done. However, developing an interest for your end -market is by no means obvious, because setting aside what we already know is much harder than learning what we don’t... and big companies know a great many things! It is rational and reassuring for new projects from to derive from “its market”, its products, its technologies, its ideas. How could Kodak ever have imagined the rest of the story without departing from its traditional activities?
Exercise: what was the end-market of the film roll?
From the “idea in the morning” to the study of macro-trends
To discover and understand one’s end-market bring something to innovation that is lacking in a simple “good idea” you may have in the morning brushing your teeth: foundations.
“Inside-out” approaches have the effect of forming what might be called “caprice projects.” These projects are all the more dangerous in that their survival depends on the hierarchical level or the person or persons supporting it. Unfortunately, such projects more often than not suffer from what patent engineers call the lack of novelty. Identifying caprice projects is therefore essential for innovators. And reject one’s very own whimsical ideas is even more important.
The so-called “suggestion box” methods very often boil down to retrieving a large number of morning ideas. In the brainstorming jargon, this is called the idea purge phase. And this phase is not intended to bring good ideas, but rather to remove instant ideas, those that competition has probably already had. Similarly, one must be wary of a misunderstanding of what open innovation is about. Many organizations see this as a method consisting in asking customers what they want. Here we shall to borrow a phrase from Steve Jobs, “the role of customers is not to know what they need.” Besides, for the most part, if you ask them they won’t need anything. Jobs often quoted the words of Henry Ford: “If I had asked my customers what they wanted, they would have said, 'a faster horse'.”
Apple’s innovations, which are a leading reference today, are not confined to good ideas: they rather owe their success to a strategic understanding of the end-market of the products that were launched. This knowledge is essential if one tries to innovate in the field of fast-moving consumer goods. The need to innovate is inseparable from that of growing, that is to say, of reaching new customers and going for the “adjacent ones” in the matrix.
To study one’s end-market is to understand what influences it, what gives rise to opportunities, what makes or breaks activities. To take it into account is to bring credit to the project start-up, i.e., foundations that will constitute the rationale behind future products. A n effort for strategic thinking and a disruption of habits are mandatory. Seizing macro-trends on the market for yogurt makers is simply impossible, given that this market does not exist (except for he who provides yogurt makers components). However the ultra-fresh market does exist on the other hand and macro-trends there are much more palpable, and they come with a host of opportunities too. They are also easier to capture, and are supported by market data which is always useful to initiate well-based reflection. They also allow one to open playgrounds that have been little explored, to wander away from one’s “core offer” and to help the firm out of its “core-core gravity.”
The broader window makes it possible to seize opportunities in segments more promising than those the company is used to play in, if only by opening up a previously non-existent option. Research activities turn into exploration activities, with learning that will enable a better understanding of the end-market, paving the way for a more far-sighted and comprehensive strategic vision.
There isn’t an obvious connection between a polycarbonate yogurt maker machined with a steel mold, on the one hand, and whatever underlying trends are to be found in the ultra-fresh market, on the other. Yet some players have pulled it off. The Seb/Tefal Multi-delights yogurt maker, launched in 2011, riding on the macro-trend of dessert variety, allowed the Seb Group to introduce a disruptive concept. Disruptive regarding the value proposition, by offering to prepare yogurt as well as chocolat fudge or crème brûlée. Disruptive regarding profitability, by allowing to market the product with a price tag twice higher than the most expensive one in the existing product range. Disruptive regarding technology, by opening up new technical requirements to achieve the new features expected (not just fermentation anymore, but also cooking), with patent-protected and sustainable inventions on top.
The benefits of outside-in
A good grasp of your end-market makes it possible to orient your strategic activities, and not just your project/product portfolio. In the field of construction, the macro-trend of energy efficiency is currently imposing heavy mutations, giving rise to new and potentially strategic segments for existing companies.
For example, while the overall construction market is stagnant in Europe, such nascent segments are experiencing a double-digit growth. This is the case of the ETICS external insulation of buildings, in the context of EU regulations aimed at limiting the energy consumption of new and existing buildings. Public funding is put forward; standards appear and confirm the growth of the new segment. An ecosystem emerges around this new segment, and brings a wealth of opportunities to be seized by the most agile companies. The novelty of this segment will also bring about new needs in terms of products, and it becomes a playground that facilitates the introduction of innovation. Addressing new problems suggests brand new solutions, particularly in relation to one’s core offer. For the U.S. group ITW, a global leader in construction fasteners, ETICS constitutes an adjacent segment in which acquisitions are relevant, owing to the growth of the segment. This also breeds new needs which generate new product innovations affecting adjacent customers. The “outside-in” approach and the understanding of the ecosystem make it possible to think the offer beyond the product. Who is selling? Who is buying? Who is prescribing it? Who is using it? This is all relevant information to build the value proposition. Meeting with the stakeholders in the ecosystem also helps to form a better idea of medium-term trends.
It is also possible to function through deployment in other geographical areas. It becomes difficult for the leading European or American firms to ignore the growth of the famous BRICS. The “outside-in” approach has also proven to be relevant whenever a corporate group decides to enter new regions. It is not wise to imagine that duplication will be smooth and easy when selling European products to penetrate the Chinese market, for example. Exploration is essential beforehand, and the discovery of local needs allows the elaboration of a suitable offer. “Forcing” an existing product offer onto a new geographical area requires considerable effort that all too often leads to very mixed results. Selling coffee to the Chinese, who consume soy milk in the morning, is a challenge. Understanding their consumption patterns through a precise exploration, combined with simple market studies on the consumption of soy milk, has enabled Groupe Seb to introduce a very innovative Soymilk maker (product advertisement here) into the Chinese market.
Whether it is aimed at introducing new, more profitable products, winning new geographic areas or targeting acquisitions, an open approach often yields unusually rapid benefits. It requires to get rid of a romantic vision of innovation that merely contents itself with promoting intuition or “good ideas.” Developing an awareness of one’s end-market, discerning macro- trends, and focusing on growth segments or new problems will transport the company into a learning culture that puts all the odds on its side.