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New insights on innovation in the consumer products industry
How innovation leaders are creating value despite industry headwinds
Consumer product companies face ongoing challenges from slowing industry growth to declining brand loyalty and the rise of unconventional competitors. While innovation is key for companies to differentiate themselves from competitors, few are creating new, viable business offerings that drive value for their customers and shareholders. Companies that maintain the status quo may continue to experience a negative impact. Companies that innovate beyond product, design for consumer behavior, and develop systemic capabilities to drive their innovation activities are likely to surpass competitors.
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Strong consumer products innovation portfolios and capabilities generate more value
While virtually all companies in the world pursue “innovation” as a key driver of growth, very few are actually creating new business offerings. However, in a recent analysis we conducted across 44 leading consumer product companies, representing over $900 billion in revenue, we found that a small number of them are driving disproportionate performance from consumer product innovation. Based on this insight, we set out to understand what separates innovation leaders from everyone else, and analyze what these leaders are doing to drive greater returns from innovation.
What did our analysis reveal? Simply put, the companies that drive disproportionate returns and performance from their innovation investments are companies that do three things well:
Innovate beyond product: Use multiple types of consumer product innovation to improve profitability and consumer experience. Companies that apply multifaceted innovation to support product differentiation demonstrated a better hit rate for innovations launched in the market.
Design for consumer behavior: Break through consumer paralysis and stimulate trial and adoption by leveraging “on the ground” realities of consumer decision-making. Deeper understanding of consumers’ cognitive and behavioral tendencies can help companies heighten consumer engagement and prevent off-ramps to action.
Develop systemic capabilities: Build robust organizational structures that enable repeated consumer product innovation performance. Companies that systematically consider innovation strategy and intentionally structure to support and fuel innovation with the right leadership, talent, and funding mechanisms, can more reliably design, launch, and scale innovations over time.
A new lens on innovation drives returns
Our study on consumer product innovation reveals that CP companies who are innovating beyond product, designing for consumer behavior, and leveraging capabilities in a systematic and repeatable fashion are seeing substantially greater returns from their consumer product innovation investments in the following ways:
- Substantially greater shareholder value creation: Consumer product innovation leaders experienced 14 percent annual stock price growth over five years, compared to zero growth for laggards.1
- Significantly greater economic value creation than the average consumer products company in our sample: Consumer product innovation leaders created an EVA spread2 of seven percentage points over five years, versus one percentage point for all other CP companies in our study.
- Improved consumer brand perception: Leaders develop and launch products that are more valued by consumers, compared to “easily replaceable” products of the average consumer products company in our study.3
1 Leaders are defined as the top 30 percent of companies with the highest innovation scores based on findings from Deloitte’s Consumer Product’s Innovation Index, 2016; Laggards are the bottom 30 percent.
2 “EVA spread” is a performance metric related to the concept of Economic Value Added (EVA), a metric developed and trademarked by Stern Value Management (originally Stern Stewart & Co.). EVA is traditionally defined as Net Operating Profit After Taxes (NOPAT) minus Invested Capital times the Weighted Average Cost of Capital (WACC), and as such measures value creation by a company in dollar terms. EVA spread, also known as “economic spread,” is a percentage-based equivalent of this metric defined as Return on Invested Capital (ROIC) minus WACC. We use EVA spread, rather than EVA, to enable meaningful comparisons across companies of differing sizes.
3 2015 American Pantry Study: The call to re-connect with consumers, 2015.