How do large companies pursue radical innovation? You know, the kind of new product that changes or creates a market. In my first blog I summarized the 6Ps, a template that I believe could help to increase the output of game-changing innovation. The next blog covered PERSPECTIVE, followed by one on POTENTIAL. The third “P” is PROTOTYPES, and in this article I’ll discuss the fourth, PARTITION.
In 1986 Nestlé launched Nespresso. Traditionally known for its retail brands like Nescafé, the opportunity was spotted for a premium, unit-dose coffee business which, with customized machines, would deliver espresso bar quality coffee direct to people’s homes.
Compared to Nestlé’s traditional business, there were some pretty fundamental differences. First, the product was unusual, involving a machine and dedicated coffee pods. Second, the route to market completely bypassed Nestlé’s valuable retail customers, and went direct to the consumer in a subscription model. Finally, the revenue model involved strategic alliance partners and a machine/consumable pull through dynamic. It was also clear that it would take some time before the new business would break even. In fact this didn’t actually happen until 1995.
In 2011 Nespresso delivered revenues around $3.3bn. It now sells in over 50 countries, employs 7,000 people and ranks in the world’s Top 100 Brands. The Nespresso business is undoubtedly radical innovation because it changed consumer behavior and created a new market.
Why has it been so successful? There are many reasons, not the least of which is the fundamental one that it’s a great product that resonates with a loyal consumer base. There’s another - it’s autonomous and managed separately from the mainstream Nestlé business. From the early days it was kept separate from the operating P&L of Nestlé country managers. It’s easy to imagine now how it would have fared if it had been integrated into the mainstream business tasked with delivering the quarterly numbers.
The separation from the main business wasn’t only on the commercial side. From the start there were dedicated technical resources that, together with external partners, focused on innovation for both machine and consumable.
Procter & Gamble’s approach to radical new business is now following a similar path. They have established a separate unit, Futureworks, which they describe as the company’s Entrepreneurial Engine. Futureworks is charged with “creating, incubating, and scaling transformational new business models, new categories, and service experiences that capitalize on consumer-driven, disruptive market innovation”. The Futureworks team reports directly to the Corporate Innovation Fund, essentially the top officers of the company. Even though it has close links to Connect & Develop and New Business Creation, it is managed separately from the mainstream business.
A great example of Futureworks’ brief is Tide Dry Cleaners. P&G want Tide to be the number one brand for clothes cleaning in North America. This is fine with full access to retail channels for home laundry consumers, but what about dry-cleaning? Previous attempts to bring dry cleaning products into the retail channel have failed. So using the expertise built up over a decade of out-licensing brands, P&G have come up with a smart alternative. Using eco-friendly technology that avoids perchloroethylene, they are franchising dry-cleaners using the Tide brand. This is after a test market (i.e. a prototype!) proved the viability of the model. If the business takes off, it could be a new and separate business for P&G.
As Maxwell Wessel explained, large companies are set up to deliver profit through operational efficiency. Find something that works, scale it, optimize it. There is potentially a mismatch with radical innovation which doesn’t easily fit with existing customers, infrastructure and business model. If it doesn’t fit, there are two options; reject it, or manage it separately. This is where partition comes in. As in the Nespresso example, partitioning the new innovation from the short-term pressures of corporate targets gives it space and time to grow, particularly when it follows a different route to market.
Many companies separate longer-term research from the rest of the technical organization. This makes sense in many industries, for example pharmaceuticals. However successful innovation needs much more than smart science and new technology. It shouldn’t just be managed separately in R&D. The full spectrum of necessary talent, including go to market competence, should be applied to the radical innovation project portfolio. It needs many parts of the company to contribute in a coordinated and organized fashion.
Partitioning radical innovation in a different part of the organization should not be a license to play around or pursue personal curiosity. It should also not be called “blue sky”. There is a danger that the rest of the business views separate businesses or R&D teams charged with developing and delivering radical innovation as ivory towers. They must be seen as working just as hard, and still with challenging targets – even if they are different.
Radical innovation needs a different set of objectives to the rest of the company; it can’t be assessed in the same way as business as usual. The measurement of performance must relate to what they are trying to do, and should avoid a direct focus on launching every project. It’s fine to look at a hit rate, as long as the large company takes a portfolio approach to radical innovation. The objectives must still be demanding and stretch the performance of the radical innovation teams.
In summary, partition can help large companies execute more radical innovation through:
- Separating business opportunities which have a different route to market;
- Separating the P&L;
- Giving new business time and space to reach payback;
- Protecting radical ideas from the pressure of short-term delivery.
In the next blog, I’ll discuss why greater persistence is needed if the radical innovation is to succeed.