We need a new narrative for FMCG innovation
There is a prevailing narrative that most innovation fails: the figure that is often quoted is that 95% fail. But is it true? If we think about it logically, it doesn’t make sense. If most innovations fail, why would anyone take the risk? Perhaps we are all hoping to be in that elusive 5%, although with odds like that, most rational people – and companies – would steer clear. However, there is evidence that most companies perceive innovation as valuable and important and, conversely, see failing to innovate and keep up with consumer shifts or competitor activity as a risk.
We manually reviewed the annual reports of the largest 20 publicly owned FMCG companies in the world and found that innovation is at the top of the CEO agenda and is a key message for investors. Furthermore, companies are willing to invest heavily in innovation and are typically getting great returns. For example, in FY22, AB InBev realised 5 billion USD in revenue from innovations introduced over the past three years. This is against total revenues of 57.8 billion USD, which means that innovation accounted for just under 9% of revenues.
If 95% is wrong...
There is also some evidence to suggest that the real failure rate is much lower than 95% – around 45% for consumer goods, according to a 2022 paper by academic Ireneusz P. Rutkowski from the Poznan University of Economics and Business in Poland. Part of the problem is that it all depends on how we define innovation and failure. Are we thinking about innovation as transformative, disruptive horizon three development, or does it include smaller-scale core innovations, renovations or tweaks to existing products? And which metrics are we using to assess whether an innovation has succeeded or failed? Retail hurdle rate, new customer acquisitions, sales growth in year two, NPS? Failure can depend on when and how we measure it.
And what is the problem?
Does it really matter if there is a widespread belief that innovation fails? We believe it does as it can create an organisational culture in which it is difficult for innovators to succeed. Leadership doesn’t believe in innovation, which leads to underinvestment. Marketing and sales don’t believe in it, which leads to a lack of support for new products. And then failure becomes a self-fulfilling prophecy.
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Trying to balance the excitement and importance of innovation with the failure narrative is hard. This tension can create a range of issues, such as the following:
We argue that it is time to change the narrative around innovation, do away with the failure myth and adopt a new approach.
Read the rest of the article on Research World here.
Author: Adam Rowles
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Founder at Creating Possibilities Limited
9moIn "The Agile Innovation Playbook," I cited high failure rates in Consumer Packaged Goods (CPG), with 76%-95% of new products failing post-launch. Failure definitions and innovation perceptions vary; for instance, new flavours or pack sizes may count as innovation. Many product changes, even minor ones, are considered in these failure rates. I analyzed data from UK Company House, EPOS, and in-house company sources, finding a 185% Return on Investment (ROI) for innovation, assuming a 90% failure rate. However, ROI is highly sensitive to failure rates; a slight increase can lead to negative ROI, while a decrease can significantly boost it. Our analysis highlights companies that innovate increase profits by 33% compared to non-innovators, but that 33% is not evenly distributed, i.e. some grow whilst some decline. Successful innovation doesn't always drive growth. Senior managers face a stark dilemma: high failure from risky innovation that might drive growth or lose their jobs if they don't grow the business. They hide under the safety blanket of a 90% failure rate to keep their jobs. We need to be straight - innovation is risky: the best governance is to manage the risk & return. And we have ways to manage that risk.
In summary....I get stuff done! B2B and B2C Business Consultant: Providing focus and commercial support to businesses including planning, marketing, conference management and project implementation management
9moWithout the acceptance of risk of failure, there is no innovation. No innovation leads to staleness - un-inspirational and standardised offerings. This doesn't feed the natural human curiosity for the possibility of continuous improvement and development - the new. Minimising the potential impact of failure is the closest we can get to attempting to ensure success. To do this, we need a sound strategic basis for the idea - the problem solver. Then we need evidence - something to prove the case and that the strategy could work. Then we need to safeguard against the nay-sayers - the non-risk takers - we need a confidence in our beliefs. We need to ensure that performance targets are in place, to keep us from heading off on a wild tangent - to ensure we stay on track. And finally, we need a lot of luck! The best ideas in the world can fail....without a certain element of pure luck.
Vice President, Strategic Accounts at Zappi
9moFailure comes with the territory in innovation. High failure rates can be tolerated because the payback on one successful innovation can pay for multiple failures, and help the business to grow organically. The alternative is growth via acquisition which carries its own risks. That does not mean that you should not attempt to minimise the risk from innovation failure and there is a lot that can be done there.
Deputy Head of Branch at CIF Research
9moInnovation does not fail, the thought that we are good at this, we can be good at that, fails.