JUNE 2004--Take a walk through any grocery store and one of the first things you'll notice is the proliferation of new products. In order for these items to scream “New!” and “Improved!” and entice the consumer to make a purchase, food manufacturers must first bring unique products of value to market. Toward this goal, companies have introduced products that address virtually every conceivable combination of consumer trends such as low-carb, low-fat, high-energy, organic and herbal. The aggressiveness of the new product arena can be seen in Prepared Foods' March 2004 New Products Annual issue.
To achieve profitable growth in this escalating new products race, companies must have strong innovation and new product development capabilities. Yet, despite this competitive imperative, global management consultancy PRTM's (with worldwide offices) industry research and experience indicates the majority of food product companies are not getting the most out of their new product development investment. Today, there is a golden opportunity for aggressive companies to step ahead of the pack and take the lead--by building world-class development capabilities.
PRTM's most recent research study, conducted in collaboration with Prepared Foods, explores the specific capabilities that truly drive new product success under today's challenging conditions. PRTM found that product development capability is a largely untapped opportunity for competitive advantage, but one that the leading food product firms are beginning to use as a recipe for profitable growth.
PRTM's research results show the food product industry, as a whole, has less mature development capabilities when compared to other industries PRTM has studied. Through its benchmarking work in many industries for the past two decades, the firm has developed a Product Development Maturity Model to measure the level of sophistication of innovation and development capability. This is represented as five stages of process maturity (see “Product Development Process Capability Model”) that can, in turn, be correlated to development efficiency, productivity and profitability.
A Decade BehindThe food product industry is at least a decade behind leading industries in efficient and effective development, based on benchmarking data. Diving more deeply into specific development practices, PRTM has found the industry to be lagging more significantly in the areas of opportunity identification and exploration, priority setting, resource allocation and risk assessment--all critical to the ability to use innovation and new product development as a source of competitive advantage.
There are obvious historical reasons for the food product industry's lower maturity level (generally at Stage 1), when compared to other innovation-driven industries. First, development budgets within food product companies are typically dwarfed by advertising, promotion and other marketing expenditures. R&D spending typically represents only 1% to 2% of revenues, compared to 8% to 15% of revenues in the high-tech sectors. However, while an aggressive advertising and promotion campaign can invigorate even poorly developed products, the results are typically short-lived, with little positive impact on company growth and long-term profitability.
The marketing focus of most food product companies also puts them at a disadvantage. They view product development as a cross-functional management process when compared to industries where the need to closely link engineering and R&D activities to customer requirements is more obvious. As a result, many food product companies have never optimized their product development capabilities in a concerted, cross-functional fashion.
As the changing food product industry environment demonstrates, however, the time is right for leading firms to look to innovation and product development capabilities as an untapped source of profitable growth. In fact, this shift is already taking place, as evidenced by the leading firms: those who are the industry best in class, or the top 20% of performers. They already are embracing innovation and product development capability as a competitive advantage and performing at the same level (high Stage 2/low Stage 3) as those companies in technology-driven industries.
Five Metrics of PerformanceThe first step toward capitalizing on the gap between the average food product company's level of process maturity and improved capability lies in understanding more detailed metrics of product development performance and their impact on overall business profitability. PRTM's benchmarking analysis identifies five key metrics of new product development capability:
- Development time to market,
- Average profit per new product,
- New product revenue per development headcount,
- Pipeline throughput and
- New product introduction rate.
The metrics are important because they focus on effectiveness and efficiency of development activities. However, it also is important to recognize up front that this in no way implies that food product companies have an inherent need to increase R&D spending itself. Rather, they need to focus on getting more out of the investment they put into new product development. While consumer preferences and brand equity will always drive the success of new products in this industry, product development capability can be treated as an important resource to be managed alongside marketing and advertising and promotion (A&P) spending, to deliver maximum value and profit contribution.
Development Time to MarketThe benchmarking results demonstrate a significant gap in the ability of firms to quickly complete the development of new products, based on PRTM's analysis of over 100 recently completed development projects. Specifically, the best performers can turn an initial concept for a product variant or line extension into a new product launch in less than half the time of average companies (see “Food Average Development Performance vs. Best in Class”). When looking at major innovations (those that involve significant levels of marketing, technical, and/or manufacturing development), the difference is even more dramatic--the best performers reach the market in one-third the time of average companies.
It is important to note that development effectiveness cannot be measured based on individual project success. In fact, researchers have yet to find a food product organization with major brands that, when their back is against the wall, cannot pull off the heroics to deliver an individual success. However, results did reveal that no single company is able to perform at best-in-class levels across all projects, meaning there is room for considerable improvement in consistency of performance.
Companies that can routinely achieve better-than-average time to market are able to develop more products in the same amount of time and react faster to changing consumer trends, competitive entries and customer requests than average companies. They also will begin projects closer to the target launch date and thus be able to enter the market aligned with the latest trends in colors, fragrances and flavors. These factors provide significant competitive advantage, even if the total development cost is the same as a project done in a longer timeframe at a lower resource burn rate.
PRTM's analysis of successful and unsuccessful projects shows that the top drivers of cycle-time performance are the ability to make timely and effective development decisions, to anticipate and mitigate technical risks and to efficiently manage the cross-functional development process--all core product development capabilities.
Average Profit per New ProductThe benchmarking participants also demonstrate a wide gap in actual new product profitability, as measured by the average gross margin per new product launched. The study shows that, on average, the leading companies outperform the average dollar profit per product by over 2.8 times. While companies in segments that tend toward intrinsically higher SKU counts are at a disadvantage along this metric, all companies should be monitoring the overall profitability of their development output on a regular basis. This will help ensure they are generating the proper mix of “base-hit” and “home-run” products to support a robust development pipeline.
Again, optimizing performance here links back to fundamental product development capability: identifying the right set of consumer requirements and executing the project to deliver those requirements cost effectively, all while balancing a portfolio of product variants, line extensions and “new-new” innovations.
New Product Revenue per Development HeadcountThrough interviews and project case studies, PRTM also investigated which metrics food product companies are using to monitor and improve their development efficiency. Apart from the typical financial stand-bys of margin and market share, PRTM found that the top performers also were measuring the amount of new product revenue generated on a per-headcount basis. These companies treat their development staff (encompassing R&D, marketing and product testing personnel) as a resource to be managed and optimized, just as a product-cost reduction focus puts emphasis on supply chain efficiency.
The study shows the top 20% of performers also are able to generate nearly twice the new product revenue per person than average, lending them an effective development capacity equivalent to a company spending twice as much on R&D. Strong development capabilities in resource management, project management, decision-making and priority setting are typically behind this performance.
New Product PipelineFinally, researchers examined the link between development capability and the overall rate at which companies are able to generate new products, as measured by the number of new products launched per R&D investment (pipeline throughput) and per total revenue (new product introduction rate). Here, results revealed striking gaps between best in class and average, with the top performers able to pump out a significantly higher volume of new products (see “New Products Generation Rate”). Strong capabilities in portfolio, project, and resource management are typically the key behind successful “innovation engines,” giving such companies the ability to consistently maintain a high level of development activity year after year.
As the benchmarking maturity analysis shows, the average food product organization still has much to gain in achieving a reliable and profitable competitive advantage from new product development capability. Even those that perform well on one metric often show gaps along other dimensions of performance. How do companies make the leap? Improving overall development capability requires a change in the role of innovation and product development within the organization. Specifically, companies that are serious about generating profitable growth through organic innovation need to focus in three areas:
Building a truly effective development process requires drawing on all functional areas--marketing, R&D, finance, manufacturing, etc.--to work together as a coordinated set of resources. Achieving a fast time to market also requires tight project management discipline in order to optimize the execution of parallel activities, such as the cycle of product formulation and artwork development (both found to be competing cycle-time drivers). In the long run, even if some activities need to be performed iteratively, strong cross-functional integration reduces total time to launch and improves overall development efficiency, effectiveness, and--ultimately--profitability.
Overall, PRTM's research has found that most food product companies do not have a shortage of ideas. Rather, they have a shortage of capability to turn these ideas into viable product concepts, to quickly develop the technology to realize the concept, and then to commercialize the product with profitable results. Building the core development capabilities to do this well will be the differentiator between companies that come up with a good idea now and then, and those that are able to consistently achieve strong business, as well as consumer, results.