Open Innovation in the Consumer Goods Sector
For consumers today, the rapid pace of innovation in technology related products has led to similar expectations from other everyday products. Consumers have come to expect, and even demand, innovative solutions and products in almost every industry. Large organizations typically invest heavily in research and development. The driving force behind this goes beyond the bragging rights and patents to a very tangible impact on the bottom line and profits. Yet, the tried and tested internal research and development model is unable to keep up with the pace of innovation required.
Industries are seeing the emergence of a more open, collaborative model of innovation, where organizations can leverage their partners, their loyal consumers and even often the general public to contribute towards creative solutions. While information technology companies are typically associated with the open innovation model, there are many organizations in the consumer goods industry that have also taken to the concept and successfully used it to drive revenues and growth.
Innovation is the key driver for revenues
Per this study by Accenture on innovation in consumer products, high performance companies introduce more new products than competitors, and bring them to market five times faster. In fact, the top quartile performers generate 20% more revenue from new products than the bottom quartile. Further data in this study shows that innovation is the key driver for revenues.
However, of the more than 35,000 new products launched every year in this segment, more than 60% do not meet revenue targets. This makes it extremely difficult for organisations to justify the large internal R&D budgets required for innovation at this scale and requires innovative methods to augment creative research and develop new products. Procter & Gamble, long known to hold innovation as the key to their phenomenal growth, were an early adopter of the open innovation model. It was one major contributing factors that funded their growth from a $25 billion company to more than $70 billion each year. P&G now sources about 50% innovations from external sources, enabling it to achieve 6% organic growth while the industry average is at 2-3%.
Ways of leveraging Open Innovation
Many other mid-sized and large consumer goods companies have also embraced open innovation as part of their research strategy. Some of the ways they are doing so include
- Using natural networks such as suppliers, distributors and academic and research institutions to augment innovation and improvements. This works well since these are mostly non-competing firms who may have technology that can be leveraged, although their core experience or end products may be different.
- Using targeted methods when looking for suitable partners to come up with innovative solutions for specific problems. This is quite often through open innovation networks or consultants who specialize in connecting to potential partners.
- Some firms use a complete open door policy whereby consumers, or the general public can submit innovative ideas. In some cases, the company may specify a wish list of areas that they are seeking innovations.
The scope of open innovation contributions can range from new product ideas, improvement to existing products, contributions to manufacturing or other processes, technology, packaging and other aspects of the entire business process. General Mills, a major food processing firm, list many such categories they are inviting innovations from.
Organizations still trying to decide whether open innovation is the right path for them may benefit from this study that shares some key benefits, insights, and challenges, faced by early adopters of open innovation in the consumer goods space based on interviews with senior executives at these organisations. The response was overwhelmingly in favour of open innovation.