INNOVATION.OPEN MINDS, OPEN WALLETS

A CSC WHITE PAPER

Improving New Product Development at Consumer Product Companies

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Improving financial viability while delivering innovative, environmentallysustainable products may be the most important business issue confrontingConsumer Packaged Goods (CPG) companies today. Faced with a globalrecession, ever-changing consumer preferences and higher developmentcosts, CPG leaders want solutions and products that offer significantconsumer appeal and competitive advantage.

How companies leverage innovation is vital for achieving results today andin the future. According to Anne Beralack at IRI, “Less than 5 percent of newbrands reach $50 million in year one sales.”1 The staggering price tag ofintroducing failed products is costing the industry billions of dollars annually.

This white paper will review how companies are improving innovation, evenin tough economic times, by utilizing best practices, technology, andinternal and external resources to improve profitability, success rates andrevenue streams.

INTR0DUCTION

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Executives are focusing on drivinginnovation and targeting metrics likepercentage of revenues generatedfrom new products. Companies arealso focusing more on how they aredefining product development. A lineextension or packaging change doesnot achieve the same results as apowerful new concept or “blockbuster”idea. Defining the type of “newproduct” into classes is a step in theright direction. With this data, brandand category managers are looking attheir initiatives to make sure they havethe right blend or mix of new conceptsand ideas to achieve desired results.

Sweeping changes are occurring atCPG organizations as a result ofimproved business processes andleveragable technology. Technologythat supports product developmenthas evolved to the degree that it nowhas the potential to provide significantbusiness value. Much of this functionalityfalls under the umbrella of ProductLifecycle Management (PLM). Consumergoods manufacturers also have thebenefit of leveraging the experience ofindustries that were early adopters ofPLM technologies, such as Automotiveand Aerospace and Defense, as well asindustry leaders like Procter & Gamble(P&G) and Kimberly Clark.

If innovation and improved productdevelopment are vital to futuresuccess, then improving businessprocess and leveraging technology is amust. To realize business benefit,companies should have an emphasis onprocess models, leveragable industrybest practices and effectiveimplementation of underlyingtechnologies.

“A difficult economic environment argues for the need to innovate more, not pull back,”says American Express CEO Ken Chenault. The company established a $50 millioninnovation fund to finance employees’ ideas for how to transform their business longterm. “We want great ideas to come from all over the company, not just the chain ofcommand,” Chenault says.2

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INNOVATION IS THE CREATION OFSOMETHING NEW THAT MAKESMONEY; IT FINDS A PATHWAY TOTHE CONSUMER.

It is no wonder delivering innovative products is such anillusive target: few can agree on how to define innovation.According to Datamoniter on their ProductScan website,innovation is “offering the consumer a significant new oradded benefit not offered before.”3 This definition does notreally bring into the equation the need for productacceptance or success. For the purpose of this white paper,innovation is defined as more than just a novel characteristicor some new product attribute. Innovation must translatethose unique characteristics into an economically viableproduct. In other words, it must sell.

If you review the list of the most innovative products asdocumented by ProductScan, none of these would be listed as top generators of revenues. In fact, Datamoniter is quick to point out that the type of innovation they qualitativelycapture does not guarantee product success.

I prefer Robert Tucker’s definition as defined in “DrivingGrowth through Innovation,”4 Product Innovation is theresult of bringing to life a new way to solve customers’problems — through a new product that benefits both thecustomer and the sponsoring company. According toFortune, “One common error is to mistake invention forinnovation; they are not the same thing. Invention is thecreation of something new.”

Innovation is the creation of something new that makesmoney; it finds a pathway to the consumer..2

This brings the proper balance: innovation with correspondingbusiness results.

WHAT ISINNOVATION?

GETTINGTHE RIGHTIDEAS

Increasing the flow of ideas into your company is a first stepto improving innovation. Few companies effectively tap amajor source of ideas: their own human capital.

Recently we looked to increase the level and quality ofinnovative ideas and launched an internal campaign, “What’sNext for CSC?” The goal was to harness the company’scollective intelligence to uncover ideas that could give uscompetitive advantage and growth.5

The outcome was tremendous. Nearly 7,000 employeesparticipated in the 17-day event, generating over a quarter ofa million hits to the website. Geographic and organizationalboundaries disappeared as people came together tocultivate a path for our future. The ideas spanned broadthemes including healthcare, education, transportation,energy and green issues, as well as more targeted topics,such as leveraging technology to protect personal data,gaming and 3D technologies. This was an impressive result,and a great example of strategic collaboration.

Improving processes and enabling technology can enhancethe collection and capture of ideas. With the emergence ofsocial networks and mass collaboration, technically capturingnew concepts and ideas has never been easier. The challenge is the right framework and process automation to collect andanalyze all the potential data. Certainly moving outside of yourown company’s boundaries is also very important. Theseareas are furthered developed below.

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It is often not enough just to leverageyour own resources to come up withinnovative products and ideas. Adriving concern is that CPG companiesin general are often too conservative orrisk adverse. The culture of corporatelife does not often lend well to thinkingoutside of the box. Also, the “up orout” mentality that exists especially inthe brand and marketing managerpositions tend to have these individualsleverage what worked well in the pastand not stake their careers on anythingtoo radical or forward thinking. In R&D,there is also some hesitancy to leverageideas that are “not invented here.”

Again, using P&G as an example, theyare astute enough to know that manygreat ideas come from outside theirown walls. In fact, A.G. Lafley, theformer chief executive officer,reinvented the company’s innovationbusiness model in 2000. He set thegoal of acquiring 50 percent ofinnovations from outside the companyand named this model “connect anddevelop.” Dr. Keith Caserta, SeniorDirector Research and Development IT,explains, “Connect and develop consistof the philosophy, process and tools

that allow us to connect to the rightresources to source those 50 percentof new ideas from outside. It’s alsointended to get the right experts incontact with our developmentchallenges, whether those experts areinternal or external.”3 Essentially, themandate states that half of P&G’s newideas will come from its own laboratoriesand research centers, with the other halfcoming through open innovation.

To illustrate open innovation, Casertacites pharmaceuticals. He says P&Gcould have an upstream researchorganization with hundreds, eventhousands, of staff working to developnew “drug candidates (novelmolecules). But there are nearly 5,000biotech companies out there doing thesame thing. We don’t have a monopolyon great minds or creative thinkers.Why shouldn’t we take advantage ofthe excellent work being doneelsewhere, seek out those organizationsdoing work aligned with our productareas, and partner with them to bringtheir ideas to market?” he asks. Thisapproach and thinking has kept P&G atthe forefront of innovation.

This strategy has continued to paydividends for P&G. According toFortune in their 2008 list of MostAdmired Companies for innovation, theonly CPG companies noted are P&G andFortune Brands. For the third straightyear Apple was #1.2

Companies that are focusing oninnovation improvements often focuson the following areas:

• Systematize the approach forgathering and collecting ideas

• Tap into often-neglected sourcesfor new ideas

• Accelerate your idea generationprocess

• Create data repositories forcapturing and collecting new ideas

• Tap into key consumer trends andstretch the relevance of your product decisions

• Make informed investmentdecisions with ease

• Move ideas to commercializationfaster and at lower cost

OPENINNOVATION

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With the appropriate level of greatideas flowing from both external andinternal sources into the organization, itis now time to discuss putting yourresources, time and capital towardsthose concepts and products that makethe most sense.

The failure rates of new products inCPG are as high as 80 percent.Conservatively, this is costing theindustry $60 billion annually. This canimprove with increasing and improvingthe number of ideas and applying aquantitative approach to narrowingfocus, as well as the pipeline of productsactually executed and launched.According to Aberdeen Group6 best-in-class practitioners in productportfolio management (PPM) are:

• Four times more likely to generatehigh margins on new products

• Eleven times more likely toexperience high innovationprocess adoption rates

• Consistently achieving newproduct success rates of 80percent or more

There are obvious metrics importantfor new product success. These couldinclude revenues, profits, market share,strategic fit, costs, market appeal, etc.Coming up with quantifiable guidelinesaround these or other areas and thenscreening the products much earlier intheir lifecycle will improve productportfolios and success rates. Generallyspeaking, a ranking system orscorecard provides a raw score toallow executives to make betterdecisions. Of course, this does not takeaway the human element or themarket research used today foranalysis but it does provide an earlywarning system to screen out thewrong ideas. Sadly, with the hugefailure rates that exist, this is nothappening consistently. Killingproducts further upstream offers hugedividends and allows your talent andhuman capital to stay focused.

Developing the right scale orscorecard is a mandate. It isparamount that companies understandkey areas of emphasis and how toweight these variables to provide thebest opportunities for success.

WORKING ON THE RIGHT IDEAS:PORTFOLIO MANAGEMENT

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Michael Treschow thinks there is not enough “wow” at Unilever.2

The Swedish chairman likes inventions, gadgets and newwhizz-bang things. After a shake-up and streamlining of thetop team at the Anglo-Dutch food and soap company, hewants the men in white coats to work faster, creating anassembly line of new products.

“The marketing is good, the selling is good, it’s the productline that needs attention,” he says. “The single mostimportant thing is that we speed up our innovation machine,which means that we bring more highly appreciated productsto the consumer so that they say, ‘Wow, this is reallysomething I would like to have,’” he says.

First to market definitely wins the day. In fact, consumergoods companies that accelerate their PLM activities arerealizing a 25 percent price premium for being first to crossthe line. On the negative side, there are many examples ofcompanies that were second to market on a given conceptand forfeited millions of dollars in lost revenues. Examples ofthis include Unilever (scooped by P&G) with a detergent andfabric softener blend, and P&G (scooped by Keebler) withpackaged soft cookies. Both were painful experiences costingthe respective companies multi-millions of dollars. The lesson —get there first. This was validated by AMR. An AMR Researchstudy7 found that “late to market/missed demand” was the topreason among companies for product launch failure.

Many companies today attempt to manage their newproduct development processes via a Stage-Gate8 approach.The problem is that many of these processes are not

standardized and some are not even followed. Anothermajor challenge is executive alignment and vision. Providingexecutive and functional exposure early and often into thenew product development and introduction (NPDI) processstarts edging towards real business value. Understandingand removing potential roadblocks for advancement,making sure key milestones are hit and managed, andassuring timely introductions are critical. Standardizing theapproach and automating and enhancing key processes willshorten the process — allowing business and IT to becomestrategically and tactically aligned.

PLM is a great vehicle to bring standardization acrossbrands, categories and business units by automating theseprocesses and creating the appropriate templates andapproach that save significant time and money. Metricsaround time to market are skewed depending on how youare defining new products. Using a lump sum approach inclassifying new products provides data that is inaccurateand misleading. Obviously, a label change is a lot less timeintensive than a new product concept. Taking cycle time outof the process for all types of new products is important. Abreak out of cycle time by product type is recommended, sothat it can be measured from ideation to launch. A baselineapproach and leveraging best-in-industry standards andprocesses helps achieve results.

SPEED TOMARKET

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MANAGINGPRODUCT DATA

IMPROVINGPACKAGINGAND LABELING

Managing product data and specifications are challenging formany organizations. Most CPG companies are using homegrown systems or Excel spreadsheets to manage thisimportant task. This area becomes more complex withoutsourcing and international needs for manufacturing andsupply. Spreadsheets and homespun systems do not scale tothis level of complexity and mandates change. Other non-process industries usually start with and have spent yearsmanaging the product data: bills of materials, productspecifications, change orders, etc. CPG should learn fromthese industries and focus not just on system replacementsor efficiencies but also on driving business value.

Many CPG companies err by making it a technology playdriven by IT or product development. The challenge is thatdata management is a portion, not the whole, of the visionyour company needs for improving product developmentand innovation. A silo approach offers challenges to scale,obstacles preventing increasing functionality downstreamand barriers to successful integrations into other importantsystems. As important, it will cost you more in the long run.

For process-driven CPG companies, there is anotherchallenge: Technology has lagged in the formulation datamanagement area with niche players controlling most of the market. Recently, SAP and other companies are puttingmore emphasis on formulation and specification managementwhich will address the areas of scale and effective ITinvestments. There is still more functionality necessary tomatch some of the best-of-breed solutions that exist.Companies that offer specific solutions around formulationmanagement include Infor, Selerant and Enginuity PLM.

Packaging design is a major factor in driving the consumerappeal of new products. Moreover, packaging developmentis on the critical path for timely introductions. Therefore, bysimplifying and shortening the process, you will be faster tomarket. A successful approach will leverage enablingtechnology that allows concepts to be mocked up as theywould appear in any retail setting. This improves the abilityto predict consumer preferences, which can impactforecasting and product pricing decisions.

P&G believes shoppers make up their minds about a productin about the time it takes to read this sentence. This “firstmoment of truth,” as P&G calls it, is the 3 – 7 seconds whensomeone notices an item on a store shelf. Despite spendingbillions on traditional advertising, the consumer productsgiant thinks this instant is one of its most importantmarketing opportunities. Companies in the US are expectedto spend about $18.6 billion on in-store marketing and in-store ads this year.

In another example, Coca Cola introduced the Fridgepackseveral years ago. Researchers had discovered that thestandard, 3x4 “suitcase” 12-pack was reducing consumptionbecause people tended to cool only a few cans from thepack. Research found that consumption was dramaticallyincreased when the beverage was cooled and available. Byconverting to the now-familiar 2x6 dispensing design, theentire pack fit on a refrigerator shelf and Coke saw a salesincrease of 5.7 percent for Coke Classic in the first year.

With radically different, highly-collaborative businessprocesses supported by new technologies, it is possible foryou to cut in half the time required to get a new design ontothe shelf.

FORMULATION, SPECIFICATIONSAND PRODUCT DESIGN

PROCESS AUTOMATION, DIGITALASSET MANAGEMENT

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WHERETO START

Where you start is critically important. Making decisions todaywithout a complete vision will add years to the change processand add millions to the cost. Most companies start withmanaging data, which is traditionally accomplished by asystem upgrade or replacement. This is a difficult place to startand it is recommended in CPG only on an exception basis.

Focusing on program or portfolio management or otherancillary processes (such as package or artwork approval)allows you to begin building your data repository withoutcrippling your organization. Equally important, it will providereal value to your business users.

Critical to PLM success are completeness of vision, executivesponsorship and understanding business value. Securing theseup front greatly increases the probability of overall projectsuccess, user acceptance and significant improvements in productdevelopment and innovation. Also IT or MIS organizations thrivewhen they consistently improve organization value throughtechnology. With a focus on business value you will assureacceptance by the business leaders; specifically Finance, R&Dand Marketing.

Starting a PLM journey should start with an assessment ofcurrent capabilities, processes and technology. An assessmentshould also review strengths and needs, identifying focus areasand quick hits for business improvements, and creating a high-level business case for moving forward. Assessments by anoutside organization generally occur in a 4 – 6 week time period.

According to Chad Johnson with the Aberdeen Group,technology and process improvements can have a dramaticeffect on product success, “Most often, what makes thedifference isn’t strategy, but the tactical execution of thestrategy. The industry leaders are leveraging these (PLM) toolsto assess costs earlier and screen for regulatory complianceearlier in the development process. This is the endgame. Theyare using these tools to gain more visibility into the movingpieces and essentially understanding the impact of formulationdecisions on cost and regulatory compliance. Because theindustry leaders are affectively executing at a tactical level,they are hitting their product launch dates, product revenue,development cost and quality targets 86 percent of the time or better.”

Below quantifies some typical savings CPG companiesexperience with investments in technology and processimprovements.9

TIME REDUCTION

RESOURCE REDUCTION

OPERATIONS REDUCTION

COGS REDUCTION

REVENUE/MARGIN

Searching for Data 60%Entering/Re-keying Data 72%Authoring/Managing Designs 27%Processing Changes/Releases 33%Managing Programs/Projects 35%Developing/Managing Suppliers 40%Managing RFQs 60%Managing Samples/Prototypes 25%

Engineering Expense (Spend) 7%Cost of Poor Quality (Scrap/Rwk/Obs) 25%Sample and Test Costs 11%IT Admin/Maint Costs 25%IT Development Costs 40%

Cost of Staffing 28%

Material Costs (RM/Comp/Assys) 1.5%Overhead Costs (Inv and Plant) 12%

Time to Market/Value 22% (Faster)

Product Launch Costs 5% (Reduction)

Emerging Markets Rev 1% (Increase)

ImprovingProductDevelopmentand Innovation

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WHY CSC FOR CPG?

We help consumer manufacturers bring better, new productsto market faster. Our clients gain significant advantages inidea generation, product optimization and execution throughan approach that automates and streamlines the new productdevelopment and introduction processes.

Capturing the right ideas and then acting on them in atimely fashion is critical to your success. Using ourapproach, your company can expand and improve thequality of its idea pipeline. By leveraging human capital (inand outside your company) and then making fast, informeddecisions early in the process, you can direct your mostvaluable resources to focus on those ideas with the mostprofit potential. Whether you are working on new ideas,platforms, line extensions or promotional events, we provideyou with the visibility and strategic control you need toinitiate and track the best and most innovative programs, as

well as to standardize across brands, categories andbusiness units so you can make knowledgeable productinvestment decisions.

An independent advocate for the company involved in anylarge software implementation significantly adds value. PLMis large, often global, and certainly should touch the entireenterprise of an organization. We excel in programmanagement and subject matter expertise around productdevelopment and innovation. We have partnerships andexperience with all key software providers. A blended teamapproach to PLM solutions and integrations shortens theimplementation process, reduces overall project costs andtime to value of your PLM initiative.

Contact UsFor more information on how CSC can help you speed yourtime to market and manage innovation, contact Michael Neffat mneff6@csc.com | 248.855.6530.

About the AuthorMichael Neff is a partner in CSC’s Global Technology andConsumer Markets Vertical and the Practice Director for theConsumer Segment. This segment includes CPG, retail andthe fashion Industries. The practice’s goal is to offercompelling solutions to companies looking to enhancerevenues and save costs through improved collaboration,processes and enabling technologies. He has extensiveexperience in working with companies to improveinnovation, data flow and collaboration.

Mr. Neff is a subject matter expert in innovation and PLM forconsumer product companies. He has worked in theconsumer products industry in developing a maturity modelto establish a baseline for product development capabilitiesand has led multiple PLM projects. He has spoken atinnovation seminars to the CPG and Fashion industries.Formerly, he worked at PTC where he led the PLM —Consumer Products Practice. He started his career atProcter & Gamble in numerous sales, marketing andcategory management positions.

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References1 IRI, “Most Successful New Brands of 2007,” Released March 5, 2008

2 Fortune, “Most Admired Companies,” March 2008

3 Datamonitor PLC, Product Scan Website, May 2008

4 Tucker, Robert, Driving Growth Through Innovation: How Leading Firms Are Transforming Their Futures, February 1, 2008

5 “What’s Next for CSC,” www.csc.com

6 Aberdeen Group, The Product Portfolio Management Benchmark Report, August, 2006

7 AMR report, "Missed Market Opportunity: Delivering Innovation Remains a Business Challenge," by Michael Burkett,March 9, 2006

8 Stage-Gate is a registered trademark of the Product Development Institute

9 Dassault Systèmes, 2009, http://www.3ds.com, accessed July 7, 2009

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