The Innovation Imperative
30 Mar 2006|Added Value
Attempts by America’s major corporations to innovate new products almost always fail. Business Week’s estimates of single-digit innovation success rates confirm what innovation practitioners have known for years: What makes the cultures of our largest corporations so successful at squeezing profit from manufacturing and marketing products often makes them inept at inventing them.
This creates a painful dilemma for executives. On the one hand, they know that the market rewards organic growth obtained from internal innovation over growth generated through acquisitions. But because of a poor track record of corporate innovation initiatives, they also observe that resources spent on these activities usually offer management a very poor return on investment.
At the same time, it’s clear that the traditional option of “buying earnings” through acquisitions has become increasingly difficult because the investor community has bid up prices for those smaller companies that already have innovative products and services. It isn’t difficult to discern that corporate management is being pushed by the market to develop their innovation chops.
“Buying earnings only works up to a point,” notes Jim Craige, CEO of Church & Dwight. He ought to know — his company is a $1.4 billion dollar consumer products company with established brands like Arm & Hammer, Brillo, Arrid and Trojan, that has been making smart acquisitions that have helped generate stock performance, surpassing bigger competitors such as P&G and Lever.
“We have been able to drive financial performance with acquisitions because of our size,” says Jim. “Our targets can be modest in size and are easily integrated. The Innovation Imperative. But when these corporate giants get to be $20 billion or more in revenue, getting a continuous 4-to-5 percent growth rate depends on making huge acquisitions and absorbing them successfully. Turning them into profits becomes ever more challenging.” That this strategy has become tougher and tougher for “the big dogs” to pull off successfully is forcing the corporate giants to look for organic growth — and that requires continuous, sustained success at innovation.
There is another downside to corporate America’s reliance on acquisitions, and unfortunately it can even inhibit management from learning how to innovate internally. Says Jim: “At some point, you need to concentrate on leveraging those investments by growing their operations. This puts your focus on the internal operational issues to refine and commercialize those products to extract the maximum value.”
And that means more effort and management focus gets placed on activities that don’t include real market innovation. Jim Craige’s answer to this is to attempt to create more balance between external and internal sources of growth at Church & Dwight. To do so, he knows that he must transform his company’s internal capabilities to develop new products and is aggressively setting out to achieve this.
By Darrel Rhea, Cheskin CEO
Originally published in The HUB Magazine, March 2006