Go Big or Go Small?

 

The September-October issue of the Harvard Business Review features an interesting bit of research on innovation management. The authors found a strong correlation between R&D investment at smaller CPG companies such as Henkel, L’Oreal, Beiersdorf, and Reckitt Benckiser, but no correlation between far greater R&D investment at large CPG companies such as Proctor and Gamble with a massive $2 billion R&D budget.

What were the authors’ explanations?

Basically, they believe that the large R&D budget incentivized P&G to go after larger, more risky bets, many of which did not pay off. The smaller firms, on the other hand, performed quite well with a more measured approach to innovation. They base their conclusions on extensive interviews with company insiders and analysis of the companies’ fundamentals.

The authors’ conclusions are interesting and raise a number of important questions:

  • This result actually runs counter to much of the established literature. In a classic 2007 HBR article by Wharton professor George Day, his research reached the opposite conclusion on innovation investment strategy. Based on a similar analysis of the innovation landscape, Day argued that companies were too focused on incremental innovation and did not have a properly diversified innovation portfolio. This raises the question on whether the innovation landscape itself has changed, or the current result is just an anomaly.

  • Along with the above question, is this result industry specific? The results in CPG may not hold true in other industries. Given the unique challenges of CPG and its heavy reliance on marketing dollars above all else, this is certainly a possibility. The authors note that their conclusions do not hold for the pharmaceutical industry, for instance.

  • How much does culture come into play? While the budget at P&G is larger, so is the company itself, which inevitably means more layers of decision making which are particularly harmful to breakthrough innovation, as opposed to incremental. This is a difficult question to properly answer given the limited sample size and ability to control for factors such as this.  

These finding are themselves not surprising – they are indicative of the types of difficulties companies face when determined to innovate.  At WHOA, we’ve found that a diversified approach to innovation delivers the best results for most organizations [our whitepaper goes into greater detail on this topic].  In an otherwise tumultuous climate, employing a variety of innovation methodologies helps organizations to better hedge against failure, and ultimately innovate more effectively.

 
Greg VanderPol