The next frontier in consumer goods: Digitally enabled innovation – McKinsey
With digitally enabled innovation, our work has shown that consumer packaged goods (CPG) companies can bring new products to market 50 percent faster, at a third lower cost, and with double the return on investment. While the industry has embraced new technologies in many parts of the business, from manufacturing to marketing, most organizations are only beginning to apply them to their full potential in innovation. This is a missed opportunity. Companies that seize the moment and undertake digital-innovation transformations ahead of competitors can capture significant market value.
Digital transformations under way in innovation in other industries such as high tech, pharma, and automotive can provide a road map for consumer products organizations. Mercedes-Benz Group, for example, has invested extensively in digitizing its entire product development system, from design and development to production. As a result, its innovation cycles have shortened significantly, and its car-personalization capabilities have improved even as assembly efficiency rose by 25 percent. Meanwhile, GlaxoSmithKline’s consumer healthcare unit is using artificial intelligence (AI) platforms to generate demand forecasts for allergy and flu seasons, eye-tracking technology to understand how shoppers look at products, and sensory models to improve consumer experience.
These examples highlight the numerous aspects of the innovation process that can benefit from digital and analytics tools. A beverage company recently brought these aspects together to improve its innovation success after a period when an aging product portfolio slowed sales and led to market-share losses. Product innovations and “renovations” took too long to get to market, causing the company to fall behind competitors in capturing opportunities. After adapting its innovation process, enabled by digital solutions, the team was able to generate five times more new concepts than before, supported by a deeper base of consumer insights, and developed a significantly broader variety of features for testing with an exponentially larger user base. The company can now get new products to market in half the time it took before, and its first product renovation was a hit.
Other CPG companies have seen similar gains when they combine digital techniques with a set of cross-cutting innovation practices and processes. In a recent survey, executives affirmed that, when done well, innovation is by far the industry’s biggest driver of growth—a critical consideration at a time when rising supply constraints and costs, combined with rapidly shifting consumer tastes and a high focus on sustainability, are challenging CPG companies’ business models.
For digitally enabled innovation to produce sustainable results, however, companies need to take a holistic approach. In our work with clients, four lessons in particular stand out.
Reimagine the system, not just use cases. While digitizing individual aspects of innovation can be valuable, the best results come from redesigning multiple end-to-end processes and enabling them digitally. Improvements to multiple elements compound the impact of each. For example, redesigning the prototyping process to be a continuously iterative one, using digital prototyping combined with digitized consumer testing, significantly speeds up the design of new concepts and features, testing, and modification over digital testing alone. The beverage company, for example, identified more than 20 priority use cases across its innovation process that could benefit from digitization, ranging from automated identification of new market opportunities to simulation of performance attributes during development. The company then created a five-year road map to implement seven use cases that built on each other.
While pilots make headlines, impact only comes from scale. While pilots can generate early wins critical to inspiring an organization-wide commitment to change, sustainable results only come with a full-scale transformation. Following pilots, companies should determine how to apply the insights and methodologies to other projects, then define the innovation initiatives that would benefit most from digitization. For example, when a food company piloted the use of AI to automate the discovery and testing of new formulations, it focused on a market niche for which it had well-classified internal and external data to feed into algorithms. While the pilot was successful—it cut typical formulation times in half and dramatically reduced cost—other parts of the business where the approach could yield valuable insights lacked the same caliber of data. Undiscouraged, the company created a plan to clean up, standardize, and classify both its legacy and new data, a move that has since enabled it to test a wide array of product formulations and adaptations. Investing the time and resources to make this work at scale has truly transformed the organization’s ability to bring many new formulations to market more quickly and cheaply.
Don’t expect off-the-shelf solutions to just ‘work.’ Given the wide range of departments, stakeholders, objectives, and systems involved in the innovation process, CPG companies can expect to tailor the technology platforms they adopt. Organizations should start by determining what tools they can build internally, what they can buy “off the shelf,” and what solutions will require partnering with vendors (such as system integrators) to adapt technology to the business’s particular needs. Making this array work best will require a combination of building analytics layers on top of off-the-shelf solutions, integrating among different solutions, and maintaining shared data lakes. A dairy company, for example, opted early on to establish a partner consortium to help it manage a digital testing platform and build a full Internet of Things suite—a decision that gave it access to the best tools for accelerating the transformation’s impact.
Technology is critical, but only one piece of the puzzle. Experience has taught us that for every dollar organizations spend on digital solutions, they can expect to spend another on subsequent rewiring of innovation processes and governance. Accordingly, companies that digitize innovation need to prepare for significant changes in procedures, roles, and skills. A consumer durables company took this lesson to heart when it recently implemented a digital-innovation transformation. The leadership reorganized the business around product categories, implemented change-management training at all levels, and adapted the company’s innovation operating model to make sure the technology-driven changes stuck.
Similarly, the cross-functional nature of innovation means that revamping the process requires key business leaders to work in partnership with the technology organization. The importance of business sponsors in delivering the change story, driving innovation pilots, and actively problem solving with innovation teams cannot be overstated. At the beverage company, for example, the digital transformation had the full support not only of the chief technology officer but also the CEO, chief marketing officer, innovation leader, director of R&D, and head of strategy, all of whom participated in various stages.
Companies hoping to enhance their innovation efforts with digital solutions need to first galvanize the organization by defining the case for change. For CPG companies, that case is both compelling and urgent, given the numerous disruptions and challenges the industry faces. While businesses should move quickly to develop these capabilities, it will be important to remain agile enough to adapt along the way.
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