Over the past decade, many packaged goods companies have been able to increase their earnings without substantially increasing their unit volumes. They have achieved this by raising prices, improving productivity, cutting product costs, and simplifying promotions. Meanwhile, most product development activity has focused on line extensions rather than on new products. Unfortunately, this approach is now failing to deliver the expected profits.

In the next few years, overall packaged food and beverage sales are expected to grow by less than 2 percent—and most of this growth is likely to come from non-traditional food service channels. With food and beverage expenditure virtually flat, competition among producers is sure to intensify. We believe that success will increasingly be determined by a player’s ability to expand sales through new product development and commercialization. To test this belief, we conducted a joint study with 13 packaged food and beverage companies to see how they go about developing and commercializing new products, and how their performance compares (see text panel).

Our research shows that most companies need to decide what role product development should play in achieving their overall business goals, and to set clear, output-oriented aspirations for product development and commercialization (PD&C). Once a company has established a clear objective, it should assess its level of performance in those dimensions that appear to distinguish the most capable companies from the rest, and incorporate proven best practices into its product development approach. Our research revealed seven key lessons that could help companies build the capabilities they need to realize their aspirations:

Lesson 1: Understand what capabilities drive PD&C performance

Our research shows that strength in product development and commercialization contributes to top-line growth (Exhibit 1), and that world-class PD&C can be recognized by excellence in nine key areas (Exhibit 2). However, PD&C skills vary widely among packaged food companies, and even the best have considerable room for improvement (Exhibit 3).

Lesson 2: Develop PD&C strategy in terms of four separate missions

Breaking PD&C into four distinct but interrelated missions (Exhibit 4) helps senior managers articulate PD&C’s role, build key capabilities, and invest in the right mix of projects. Our research suggests that the best companies understand what it takes to succeed in each of the four missions (Exhibit 5). They appreciate the differences between new products and line extensions in terms of their economic profiles (Exhibit 6), and recognize that much of the economic value generated by a successful new product lies in its use as a platform for future line extensions (Exhibit 7).

The best companies also insist that senior management is clear in its assessment of the relative importance of each mission for each business. They use mission-specific priorities by category to allocate resources, build capabilities, and set performance expectations. Finally, they make sure that the head of each division and his/her management team are actively involved in driving PD&C performance.

Lesson 3: Organize around the four missions

Many of the differences in PD&C performance seem to result from the ways in which companies organize their PD&C efforts. The best companies dedicate people within each function to support each of the four missions. For example, some marketing, market research, product development, and manufacturing people work only on new products, while others focus exclusively on line extensions. To avoid spreading efforts too thinly, the best companies focus their teams on small numbers of projects (Exhibit 8).

Our findings suggest that the most common cause of breakdown in senior management’s effectiveness in managing PD&C performance is inadequate and superficial performance measures. Most companies look merely at aggregate sales and profit growth, but the best also have mission-specific performance measures. For mission 1, the metric might be the percentage of substantially new products introduced in existing categories. For mission 2, it could be the number of line extensions whose second-year sales are higher than their first-year sales. For mission 3, a company might measure the proportion of products that have undergone a cost review in the past three years. And for mission 4, it might measure improvements in the time to market and success rate of projects from the other three missions.

Lesson 4: Create a constant flow of good ideas

The survey identifies new idea generation as the critical bottleneck for growth. Most companies use an unstructured bottom-up process, but the best employ rigorous strategic planning processes to give clarity, direction, and discipline to idea generation. In addition, they charge small teams of the best and most seasoned people from marketing, market research, manufacturing, and product development with creating a constant stream of ideas. Thanks to the breadth of their knowledge and experience, these teams are able to tap into many external sources of ideas and apply their expertise in combining ideas and developing "big idea" opportunities (Exhibit 9). With an abundance of ideas to choose from, it is easier for managers to jettison less promising projects to make way for others that have more potential.

Lesson 5: Set priorities across groups

Perhaps surprisingly, only a quarter of the companies in the survey allocate resources and set PD&C priorities across product groups. Most allow their brand and product groups to set their own priorities for R&D, or simply let the groups that scream the loudest get their way. We believe that most companies could manage their PD&C portfolios much better.

The most successful companies allow funding to flow to the best opportunities, prioritizing projects across the whole company according to the four missions, rather than looking at projects within their separate product groups. New product proposals are evaluated against others from else-

where in the company, and only the best are funded. In addition, successful companies plan and reallocate resources on a quarterly basis, use a planning horizon that covers the full time to market of their new platform projects, and plan well beyond a single product generation (Exhibit 10).

Lesson 6: Vary the process by type of project

The best companies use different PD&C approaches for different types of project. They build a great deal of iterative consumer and market learning into the development of new products (Exhibit 11), but pursue a more traditional approach and apply strict hurdles to line extensions and cost reduction projects.

When they develop new products and platforms, the best companies invest much more heavily in upfront consumer and market research. In the early stages, they develop and test many real product prototypes and directly interact with actual consumers in their natural environment. During product development, they allow projects to proceed only if they meet preset performance targets. At later phases of development, they continue to learn by trying out multiple product and marketing mix variants with consumers and by carrying out contained in-market tests: for instance, by launching a product in a university town or on a campus.

Lesson 7: Over-plan and over-manage product launch

After idea generation, product launch is the next most critical phase in PD&C. Two-thirds of the companies in the survey experience difficulties here. Launching a new product involves more crossfunctional coordination than any other stage in product development (Exhibit 12), and accounts for more than 90 percent of the total cost of getting a product to market (Exhibit 13).

The best companies use a market-anchored sales calendar to coordinate product development activities. They take great pains to communicate with their salesforces and retailers, ensuring that all the necessary advertising and promotion funding is budgeted and available before they make the decision to launch. They also devise new incentives to help fuel the launch: for instance, by changing the basis of sales commission from volume or profit to "getting the product on the shelf." The very best also minimize the critical time between shipment and the beginning of advertising (Exhibit 14).