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Finance's key role in new product development: successful innovation is as much about portfolio management, resource allocation and business analysis as it is about breakthrough ideas. Finance may be in the best position to provide the tools, discipline and insight needed to succeed by providing "innovation insurance.".

At this moment in time, the innovation imperative has never been stronger--particularly at consumer-goods companies where new products are the engine that drive growth and, along with it, shareholder return.

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Consumer and retailer demand for new products led to a record number of introductions in 2006, when more than 180,000 new products were introduced, according to Mintel's Global New Products Database.

Investors and analysts have taken note and joined in the growing chorus for innovation. Over the past two years, 10 of the top food, beverage and packaged-goods companies have provided some level of formal guidance on sales related to new products or "innovation." Indeed, one company has gone so far as to provide a target for innovation-driven sales growth for 2008.

In the company's 4th-quarter conference call, Dan Heinrich, the senior vice president and CFO of The Clorox Co., said: "We anticipate the new product innovation will deliver 1 to 2 points of incremental growth, within our targeted sales growth range of 3 percent to 5 percent. The majority of fiscal 2008 new products will be introduced in the second half of the fiscal year."

Unfortunately, however, for many other companies, this engine of growth is sputtering. Across the consumer goods industry, new product failure rates of 40 percent to 60 percent are common in many categories. Based on IRI data, less than a quarter of the new products that actually made it to the shelf attained sales greater than $7.5 million in year one.

In fact, "new" is often a misleading term. Over the past 10 years, the proportion of new products in the food and beverage segment that represent truly new brands has declined to less than 5 percent, according to IRI data.

Despite their expression of commitment to growth through innovation, companies still falter when it comes to building a successful approach to investing and managing innovation dollars. And, when those growth estimates are overly exuberant and not realized, investor and analyst criticism can sting.

In early 2006, when many food companies had whittled their innovation efforts down to splinters, at least in the view of analysts, one analyst took the whole sector to task. "There is a lack of innovation, lack of reinvestment and lack of news in the category. We're not recommending any large-cap food names," commented analyst Timothy Ramey with the research firm D.A. Davidson.

CFO's Responsibility in Innovation

The CFO and Finance team bear as much responsibility for the success or failure of innovation as any other senior executive. In a public company, the CFO has the added responsibility of providing detailed explanations to anxious and model-driven analysts.

CFOs are appropriately suspect of the ever-increasing pull on resources from R & D and innovation activities. Successful innovation is rarely cheap and often hit-or-miss. But with Finance organizations undoubtedly owning some of the responsibility for innovation waste, an effective role is often elusive.

In attempting to manage the risk associated with new product development, a bias toward the familiar and historically successful initiatives favors "close in" innovation (such as line extensions, bonus packaging, more displays).

Finance may exacerbate this tendency by squeezing R & D budgets in lean years. Line extensions can be called upon to plug holes in revenue goals and rapidly be rushed to market. Unfortunately, they also tend to provide only marginal return, or worse, excessively cannibalize existing products.

Finance functions are frequently culpable in the push to launch new product programs into the market for near-term revenue before the products--and the necessary product support--are really ready for launch. Finally, there is the age-old problem of cutting advertising and promotion to make earnings goals--rarely a successful recipe for a new product launch. Here, again, Finance is often playing a key role.

What precisely can and should the CFO do to support a successful innovation process and secure what has become a critical component of shareholder value? Archstone Consulting's research and experience suggest that Finance can do a lot. Successful innovation is as much about portfolio management, resource allocation and business analysis of programs as it is about breakthrough ideas.

Brilliant ideas can wither in the back office while scarce resources are dedicated to pushing a pet project into the market. Or like yesterday's pop star, they can rise, then fizzle for lack of planning and support. The fact-based discipline required to resource and manage innovation across complex organizations with continuous success over time is precisely what effective Finance executives excel at and should be relied upon to bring to the innovation process.

Reinvigorating the innovation engine--returning to measured, meaningful innovation for consumers and retailers--may require a "back to basics" approach to the new product development process, and Finance may be in the best position to provide the tools, discipline and insight needed to get there.

The role of Finance can be viewed as providing the "innovation insurance" necessary to ensure scarce investment is spent on a portfolio of programs that really drive growth and shareholder value. Further, Archstone research and experience suggest that Finance should take a leadership role in new product development in four critical areas:

* Planning and Performance Management: Creating and managing a cross-functional planning process that targets growth and replacement revenue from new products and allocates innovation resources consciously across brands, types of new products (major platforms, line extensions and product updates) and business units.

This requires an overall process with an appropriate time horizon for planning, considering new product development cycles, customer planning cycles and in-market support requirements for new and existing products.

* ANALYTICS: Cost and market analytics tools that provide indicators of cost, capital, volume over the lifecycle of the product, pricing and promotion support needs. Setting clear expectations and getting reasonable information in the hands of marketing early in development will allow for wise trade-offs to be made and avoid unnecessary surprises later.

A robust analytics program can guard against the frequent "churn" of marginal new product activity with negative return on investment (ROI) over the life of the product.

* CONTROL: A "stage-gate" process (in which Finance partners with R & D and marketing) providing objective, fact-based decision-making at distinct gates within the product development process. All too often, products gain momentum and sail through gates without reasonable discussions about costs, benefits and risks. This control includes the capacity to protect valuable projects with longer development cycles, and Finance should play a governing role in this process to ensure it works.

* POST-LAUNCH AUDIT: Organizations can make the same mistakes repeatedly. It is critical to uncover flaws in core market or supply assumptions quickly in order to build improvements into the next generation of new products.

Effective post-launch analytics can inform both the planning and decision-making processes with information such as: assumptions about consumer or shopper buying patterns and market size; cannibalization of existing products; materials and costs assumptions; marketing and promotion support needs; pricing; volume builds and degradation; and stock-keeping unit (SKU) proliferation.

Looking to Finance Leaders

Across all of the four areas above, it is imperative that the Finance function partner with business leaders to inform decisions, provide insight and deliver objective, fact-based advice. Experience shows that the most compelling characteristic of effective Finance participation is the ability to "look beyond the numbers" and provide strategic and nuanced input to the portfolio management and new product development program.

The three accompanying company profiles--Coty Inc., The Hershey Co. and VF Corp.--highlight organizations that look at their Finance leaders as innovation partners who can ensure results.

Perhaps the greatest value the CFO can provide is building a Finance team that can partner with business leadership on an innovation program and supporting processes.

In many cases, this level of involvement will require Finance organizations to develop a new range of skills and tools to contribute to the process with Sales, Marketing and R & D colleagues. While undoubtedly requiring reallocation of Finance resources that currently support reporting and forecasting activities, it should also lessen the burden of forecasts and re-forecasts as Finance fulfills its role in providing innovation insurance to the organization.

PATTI MULDOWNEY (pmuldowney@archstoneconsulting.com) is a Director and DAVE SIEVERS (dsievers@archstoneconsulting.com) is a Principal and Consumer Products Practice Leader. Both are with Archstone Consulting, a Stamford, Conn.-based management consulting firm.

RELATED ARTICLE: Company CFOs Who Promote Innovation

Coty Inc.

Coty Inc. is one of the world's premier fragrance and beauty companies. Its business reach spans the globe and its products are sold with famous labels such as Calvin Klein, JOOP, Jennifer Lopez, Vera Wang, Esprit and Stetson. Coty's products can be found in the established markets of North America, Western Europe and Japan and fast-rising markets in Eastern Europe, Russia, China, India and the rest of Asia.

One way to characterize the fragrance and beauty business is fast-moving and trend-driven. Coty targets a staggering 20 percent of its revenue every year from new products to please the unique tastes of its consumers, whether in a fashionable London boutique or a department store in Hangzhou, China. "You have to constantly have new news to win in this game," says Coty CFO Michael Fishoff.

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What drives Coty's success? "We can move faster than our competition. We pride ourselves on a culture that is not bureaucratic and people who are empowered," explains Fishoff.

Those qualities allow Coty to create a team of professionals across Sales, Marketing, Operations and Finance to support innovation. Fishoff says that at Coty, Finance is an integral part of the process, providing executive direction at the strategic level and analytical support at the tactical level.

"We all have the same goal, and it is our job (Finance) to work with Sales and Marketing, but we have to speak their language. It is not all about the technical aspects of finance; it is about working for the same goal, where we are successful commercially and financially." In the end, he says, "what makes the innovation engine at Coty work is a cultural and organizational focus on openness, communication and alignment."

A critical component of Coty's innovation process is responding quickly to market feedback on new products and categories as they are rolled out. Given its sheer volume of new products, a significant number of lines and individual products are introduced every year, and not all will be successful.

"You have to measure to know when to feed a successful product launch and when to pull the plug on one [that is] not working," says Fishoff. That type of quick response is critical to Coty's making best use of its advertising and promotional investment and requires alignment and communication across the organization, with Finance at the very center of the process.

To improve the performance management process and aid Coty's ability to drive innovation, its Finance team is designing a business intelligence solution to provide consistent and timely performance back to the organization.

Jim Shiah, Coty's senior vice president and corporate controller, is the executive architect and sponsor of this program. Shiah believes the program is critical to innovation because it "enables the business decision process by providing the right data at an appropriate level of detail whenever and wherever it is needed."

Shiah explains that providing the right tools to the Finance team gives the team the confidence to engage in new product discussions with the comfort that they have the right data and are using the appropriate analysis. "That leverages our senior Finance executives," he says, allowing them to "participate in the development of Coty's strategy as it occurs and not just measure it."

The Hershey Co.

Everybody knows Hershey. Its iconic brands include Hershey's bars and Hershey's Kisses, Reese's, York, Almond Joy, Mounds, Twizzlers and Jolly Rancher; the list goes on. The Hershey name is practically synonymous with innovation in its markets. Recent popular innovations have included a series of dark chocolates that have extended Hershey's core franchises, adjacent categories like cookies and snacks and promotional events like the current "collector edition" Elvis Reese's Peanut Butter Cup.

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In this environment, innovation is not just something to be wished for from an R & D department. It is an ongoing business practice, bringing leadership and resources from across the company--including, and particularly importantly, Finance.

Hershey CFO Bert Alfonso says, "We view Finance as integral to the new product development and innovation process at Hershey. Finance aids the business in allocating investment resources, evaluating concepts at different stages in the development and launch process and providing performance analytics which underpin decision-making."

In a continuous effort to improve efficiency, Alfonso and Hershey's Finance organization led an effort to place comprehensive new product analytics in the hands of Marketing and R & D for early concept evaluation. Hershey found that its Marketing and Operations teams were spending an inordinate amount of time costing and evaluating new concepts early in the innovation cycle.

The effort involved was impeding the organization's ability to quickly put market performance analysis in the hands of brand teams and, in turn, impeding its brand and leadership team's ability to evaluate ideas early in the process. According to Alfonso, "if we can get our money and resources behind the right products early, we win in the marketplace."

The Hershey Finance organization has been instrumental in establishing the criteria for evaluating new products, setting performance hurdle rates, designing and building analytical tools and training brand teams in the more mundane aspects of financial analysis.

While recent Finance efforts have been targeted towards new product analytics, Hershey's Finance team has long been an integral part of the company's stage-gate process. Senior Finance leadership participates in all critical gate meetings to review concepts and agree whether a product should proceed to the next stage of the process. "It is not enough for the Finance team to track performance; we need to be involved in the innovation process at the very beginning," comments Alfonso.

The VF Corp.

The VF Corp. delivers apparel with popular-branded names like Lee, Wrangler, The North Face and Nautica, and names that circle the globe (including Kipling, Napapijri and others). With its latest acquisitions, VF Corp. is expected to exceed $7 billion in sales in 2007. Two of its latest acquisitions, Seven For All Mankind and Lucy, reflect its relentless pursuit of "lifestyle brands" and its evolving emphasis on the women's apparel market.

VF continues to outpace its competitors in winning retail space, expanding its own retail footprint and building a portfolio of sought-after lifestyle brands.

The extraordinary growth enjoyed by VF over the last three years is a clear reflection of the strategy articulated by management to build the business through a measured approach to acquisition and organic growth.

The company regularly provides guidance relative to its long-term sales-growth targets of 3 percent to 4 percent organic growth and similar growth through acquisition. The foundation of this strategy has been VF's investment in a strong corporate team, including Finance, Strategy and M & A, to manage the significant resources dedicated to its growth strategy.

As CEO, Mackey MacDonald recently told Apparel magazine, "... one of our key initiatives has been to build what we call 'growth enablers' by adding and developing talent at the corporate level and across our brands." This talented team has been responsible for the acquisition of high-growth brands such as Vans and Reef. They have also been responsible for enabling key innovation processes that resulted in substantial new product growth in existing brands, including heritage Lee brand women's jeanswear, particularly with core customers like JC Penney.

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Building a strong corporate team has provided a basis for control and a mechanism for support of innovation across the portfolio. While it has been VF's practice to retain key leaders at each of its acquisitions, it has imposed reporting requirements and discipline that provide visibility into resource allocation. Operational improvements enabled through corporate structures have also freed up resources (both dollars and management attention) that can be redirected toward new product development.

As MacDonald explained in his presentation at a Prudential Equity conference last fall, "There's a real commitment to providing innovation and new product development, but in a very disciplined way." At The North Face, for example, this discipline and realignment of resources supported substantial innovation activity and resulted in new product launches that drove more than half of all sales by year three of the acquisition.

The CFO, Bob Shearer, takes a lead role in managing resources and corporate decision-making to support innovation and growth across the portfolio, as evidenced by his comments on the 2007 second-quarter earnings call.

As Shearer explained, "We would like to put our balance sheet to work for us against the kinds of investments that will provide us with long-term top-line and bottom-line growth." He added, "At the corporate level, Finance regularly conducts margin reviews and other analytics to assure that new product lines (and new acquisitions) are accretive to the broad portfolio."

RELATED ARTICLE: TAKE AWAYS

** Innovation is particularly strong currently at certain consumer-goods companies, where new products drive growth and shareholder return.

** However, at many, new product failure rates of 40 percent to 60 percent are common; less than a quarter of new products that make it to the shelf achieve sales greater than $7.5 million in year one.

** Finance functions are frequently culpable in the push to launch new product programs into the market for near-term revenue before they are ready for effective launch.

** Archstone Consulting research shows that Finance should take the lead in new product development in four critical areas: planning and performance management; analytics; control; and post-launch audit.
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Author:Muldowney, Patti; Sievers, Dave
Publication:Financial Executive
Article Type:Cover story
Date:Oct 1, 2007
Words:2919
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