Introduction Everywhere I go, it's the same story. Over lunch with a client, the VP of marketing talks my ear off about all the new products the company is planning to introduce. At the quarterly meeting of one of the firms whose board I sit on, the CEO spends twenty minutes describing the new markets the company is getting into and the acquisition deals they're working on. And these guys aren't alone. Overall, more than 60 percent of S&P 500 firms incorporate the concept of innovation into their mission statement, use the term "innovation" in marketing and branding communications, or cite innovation as part of their strategy in their annual reports. What's the big deal with innovation? Well, most corporate execs know this basic formula for business success: Increased sales lead to increased cash flow, which in turn drives growth. And ultimately that's what it's all about: Firms that have a proven history of top-line and bottom-line growth get rewarded by Wall Street with higher valuations (price-earnings ratios) than other companies in the same category. Just think of Coca-Cola, L'Oréal, Procter & Gamble, and Sony. However, since many attempts at marketing have failed to create both top-line and bottom-line growth, CEOs have decided that the only way to drive growth is to change the rules of the game, gut the old system, and build a new one from the ground up. In other words, innovate. Most dictionaries agree that innovation is "the act of introducing something new" or "a new idea, method, or device." Both of those definitions work for me, but I think it's also fair to say that innovation is "using your existing assets and core competencies to do something different from what you're already doing." This fixation on innovation has spawned an entire industry of consultants and authors and businesses whose entire purpose in life is to support and promote innovation. If you do a quick search on Amazon.com for "business innovation" you'll find two thousand titles. And if you Google "innovation consultant" you'll get more than 450,000 hits. Two of the biggest innovation gurus these days are Tom Peters and Gary Hamel. We're all Michelangelos, they say. We need to forget everything we know, "de-risk" unfamiliar opportunities. Distance is dead, destruction is cool. Innovation rules! Sounds fantastic and inspiring, doesn't it? And it is-except for one small thing: For the majority of companies out there, it just doesn't work. All it offers is a quick fix-kind of like a sugar high: You feel better for a while, but when the effect wears off you're in worse shape than when you started. At its core, this approach to business growth is simply lazy. Actually, it's worse than that; it's dangerous. But both Peters and Hamel have struck a chord with a broad base of companies that are now trying to grow their business by turning their back on what they need to do first, which is fix their basic value proposition-what it is that they offer their existing and prospective customers. So now we've got a bunch of companies that have forgotten all that boring stuff that made them successful in the first place and are getting into areas they don't know anything about and have no business being in at all. A lot of these companies are showing their commitment to this strategy by creating a new position: CIO. No, that's not Chief Information Officer. It's-yep, you guessed it-Chief Innovation Officer. And these CIOs are rattling on and on about how the company is "retooling" and "charting a new course" and "exploring new opportunities." And let's not forget about "driving double-digit top-line growth." The fact that all that top-line growth will probably come at the expense of the more important bottom line doesn't seem to bother anyone. Except me. In my view, innovation is just another word for "giving up." It's saying that things are so bad that it's easier to get into an entirely different line of business than to deal with our problems. And this whole "innovation culture" is just the latest in a long line of business fads. Just think of all the ones that have come and gone over the years: We've had one-minute management, total quality management, management by walking around, matrix management, management by objectives, theories X, Y, and Z, reorganizing, restructuring, the experience curve, downsizing, right-sizing, sensitivity training, and quality circles. Every single one is dead and gone. In defense of fads, most of them are actually based on a good idea. The problem, though, is that the fadmeisters too often try to condense complex ideas into a few sentences. All you have to do, they say, is attend our seminar (or hire us as your consultant) and we'll cure you of whatever ails you. Just a few years ago, for example, everyone was talking about CRM (customer relationship management), and companies ran out and plunked down tens of thousands of dollars for programs that promised them the moon-or at least well-managed customers. The smart ones figured out pretty quickly that good customer relationships don't come in a box. The rest kept trying to make the magic program work or moved on to the next trend. In the 1990s, it was all about knowledge management and process reengineering. And technology, the Web, and the information economy. Managers stopped trying to drive growth the old-fashioned way and bought into the Wild West mentality instead: Get there first, pay exorbitant amounts of money for eyeballs, drive traffic at any cost. Business schools followed closely, starting MBA programs on entrepreneurship and information technology and forgetting about the basics-things like return on investment. Of course we all know how that turned out: Most of the high-flying dot-coms ended up sinking into the dot-swamp. After a few decades of drinking bottle after bottle of corporate snake oil, an entire generation of managers and executives has now forgotten what it really takes to create organic growth. Even worse, there's a whole new generation of up-and-coming executives and managers who never even learned the skills necessary to drive organic growth in the first place. So we have a situation in business today where the old guard want to leave a legacy, and the new guard want to make a name for themselves on their way up. And both generations have come to the conclusion that there's no better way to make a big splash than by doing something totally new. In other words, innovating. But too many of them-old and new-haven't really thought about what that means. Besides stroking their own egos, the implicit assumption behind most corporate philosophies of innovation is that Wall Street will continue to reward them with higher multiples based on the "higher optionality" that all that innovation is expected to yield. Unfortunately, as you've no doubt seen for yourself, and as we'll discuss in detail in the following chapters, it rarely works that way. At this point, you may wonder where I get off making these pronouncements about what works and what doesn't. Well, here's your answer: I've spent more than thirty years managing and renovating some of the world's most successful brands. At one of those companies, The Coca-Cola Company, I put together a team that increased worldwide annual volume from nine to fifteen billion cases-the most explosive growth period in the company's history-and quadrupled the company's stock price. And since leaving Coke in 1998, I've consulted for leading companies in a variety of industries all over the world. I'm not the kind of guy who spends a lot of time on theoreticals and hypotheticals. I deal in what works-not just on paper, but in real life. Throughout this book I'll tell you about dozens of companies that have either renovated successfully and gained tremendously, or that failed to renovate and have suffered the consequences. In Chapter 1, I'll talk about the current obsession that companies have with innovation, and I'll show you how that obsession has caused companies to lose track of what made them successful. I'll also introduce an idea that I'll keep coming back to throughout this book: the critical difference between core competencies (what you know how to do) and core essence (who you really are as a brand) and why a solid understanding of core essence is at the heart of any business success. I'll finish this chapter with a discussion of some of the major pitfalls of innovation. In Chapter 2 I'll discuss exactly why renovation is a far better alternative than innovation. On the most fundamental level, the difference between the two is one of competing philosophies. Innovators leverage their core competencies and say "Let's start with what we can build and let's see whether we can sell it." Renovators, however, leverage their core essence and say "Lets find out what we can sell and then we'll figure out whether we can make it." The former gets you into trouble. The latter helps you grow your business organically. Chapter 3 is devoted to a thorough discussion of the first element of my renovation program: Renovate the way you think. Too many companies achieve a little success and then get fat and lazy. They see themselves as the undefeated champion and look down their noses at would-be competitors. I'll also talk about two other important ideas that get companies into trouble. First, too few companies track their spending, let alone measure the results. Second, they fall into the trap of constantly lowering their prices. As simple as it sounds, if you don't know where you're starting from and where you're going, you can't get anywhere. In Chapter 4, I'll show you how to assess both of those questions and how to come up with a solid destination statement that clearly articulates how you want the consumer to think, feel, and act in relation to your company and your brand. I'll also discuss the importance of making any destination consistent with your core essence, because if you don't, you'll end up innovating instead of renovating and the results will be disastrous. Knowing who your competitors are is a basic part of doing business. But most have it all wrong. For decades, the Big Three automakers, for example, thought they were competing only against each other. Meanwhile, the Japanese imports were gobbling up market share left and right. In Chapter 5, you'll learn how to define your competitive space and how to create preference for your brand. In Chapter 6 we'll take a look at another side of the equation: your customers. I'll talk about a very different kind of segmentation than you're used to. Demographics and psychographics aren't enough anymore. Companies also need to know exactly why customers buy what they do, what they're doing when they buy, why they choose one brand over another, and specifically what would make customers buy more of their products. In Chapter 7 it's all about taking and maintaining control of the dialogue between you and your customers. If you don't, your competition will, and they'll position you as irrelevant to the market. I'll show you how to create a positioning statement that will leverage your core essence to ensure that you position yourself-and everyone else-right where you want to be. Although the quality of the product or service you're selling will contribute to customers' satisfaction or dissatisfaction, it's the quality of their experience that makes the biggest difference. In Chapter 8 I'll give you the recipe for creating a meaningful experience for your customers. I'll also highlight one of the most neglected aspects of most customers' experience: postpurchase, which is the time when consumers make usage and repurchase decisions. Renovation isn't something that a company does just once. It's a process, one that needs to be ingrained in the company's overall philosophy and be a part of everything it does. But too often it's not. In Chapter 9, I'm going to talk about forced renovation, which is what happens when companies put off doing what they should have been doing all along. Either they renovate in a hurry or they die. I'll also talk about the brand life cycle-beginning, middle, and end-and show you how renovation can keep you away from the end stage. In Chapter 10, I'll take you through a detailed look at several companies whose successes and failures perfectly illustrate all of the points I've made. Some of these companies are textbook examples (with this book as the text) of what to do right, and they've profited immensely. The others have blown every renovation rule I have, and they've suffered the consequence. Then in Chapter 11-oh, wait a minute, there is no Chapter 11 in this book. But if you ignore what I say in the first ten chapters and you don't start making some changes pretty quickly, there could be one in your book. I give dozens of interviews and keynote speeches every year. And in almost every one of them, questions come up about my experience at The Coca-Cola Company, even though I left more than five years ago. Because so many people want to know, I've told the story in the Appendix to this book. It's a great example of just how powerful renovation can be. By the time you're done reading this book, you'll have the knowledge, insights, tools, and direction you need to renovate your company from top to bottom and to expand and grow your business as much as you want to. 1 So What's Wrong with Innovation? Let me take a second to clear something up right here: I'm a big believer in innovation and risk taking, and I think both can be critically important elements of some companies' strategy. But for most companies it simply isn't the right way to drive organic growth. Believe me, I know about this firsthand. After all, I'm the guy who managed the introduction of New Coke-one of the more (in)famous product innovations of the twentieth century. I must admit that the whole New Coke thing is a classic example of lazy business growth strategy. The fundamental issue was that our brand's value proposition was flawed. Pepsi had been repositioning us for years-the latest assault being the Pepsi Challenge, in which they were implying (very successfully) that Coke didn't taste good. Back in those days, marketers believed that if you grabbed people's hearts, their wallets would follow. So in an attempt to grab their hearts, we upped our ad spending. But we didn't change the value proposition. We acted basically like the tourist who goes to a foreign country where he doesn't speak the language and he keeps repeating himself over and over, louder and louder, thinking that eventually the locals will understand him. We did exactly the same thing, telling consumers over and over, louder and louder, to just "have a Coke and a smile." What we really should have been doing was giving consumers a reason to drink Coke instead of mindlessly repeating that Coke was part of their life or that it was an advertising icon. Meanwhile, Pepsi was telling consumers that Coke was fat, lazy, and an outdated, stodgy way of drinking cola, and they offered the Pepsi Challenge to prove it. Unfortunately, Pepsi was right: We were fat and lazy. Rather than address the value proposition problem, we opted for the easy way out. We decided we needed to innovate, so we changed the formula to make Coke taste more like Pepsi. It didn't take long to figure out that New Coke was a disaster. After only seventy-seven days we brought original Coke back (calling it Classic). Ultimately, we recovered from our little brush with lazy business growth strategy. We reconnected with our customers, deepened our relationship with them, and increased our sales. But most companies aren't that lucky-or honest enough to pull the plug on an expensive (and potentially embarrassing) project. But remember: Corporate graveyards all over the world are filled with companies that have innovated themselves right out of business. So if innovation is such a rotten idea, what should you do instead? In a word, renovate. That means no longer doing different things with your existing assets and competencies, but doing better things with them instead. It means reengaging with your customers by using your relationship with them (your core essence) to provide the products and services that they truly want. Put slightly differently, renovation is starting with what you can sell and then seeing whether you can deliver it. But there's a big difference between what companies should do and what they actually end up doing. The Value Equation Dave Singleton, one of the senior people on my staff at the Zyman Group, always says that to grasp the difference between innovation and renovation, you have to understand how businesses create value. Essentially, your brand's value is a direct function of your ability to align three key things: your core competencies, your core essence, and your assets and infrastructure. If all three of these elements aren't working together, your business cannot succeed. "Assets and infrastructure" are pretty self-explanatory, so I won't get into those, but let's talk about the other elements. Your core competencies are not just a list of your products or services. They're based on four distinct factors: * Knowledge: What you know and what you have learned * Experience: What you've been through * Resources: What you have * People: What you do and how you do it Overall, your core competencies are the things you're good at, the things you know how to do-or that you believe you know how to do-better than anyone else. And every company (and individual, for that matter) should have at least one. Your accountant's core competency, for example, is probably knowledge of tax law and IRS regulations. Intel's is designing complex chips for computer applications. The Army's core competencies are deploying combat-ready soldiers, equipment, and systems. The Air Force defines theirs very differently: air and space superiority, global attack, precision equipment, rapid global mobility, information superiority, and agile combat support. Microsoft is a fast follower. Southwest Airlines is phenomenal at running short routes and turning planes around quickly. And McDonald's is better than just about everyone else at picking locations, sourcing products, and hiring people. Core essence is somewhat more abstract. It's who you really are as a company or brand. It's the relationship customers and noncustomers alike have with your brand; it's what your brand stands for in their hearts and minds and the promises your brand makes to consumers. Coca- Cola's core essence, for example, is authenticity, continuity, and stability. Pepsi's is choice and change, British Airways' is British comfort, Apple's is community. Your core essence is critical in determining where you can go as a business. If you try to extend your brand beyond your core essence, your customers won't cooperate. Would you go to an Amazon.com brick-and-mortar bookstore? Probably not. Amazon's core essence is allowing you to shop without ever having to leave your house. And what about a Disney cell phone? Yep, it's true. Part of Disney's core essence is family entertainment, but although sending text messages may be fun, it's not fun enough to be called family entertainment. I could see them renting walkie-talkies to families to use in the theme parks, but outside the park? And it's no wonder that New Coke failed-it violated the key elements of its core essence: authenticity, continuity, and stability. On the other hand, IKEA has been remarkably consistent with its core essence of reasonable quality at a reasonable price. They're coming up with new products all the time; but if they can't get them designed and manufactured in a way that fits with the company's core essence, those products never show up in the stores. If you succeed in leveraging all three of the elements of value I mentioned above (core competencies, core essence, and assets and infrastructure), you'll be able to grow your business successfully. Think about Starbucks. Their core competencies are building stores, motivating people, and sourcing the best coffee in the world. Their core essence is providing a great coffeehouse experience. Oreo's core competency and core essence are pretty much the same thing-"dependable, good cookie"-and their new Chocolate Creme Oreos has paid off handsomely. And think about Outback Steakhouses. Their core competency is grilling food, their essence is Australia, and their new chain of seafood restaurants, Fishbone (which is modeled on Outback), is a great success. The company has significant expertise in locating real estate, restaurant design, and staffing which they also leveraged in creating Fishbone. The basic Outback business model is the same, but the menu and the sign over the front door are different. And let's take a look at a company that's constantly called innovative, when it's really practicing renovation: Apple. Sure the iPod is a great new design-but it's not a truly innovative product. Apple always starts the design process by asking itself, "What's the user's experience and what does he or she want?" as opposed to "Hey, look at this cool thing we can make." New products are a logical extension of Apple's core essence of fun through creative technology. They purchased some missing core competencies (such as how to store music files) and organized their assets to build the product as well as an online community where comsumers could legally download songs. Apple simply extended an existing idea-a lot of people are downloading music files-and found an easy way for consumers to store and retrieve those files. Thanks to a renovated idea, Apple has got itself a brand-new, multibillion-dollar iPod brand. nnn So what does this whole value equation thing have to do with innovation and renovation? Plenty. Businesses that pursue an innovation strategy generally identify new growth opportunities that allow them to leverage their core competencies and assets. The challenge for innovators is that no matter how well they deliver on the opportunity (in other words, how great the new product or service), they still have to persuade customers to buy. They're embracing a philosophy of "Let's start with what we can build and then see whether we can sell it." Companies that rely on renovation, on the other hand, start with their core essence and identify new growth opportunities that are consistent with what consumers have shown they're willing to buy. What this means is that renovators know-way before they introduce anything new-that the product or service they're considering will be accepted. The challenge for renovators, then, is making sure that they have the right core competencies and assets to deliver what they're promising. The philosophy of renovation is "Let's find out what we can sell and see whether we can make it." What this all comes down to is that the big difference between renovation and innovation lies not in the desired outcome, but in the approach you take to get there. Having tried both at Coca- Cola, and with the many clients I've worked for, I've figured out that most companies spend way too much time trying to innovate and not nearly enough time renovating. Because renovation is grounded on the company's core essences and established relationships with customers, it is almost always going to be more successful. It's far more difficult to persuade consumers to buy something that you can make than it is to make something you know they will buy. Unfortunately, far too many firms are so focused on innovation that they fail to grasp this fundamental truth. And that, folks, is a recipe for disaster. nnn Over the past few pages I've been painting a pretty negative picture of innovation and I've taken some swipes at people and companies who pursue it. I haven't been too specific, though, just telling you that it's a dumb thing to do. Now let me tell you why that's true. The Five Innovation Pitfalls Most companies that consider innovation make at least one-usually more-of the following major mistakes: 1. They focus on leveraging their core competencies instead of their core essence. 2. They pursue creativity at any cost and treat all new ideas as potentially equal. (I call this the "big bang" approach.) 3. They limit their innovations to only new products and forget that innovation is about creating new value for customers, consumers, and the business. 4. They grow horizontally instead of vertically. 5. They try to innovate by acquiring other companies instead of growing organically. Let's take a look at each of these blunders in some detail. 1. Core Competencies over Core Essence A critical part of being able to leverage the three elements of the value equation is having a firm grasp of what they are. Sounds a little silly, but you'd be amazed at how many companies can't tell the difference between their core essence and their core competencies and end up confusing what they know how to do with what consumers will buy from them. I've seen this happen many times, up close and personal. At one point in its history, Coke got into the shrimp farming business in Mexico and Hawaii. Why? No one's sure. But everyone agrees that it was a complete disaster. It sounded-like so many things that turn out badly-like a good idea at the time: a way to build goodwill and to provide jobs in local communities. We knew we had world-class purchasing, distribution, and sales capabilities. Plus, we had distribution, and logistics assets that were being underutilized, and an overall competency of operating businesses all over the world. We were absolutely right about that-at least as it applied to selling sugar water. But where it fell apart was that we knew absolutely nothing about shrimp farming. Yes, Coke knows how to run businesses in different countries, but the company's real strengths are in direct-store delivery and helping retailers sell those products to consumers. The venture was a complete failure for several reasons. To start with, it turns out that to be in the shrimp farming business you need to have the right kind of shrimp, otherwise they won't mate and you'll end up with no shrimp at all. But far more important that that, we never even thought about why consumers would buy shrimp from us in the first place. Shrimp farming couldn't have been further from the company's core essence. No one could make the connection between Coke and shrimp farming. Soft drinks, yes. But shrimp, no. In the final analysis, we fell into the trap that so many other companies before and after us have: We confused our core competencies with our core essence, vastly overestimating the former and completely ignoring the latter. The same basic thing happened with McDonald's not too long ago. For some reason they decided to go in the hotel business and built a few Golden Arches Hotels. Don't see the connection? Neither do I-and neither did anyone else. Getting the right competencies is pretty easy; if you don't know how to do something, you can probably hire someone who does. But getting a new core essence is nearly impossible. Golden Arches Hotels may have taken advantage of McDonald's customer service and real estate competencies, and even if it didn't, they certainly had the resources to hire a top-level hotel management firm. But the company's core essence was nowhere to be seen. McDonald's core essence is that you always know you're going to get a reasonably good meal for a reasonable price. The meal won't be spectacular, but it won't be horrible either. You always know what you're going to get, and you'll be able to be in and out in a hurry. It's easy to see how some of McDonald's core essence carries over into the hotel business. For example, a lot of people who stay in hotels want consistency at a reasonable price. That's how Holiday Inn, Motel 6, and some other chains have stayed in business. But where it falls apart is the "in and out in a hurry" part, which is completely incompatible with what people are looking for in a hotel. 2. Creativity at Any Cost The innovation culture has developed a number of frameworks for business, most of which focus on getting people to be creative and "think outside the box." The more different the new product, the better, they say. Although the Chief Innovation Officers usually claim that their innovations will drive sales and increase the bottom line, there's often a hidden agenda that comes from higher up in the organization: Do something-anything-with idle capacity or underutilized assets. But the push for creativity at any cost has a number of very negative side effects. To start with, a huge amount of time and money goes into exploring and developing every new idea that comes down the pike. Everyone knows that all ideas are not created equal in their potential to create new value. Unfortunately, a lot of companies don't have the knowledge and ability to differentiate between the good ones and the bad ones, and it doesn't seem to occur to them to ask consumers to tell them which products they might actually buy. And if they do ask, they tend to ask either the wrong people or the wrong questions, or they put together focus groups that are stacked with people who enjoy doing focus groups and are happy to pat the company on the back. As a result, a lot of really dopey ideas don't get weeded out when they should. Consider the following: * Porsche. These guys have come out with some very creative-yet incredibly dumb-product innovations in the past few years. First there was the rear spoiler that popped up at 65 or 70 miles per hour. Great idea. That way even the cops who didn't have radar could tell when you were speeding. Then they came out with an automatic transmission. Excuse me, but most of the fun of having a Porsche in the first place is driving it, and shifting gears is an integral part of the Porsche experience. If you're going to have an automatic transmission, you might as well drive a Ford Escort. What's next, a Porsche minivan? And speaking of minivans, why doesn't Volvo, the ultimate safe family car, have one? And why did it take them forever to introduce an SUV? * Pepsi Blue. This "berry fusion" cola was on the market only a few months before reporting dismal results. I understand that Pepsi was trying to duplicate the success of Mountain Dew's successful Code Red, one of the most successful soda launches in years-teens couldn't seem to get enough. Pepsi, which owns Mountain Dew, apparently thought that teens would like Blue as much as Red. But did you ever try it? In the interest of checking out new products, I went down to my local store just after Blue was introduced to give it a try. On my way through the checkout line, the checker tried to talk me out of buying it. I should have listened to him. Pepsi claims they had teenagers help develop the taste, but teens rejected it as much as adults did. It's no wonder that Blue was soon nowhere to be found on Pepsi's Web site or in grocery stores. * Nestea's bubbly yellow tea drink called "Tea Whiz." Really. What I want to know is, with the dozens of people who must have been involved in the R&D process, why didn't anyone notice that there was something very, very wrong? * Kimberly-Clark's and Procter & Gamble's wet toilet paper on a roll. Could have been the punch line of a grade school joke, but it wasn't. Somehow both of these giant consumer products companies came up with the same idea at about the same time. Consumers had absolutely no interest and sales were nonexistent. P&G had the good sense to flush the idea after only a few weeks, but K-C dug in their heels for a while longer. Creativity at any cost also results in products or offerings that confuse customers or don't offer them any real benefits. For example: * Taco Bell Lites, a low-fat, more health-conscious version of the taco. Sounds like a great idea, right? But the new tacos had lettuce, cheese, sour cream, salsa, and a shell-just like the old ones-so customers were confused about what was so great about Lites. And even after they figured it out, they interpreted Lites as an admission that Taco Bell had been serving unhealthful food until then. * Family-friendly Las Vegas. A few years ago, Las Vegas tried to shake its Sin City image and remake itself into a haven for families. They spent millions on advertising, roller coasters, family shows, and restaurants. It was wonderful, except that parents couldn't figure out why they would want to spend their family vacation in a place where prostitution is legal. Eventually Las Vegas realized that the whole thing had been a mistake and they went back to doing what they do best: adult entertainment. * Friskies cat food in the cat-shaped foil pouch. Cute idea, I suppose, but what was the point? They must have spent a huge amount of money designing the packaging, which may explain why, at about 63 cents per ounce, it cost consumers seven times more than the exact same product in a regular can. It's entirely possible that some cats preferred the cat-shaped packaging, but people-who are usually the ones with the wallets in the family-generally need a better reason than "It's new!" to spend money. There's something else, too. With the tremendous number of new products hitting the market every day, warehouse and shelf space is extremely limited. More and more retailers are going to just-in-time inventory management systems, which push responsibility for warehousing back upstream, and they don't have patience-or space-for products that don't sell. That was clearly something that Friskies didn't consider when they came up with their cat-shaped packages: Unlike the cans, the new product couldn't be stacked, which meant stores couldn't keep as much of it on the shelves. It also meant that they couldn't fit as much volume into shipping crates, which translated into higher shipping costs and more warehouse space. Bottom line is that if retailers can't move your products, you're out of luck. In their rush to carpet bomb the market with creative new offerings, a lot of companies try to sell their products to people who just aren't interested. RJR Nabisco, for example, spent more than $500 million developing and marketing smokeless cigarettes, which seemed like a wonderful concept. The cigarette industry, which was still denying that cigarettes cause cancer, tried to define the problem as smoke-"People don't like the way I smell after I've had a few." The only problem was that smokers themselves aren't bothered all that much by the smoke-only the nonsmokers who happen to be in the same general area are. Since smokers don't care and nonsmokers don't buy cigarettes, the whole thing was a tremendous flop. In 1994, General Mills came out with a Wheaties cereal called Dunk-A-Balls. The idea was that kids would love to play with the basketball-shaped puffs. I'm sure they were right. But the problem is that very few parents are looking for a way to get their kids to spend more time playing with their food. Heinz made a similar mistake with their new Ore-Ida Cocoa Crispers- yep, chocolate French fries, designed for "kids with a sweet tooth." Heinz actually did some market research, asking kids what would make them want to eat more French fries. But they didn't ask parents, very few of whom are looking for creative ways to get their kids to eat more chocolate and French fries. nnn Now, I don't want you to get the wrong idea. As with innovation, I have nothing against creativity. Au contraire. Businesses absolutely need creativity-it just has to be properly channeled to develop organic growth opportunities that have a high probability of success. By success I mean coming up with something you can actually sell! Quit worrying about new businesses, new brands, and new customers. Instead, worry about how to make better use of the ones you already have. The bottom line is this: You don't have to abandon everything you know in order to achieve breakthroughs that lead to top-line growth. 3. New Products Only When it comes to identifying organic growth opportunities, an amazingly large percentage of companies are one-trick ponies, focusing only on coming up with new products to the exclusion of everything else. Even worse, the emphasis is clearly on quantity over quality. Some firms set ridiculous goals for themselves, which they then go out and publish in their annual report- comments like "over the next twelve months, 40 percent of our sales will come from new products." Recent data I've seen indicate that only one of every fifty-eight new product introductions succeeds. But that doesn't stop corporate R&D departments from taking the shotgun approach and churning out as many new products as they can come up with. According to a February 2003 article in Stagnito's New Products Magazine, 55 percent of drinks, 35 percent of prepared meals, 32 percent of mixes and sauces, 32 percent of snacks and bakery products, and 29 percent of dairy products had been introduced within the previous twelve months. This narrow-minded approach can easily do more harm than good, in a number of ways: a. Conflicting with core essence. As I've said, renovation attempts to leverage core essence, core competencies, and existing assets and infrastructure. Innovation is also often about leveraging core competencies and assets; but too often, innovation misses the mark because companies neglect core essence and spend too much time pursuing ideas that aren't consistent with where they want to be. This past summer I was at Ace Hardware looking for a barbecue grill. There were a dozen of them in all shapes and sizes, but the one that I found most puzzling was the one manufactured by Thermos. Thermos's essence is containing beverages and keeping them hot or cold. It has nothing to do with steak. I bought a Weber. When Starbucks installed wireless networks in their stores, they were extending the Starbucks experience-giving you yet another reason to hang out, eat biscotti, and drink coffee after mocha after cappuccino. But when McDonald's did the same thing, the result was exactly the opposite. Part of the McDonald's essence is "in and out quickly," but Internet surfers don't want to be rushed. And it's hard to imagine even the most loyal McDonald's customers spending the afternoon sitting at one of those incredibly uncomfortable molded plastic tables munching on Chicken McNuggets and fries while they surf the Net. If you think of Gerber, chances are you think of baby food and babies. So can anyone explain to me what Gerber was thinking when they decided to come out with a line of foods aimed at adults? None of us is looking forward to getting old, and no one wants to eat stewed prunes out of a jar any sooner than we have to. On the other hand, take a look at Evian. Back when they were one of the first bottled waters, their core essence had nothing to do with taste, clarity, or purity. In fact, it didn't have anything at all to do with the water itself. The Evian core essence was all about status, about being able to say "I'm such a big shot that I can pay a dollar for something that would cost a penny if it came out of my tap." And, as snotty as that sounds, people loved it. Unfortunately for Evian, their customers had a firmer grasp of the Evian essence than the company did. In the perfectly reasonable search for added distribution channels, Evian got into bars and dance clubs. But to save money, they shipped the product in large bottles. So when Mr. Cool sidled up to the bar and ordered an Evian, the bartender poured some into a glass and charged a premium price. But with an unmarked glass of water, Mr. Cool couldn't impress Ms. Cool or anyone else with his sophisticated taste, and Evian's club sales dried up. Eventually Evian got wise: They got rid of the large tanks and started selling small labeled bottles. b. Small ideas. Incremental thinking is different from innovative thinking. Too many companies believe in the "If you build it they will come" philosophy. In other words, introduce a new product and customers will beat a path to your door. As a result, many firms keep extending their lines, trying to create consumer needs rather than being driven by them. But sticking "New" or "Improved" on a package doesn't do much to make consumers drop it into their shopping carts. In fact, more often than not it makes them wonder what was wrong with the original version. If you want to see what I mean, just take a walk down to your neighborhood grocery store. Frito-Lay sells at least nine types of barbecue potato chips. Do they really need that many? And does Crest really need to have fifty different kinds of toothpaste on the shelf? Procter & Gamble (which owns Crest) spent millions formulating their new products and millions more designing new tubes and packages and retooling production lines, distribution, advertising, and marketing. (Remember the Pump? What ever happened to it?) Sure, Frito-Lay will sell a lot of each kind of chips, and P&G will sell a lot of each kind of toothpaste, but their respective shares of the overall chip and toothpaste markets won't change. Even if there is a small increase in sales, it rarely justifies the additional operational and advertising expenses it took to launch the product. (They may be introducing all these new products in an attempt to squeeze the competitors off store shelves, but even if that's true, it will never work. If Crest comes out with two new products, Colgate will be right behind. It's a zero-sum game.) Instead, they'll cannibalize their own brands. "Dual Action Whitening" customers will be people who used to buy "MultiCare Whitening" or "Extra Whitening" or "Baking Soda with Peroxide Whitening." c. Increased spending without increased revenues. New products usually require new financial outlays for R&D, manufacturing, distribution, and marketing. Is all that really necessary? Well, nearly half of all the money that U.S. firms spend on product development is spent on products that end up getting pulled or that never pay off. Nowhere is this more true than in areas where new products can be easily imitated. Coke spent a ton of money coming up with Diet Coke with Lemon. Pepsi wasn't far behind with Pepsi Twist. A massive waste of money and resources for both companies. If your new product isn't going to increase your market share or help you command a premium price, you have no business introducing it. Or, as my old boss Don Keough used to say, "New products that have a low velocity don't belong in a high-velocity environment." All too often, line extensions end up fragmenting the brand and increasing the cost of doing business. But that didn't stop Delta from launching a new airline, Song. Reeling from the terrorist attacks on 9/11 and increased competition from low-cost airlines such as JetBlue and Southwest, Delta responded by coming up with a discount airline of their own. But they decided to use current Delta pilots because they didn't want to upset their unions. That meant that Song would be saddled with the same high costs that brought Delta to its knees. (In 2002 Delta's labor costs were about 40 percent of sales; compare that with 25 percent of sales at JetBlue.) So who would choose to fly on Song? Probably people who were already flying Delta. But now their margins would be even lower than before. Other companies, under the guise of driving top-line growth, do even more damage to their bottom line by subsidizing their cannibalizing new products, often to the point of giving them away. To make things worse, they actually convince themselves that all the people who have gotten used to getting the free product love it and will suddenly start paying full price for it when the freebies and promotions are over. Consumers don't always act like it, but they're often more sophisticated than marketers give them credit for being. And while some of them may buy the new product, profits are built on repeat purchases, not one-offs. d. It's too easy to jump on the bandwagon. Back in the early 1990s consumers suddenly started getting concerned about healthful eating. Evian and Perrier came into the market positioning themselves as healthier-and safer-alternatives to your local tap water. Manufacturers saw how successfully water was doing and decided to jump on the bandwagon. But instead of pursuing the health angle, they latched on to the color of the water. Amoco, Miller, and Pepsi jumped headfirst into the "clear craze" at about the same time, introducing clear motor oil, clear beer, and Crystal Pepsi. All may have been interesting ideas, but when consumers found out that the only difference between the old stuff and the new stuff was color-actually, the lack of color-they laughed and closed their wallets, clearly fed up with the whole thing. One of the few successes was Ban, whose clear deodorant communicated the added benefit of "doesn't stain your clothes." The next bandwagon we'll see will be disposable products. Everyone seems to be coming up with an "on the go" version or a "use-it-once-and-toss-it" version of their existing brand-and they'll charge you a premium for the "convenience." The cleaning aisle of your grocery store, for example, is well stocked with single-use wipes and cloths. While you're in the store, check out some of the food products for children. Yoplait's Go-gurt, which comes in a lunchbox-friendly tube, has been extremely successful. In the same vein, Stonyfield Farm's Yo-Baby organic yogurt comes in a four-ounce package instead of the usual six-ounce ones. e. Possible damage to existing brand equity. The Gap decided to take a bold, innovative step and created a completely new brand: Old Navy. That was a great move, except that consumers perceived Old Navy as essentially the same as the Gap but cheaper. So they abandoned the Gap in droves. The same thing can happen any time consumers and customers get mixed messages that confuse them. f. Corporate schizophrenia. In some cases, being truly innovative means betting the farm in the hope of realizing an uncertain return. Despite all their bravado, most executives aren't ready to do that. Innovations are usually long-term investments with very few short-term prospects. Even for less risky ventures, most corporate executives aren't ready to put their money where their mouth is. Ted, United's new "discount" airline, is a good example. Using current United employees has prevented Ted from breaking away completely from the bankrupt main brand. And since an airline ticket costs the same on United and Ted, there's nothing discount about it. So don't expect United's A-320 planes to fly with a Ted logo for long. Of course, being willing to get 100 percent behind an innovative new project is still no guarantee that it will succeed. Just think of all those dot-coms that leased huge lofts, paid outrageous salaries and bonuses to lure top-notch people, poured money into R&D, and lost it all. Of course the fact that the money came from some venture capital firm instead of out of their pockets probably made it a little easier to spend. g. Customer frustration. Before you start making new-product promises, you'd better be sure you can deliver. Hewlett-Packard ran some television ads in which they asked us to imagine the future, with ant-sized cell phones and lightbulbs that never burn out. Sounded fantastic. But neither of those products will be available in anything less than ten years. In the meantime, HP's customers may get tired of waiting and take their business elsewhere. And Sprint PCS, which not so long ago was ranked among the top five of "trusted brands," is treading a very thin line. Recent television ads about their nationwide network have led consumers to believe that they'll have service no matter where they go. But Sprint PCS has as many, if not more, dropouts as anyone else. And when you get frustrated enough with your shattered expectations and try to get out of your plan, they charge you $150. The message is "We're not going to give you decent service and we aren't going to apologize for it either." 4. Horizontal vs. Organic Growth Trying to grow a business through innovation means spreading resources horizontally- developing new businesses, new markets, new customers, new brands, and new directions. As we've discussed above, that's all tremendously expensive-and tremendously risky. Winning over a new customer costs six times more than retaining an old one. Organic growth, on the other hand, maintains relationships with existing customers and deepens the connection between them and the brand. We'll talk a lot more about this in the next chapter. This isn't to say that it's not possible to grow a business horizontally. When the Berlin Wall fell, all of a sudden there were more than two billion new consumers clamoring for American products and services. American companies started doing what I call brand arbitrage-taking brands that were well developed in one area and extending them into completely new areas in which they were underdeveloped. In cases like that-which are few and far between-you don't have to worry about retaining old customers, (at least for a while) because you don't have any. And you don't have to worry about one of your products cannibalizing any of the others, because all of your products are new. But after a while, when the market starts to mature and the battles for mind share and wallet share have settled down, you're right back to dealing with the very same issues you faced in the more established markets. And the choice is the same: Grow horizontally by chasing new customers and getting into new markets and new businesses, or grow organically by focusing on existing customers, existing businesses, and existing markets. You know where I stand on this one. 5. Innovation by Acquisition In the year 2000 alone, there were almost 9,500 mergers and acquisitions in the United States- with a total value of about $2 trillion. Acquiring another company or brand is the Hail Mary pass of innovation: a desperate last-ditch attempt to get out of trouble. And, as with the Hail Mary pass, there's a pretty good chance that things will go exactly the opposite from the way they were supposed to. To start with, being acquired more often than not destroys or at least reduces a company's or brand's value. Prior to being acquired, 24 percent of companies were performing better than their industry average and another 53 percent performed better than 75 percent of the industry average, according to management consultants McKinsey & Company. After the acquisition, though, those percentages dropped to 10 and 16 respectively. The outlook for the bigger fish-the companies that do the acquiring-is just as gloomy. Here's a play-by-play description of a typical acquisition: a. Acquisition candidates are screened on the basis of industry and predicted company growth and returns, not on the current and future potential strength of their brands. (Plus, it's extremely difficult to put a firm dollar value on what a brand is worth at any given moment. A building, yes, but a name?) Frequently, no destination planning is involved. Instead, it's all about ghost economics, economies of scale, "fit," and synergies. One of the best examples of this was United's acquisition, in the early 1980s, of Hertz and Westin Hotels. The idea was that the airline's customers could be funneled into the hotels and rental cars. In a wide-eyed fantasy that revenues from the whole company would be greater than combined revenues from each individual company, they changed the name from United to Allegis. Unfortunately, consumers didn't see the connection between the airlines, rental cars, and hotels. And even if they had, the new corporate entity-which was run by airline execs-had absolutely no idea how to rent cars or book hotel rooms. The whole thing was a complete flop. b. Occasionally, one or two perfectly good candidates are screened out based on projected cash flows that are too low. But eventually frustration sets in and the pressure mounts to get the deal done. Cash flow analysis is tainted by unrealistic expectations of synergies between the brands and the organization's processes, most of which either never materialize or require massive additional investment. A huge amount of time and energy is spent trying to justify the purchase price and very little time is spent worrying about the most important question: Will consumers continue to buy? One major consumer products conglomerate sent me a package they put together because they want to sell a number of their well-known (but languishing) national brands. They've included all sorts of suggestions on how the brands could be revitalized, new markets to get into, new brand extensions, and, of course, rosy cash flow predictions based on all that. I've been through the proposal at least twice and I don't think the words "customer" or "consumer" show up at all. If you were buying a house you'd go inside and take a look around to make sure it was solid and that it would stand up to the elements. And if you didn't know what you were looking for you'd probably hire a contractor to check it out for you. You'd think companies would do the same basic thing when shopping for new businesses: send in a team of accountants and sharp marketing people to figure out whether the target company can generate enough cash flow to justify the purchase price. But they don't, instead falling into the same synergy (or "fit") trap that United did. @Home, for example, thought that its high-speed Internet service and Excite's web content would be a natural combination. It wasn't. Sony must have thought that being able to make good quality VCRs made it a natural fit with Universal Pictures' filmmaking. And AOL and Time Warner convinced themselves that their operations meshed well together. Now Time Warner has lost 75 percent of its value and the company just dropped "AOL" from its name for what they called "marketing purposes." At last, the deal is consummated at an outrageous premium (the average is approximately 40 percent), which makes it difficult if not impossible to achieve a satisfactory return on the investment. If someone wants to acquire a company or a brand badly enough, they can value it any way they want to. Selling companies contributes to the problem by coming up with overoptimistic estimates of future cash flow and value. In 1994, Quaker bought Snapple for $1.7 billion, thinking (or dreaming) that Snapple could piggyback on Quaker's incredible supermarket distribution networks. What they didn't take into account, though, was Snapple's existing distribution. It turned out that half of Snapple's sales came from gas stations, liquor stores, convenience stores, and other places where Quaker had no expertise at all. When all was said and done, they sold Snapple for $300 million-a $1.4 billion loss. c. Postacquisition experience reveals that all those wildly optimistic synergies never materialize. Of mergers with strategic motivations (a move upstream or downstream in the value chain, or an attempt to add capabilities or develop a new business model), only 32 percent achieve their vision and objectives, according to a study by Booz Allen Hamilton. d. The acquiring company's returns are reduced and stock price falls. Overall, about two thirds of all mergers fail to reach their objectives, whether that's measured by stock price, sales, revenues, or something else. Both companies' brands often suffer as confused customers bail on them; disenchanted employees run, which further impacts service, causing even more customers to leave. Costs go up, management starts to panic, and stockholders start looking for someone to blame. That helps explain why Booz Allen found that 42 percent of the CEOs whose companies didn't achieve their merger/acquisition objectives were gone within two years. There are, of course, plenty of merger success stories. But those successes are almost always the result of solid research, good planning, and realistic thinking as opposed to wide-eyed optimism. Although Quaker's acquisition of Snapple was an unqualified disaster, its purchase of Gatorade has been a big success, largely because Quaker used a completely different approach. Quaker tried to change Snapple's brand image from quirky, fun, and alternative to little more than juice in a bottle. They fired Wendy, the spokeswoman who read fans' letters, and replaced her with traditional advertising, and people immediately stopped buying. Perhaps having learned their lesson, Quaker left Gatorade's core essence of "scientifically proven energy boost" alone and didn't try to make it just another drink. As a result, most consumers probably didn't even know that Gatorade had changed hands. Taking this up a level, ever since Pepsi purchased Quaker in 2001, consumers have been able to eat Pepsi-owned products for breakfast. And the company has made good use of Frito-Lay's tremendous convenience store distribution to get Quaker's granola snacks into more outlets. As the country becomes more concerned with healthful eating, consumers will have a choice between granola and chips-both of which will help Pepsi. This strategy is working: Quaker has grown every year under Pepsi's leadership and contributed $470 million in operating profit to PepsiCo in 2003. Although I take a lot of swipes at McDonald's for things they do wrong, I also think they do plenty of things right. One of those is their acquisition of Boston Market, which fits McDonald's core essence of reasonable food at a reasonable price. Now McDonald's can use their core competencies of real estate planning, operations, and employee hiring to capture more of the convenient family dinners sector. Boston Market was on the brink of bankruptcy when McDonald's bought them, but they're recovering. And licensing the Boston Market brand name to H. J. Heinz Company was a great way to expand the business destination to include grocery store shoppers who like to buy their meals ahead of time. As we've discussed in this chapter, innovation is an attempt to leverage existing infrastructure and core competencies in order to launch completely new business initiatives. And as we've seen here, that approach is remarkably unsuccessful for most companies: It's expensive and time- consuming and can even hurt your brand. There are, of course, plenty of situations where innovation is absolutely essential, but for most companies, the downside risk far outweighs any upside reward potential. The solution? Forget about innovating and start renovating! Next, we'll talk about what renovation is and how it differs from innovation, and we'll give you the tools you need to quit doing different things with your existing competencies and assets and start doing better things instead. Excerpted from Renovate Before You Innovate: Why Doing the New Thing Might Not Be the Right Thing by Sergio Zyman, Armin A. Brott All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.
