Why the Pressure to Innovate Won't Stop

Because creating further line extensions of existing brands simply waters down the franchise

We're now into an era where new products and innovations (BusinessWeek.com, 6/17/08) are seen as smart investments. Some context will show that:

• This wasn't always the case;

• It took us a long time to finally come to this point, and

• The demand for NEW isn't going to slow down any time soon.

First the context.

In the 1950s, mass marketing was driven by the mass media—more specifically, television. All you had to do was produce a product, put it in a tube, and advertise it on the tube. It sold incredibly well.

Starting in the '60s, we saw the concept of segmenting introduced, driven in large part by a statistical technique called cluster analysis. In cluster analysis, you survey people about their needs, wants, and desires and then literally cluster the results based on the pattern of response. Everyone who responds the same way is put into one cluster. At the end of the process, you'd have four, five, or six clusters, and then you set out to create products designed specifically for each one.

So companies like Procter & Gamble (PG) would create products geared to people who wanted brighter, whiter, or softer clothes. Once the need was identified, a product would be launched to meet the need. Often these products were seen as revolutionary, e.g., Downy fabric softener, launched in 1960.

The 1970s were the heyday of new products and new product marketing, in large part because:

• We had identified all these segments through cluster analysis and

• We had more sophisticated tools—such as simulated test markets—to help predict demand.

Thanks to simulated test market research, you can: sample a group of people in your target market, show them an ad which causes them to buy, and then you can forecast from their reaction how well the product will sell out in the real world. So in addition to Downy, we got Bounce fabric softener sheets in 1972.

For much of the '80s, the stock market was soaring, so it was cheaper to acquire (using your stock) someone else's brands than it was to build your own from scratch. The rationale became that the brands themselves had value—which, of course, they do. So during the '80s we got all these mergers and acquisitions and the notion of brand equity emerged. In the process, we took our eye off the idea of innovating internally.

In the '90s the worm turned, and it became all about cutting costs and eliminating people. Creating a new brand completely from scratch was seen as too costly and too hit-or-miss, so the focus switched to line extensions, which are seen as having less risk. Line extensions are products that are new, sort of, but you are not spending huge sums to create them, which makes the people in the finance department happy. Instead of brand-new technology, we often get a new flavor or combination of benefits that were already on the market. After all, who doesn't need whitening AND freshening with his Mint Blast toothpaste?

What's important to note is that when you extend the line, you stretch the brand, and in the process you begin to sap its value. If you had started with a soft drink product that had started to build some equity in the marketplace, and then you come out with a diet version, and a no-caffeine version, a zero-calorie version, and several flavored versions, the value of the original soft drink itself decreased by the time you were done expanding it to death. You had undermined the very value of the original product. And that was the net result of all the cost cutting and brand extensions that we saw in the 1990s.

So, we had more than two decades where innovation wasn't valued, first because it was cheaper to acquire a brand than build one, and then because it was seen as far riskier than brand extension. But we have finally gotten to the point where there is nothing more to wring out of existing products. And that is why innovation is once more—correctly—seen as important and will remain so in the immediate future.

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