Brand owners remain focused on innovation

11 August 2010

NEW YORK: Major brand owners such as Procter & Gamble and General Electric are continuing to focus on innovation despite the recession.

Procter & Gamble, the FMCG giant, spends around $2bn (€1.5bn; £1.2bn) a year on this aspect of its operations, and has begun working with external enterprises and individual experts to enhance its innovation capacity.

One of the company's "big ideas", according to chief executive Robert McDonald, is the "digitisation" of certain processes, as demonstrated by the creation of a virtual store to test redesigned packaging.

"Many of our new products today, we designed using simulation and modeling versus [the] bench scale kind of prototyping that we did years ago. That gives us a much faster cycle and innovation," he said.

"That $2bn is much more productive because of our open-innovation system with outside partners and also because we're using modeling and simulation and digitisation a lot more than ever before."

Dow Chemical devoted $1.5bn to a broad range of initiatives in 2009, an increase of 14.6% on 2007.

Meanwhile, sales decreased by 16.1% over the two-year period.

Some 20% of this outlay is typically earmarked for "disruptive" innovation, or what it describes "new new" goods solving "the unmet needs of society."

Bob Plishka, Dow's director of corporate communications, argued the fact these schemes are often so different from its existing output means they cannot be allocated to a specific unit.

"[They] have a very long time line, and you need to have a commitment - and to stick with it. You can't fly in and out with your investment dollars, because you won't see it commercialised," he said.

The Powerhouse Solar Shingle, first unveiled in 2009 and set to be formally rolled out in 2011, is an example of this sort of project.

"All the work on Powerhouse continued through the recession, through our acquisition of Rohm & Haas, and through all the challenges the company faced in late 2008 and 2009," said Plishka.

The wider impact of the downturn is shown by statistics collated by the National Science Foundation, which discovered that innovation expenditure among US businesses fell 13.1% to $234bn in 2008.

Separate research by Bloomberg covering 232 firms in the S&P 500 Index that made figures available revealed their overall funding for R&D stood at $154bn in 2007, $163bn in 2008 and $166bn in 2009.

Scott Davis, an analyst at Morgan Stanley who monitors organisations well-known for pioneering technology, suggested bonuses may be declining but staffing levels have not fallen dramatically.

"Confidence in R&D comes down to the [number] of heads you're willing to hire," he stated.

As such, while 3M, famous for its emphasis on new product development, cut its budget by 5.8% to $1.3bn between 2007 and 2009, this could reflect a natural fluctuation in the innovation pipeline, Davis added.

General Electric, the conglomerate, is also "investing a lot in R&D" across its portfolio, ceo Jeff Immelt recently reported, with its aviation arm in line to receive sizeable support as a result.

"We are going to invest more in R&D and product spend over the next couple of years, anywhere from a couple of hundred million bucks to as much $400m, $500m as we look at the next few years," he said.

Data sourced from Bloomberg/Seeking Alpha; additional content by Warc staff