PURCHASE, N.Y. — About eight years ago, PepsiCo began overhauling its approach to innovation.
“At that time we were an extremely decentralized organization operating as a loose confederation of geographic business units with each largely driving its own development agenda and establishing their own processes,” said Indra Nooyi, chairman and chief executive officer, during a July 9 earnings call with financial analysts. “Development was focused largely on product line extensions, and that structure while effective in its time led to less efficient use of resources with redundant projects often being undertaken in different parts of the world and sub-optimal resource allocation to the most promising ideas.
“As a result, much of our innovation lacked staying power.”
Today, new products contribute significantly to PepsiCo’s sales. Innovation as a percentage of total revenue reached 9% in 2014, and a number of new products introduced in the past three years are on pace to achieve more than $100 million each in annual retail sales. These include Tostitos Cantina, Mountain Dew Kickstart, Doritos Cheetos Fun Multipack Mix, and Gatorade Fierce Blue Cherry and Frost Glacier Cherry.
|Indra Nooyi, chairman and chief executive officer of PepsiCo|
What changed? The company undertook a major transformation to improve its research and development function and innovation capabilities in seven key ways.
First, PepsiCo established global category groups charged with coordinating global innovation.
“This resulted in a more focused innovation agenda, a greater emphasis on development platforms rather than product line extensions only and more efficient allocation of development resources as we have significantly reduced redundant efforts through better coordination,” Ms. Nooyi said.
Second, the company globally adopted the proprietary framework developed at Frito-Lay North America, which focuses on triggers of consumption, or “demand moments,” by examining consumer needs based on the context of the occasion.
“This created much stronger linkage between consumer and shopper insights in the R.&D. functions and has led to our innovation being more incremental to top-line growth,” Ms. Nooyi said.
Third, the company implemented a common, disciplined stage-gate process to gain better visibility into the multi-year pipeline of projects under development in order to allocate resources to the most promising ideas and new platforms and to ensure a more balanced approach to innovation.
Fourth, PepsiCo provided its businesses with better visibility into the performance of new products around the globe in order to facilitate a more rapid lift and shift of the company’s most successful innovation launches from one market to another.
Fifth, since 2008, the company has increased its investment in product development. Between 2011 and 2014, PepsiCo’s investment in R.&D. increased almost 40%, Ms. Nooyi said.
Sixth, PepsiCo recently established a design capability to increasingly involve design in the early stages of innovation.
Finally, the company is using reverse-engineering and leveraging its learnings in developing markets to develop lower-cost products, packaging and equipment without sacrificing quality.
“We are pleased with the progress we’ve made across all these fronts and the tangible results we are seeing,” Ms. Nooyi said.
A focus of innovation at PepsiCo is health and wellness, with recent introductions such as Naked Juice almond milk beverages and Quaker steel-cut oatmeal.
Channel-based innovation is advancing PepsiCo’s food service business, Ms. Nooyi said. The company is launching a line of craft soft drinks called Stubborn Soda in fountains this summer.
“The Stubborn lineup includes unique and contemporary takes on traditional craft flavors,” Ms. Nooyi said. “Flavors include black cherry tarragon, lemon berry acai, agave vanilla cream and pineapple cream. They contain no high-fructose corn syrup and are made with fair trade certified cane sugar and natural flavors.”
Packaging is another part of PepsiCo’s innovation strategy. The company has introduced personalized bags of potato chips as part of a campaign for its Lay’s brand.“Our intention is to continue to invest in innovation, build upon our already strong capability base and further shop in our holistic innovation process to drive greater growth for our customers, create compelling products for our consumers, and ultimately increase the contribution of new products to our total revenue,” Ms. Nooyi said.