Thursday, 14 May 2009

Branding, Innovation and Premium Pricing: The P&G Challenge

Procter & Gamble is the Harvard and Yale, or the Oxford and Cambridge, of the world of consumer brands and marketing. It is the ultimate proving ground for those with aspirations in the field. For that reason, I read with particular interest an edited version of an interview with the CEO of P&G, A.G. Lafley, as published in the April 13, 2009 issue of Business Week "("How P&G Plans to Clean Up").

In the article, Lafley shared his thoughts on how P&G is confronting the economic slowdown. Of particular interest are Lafley's observations about the centrality of innovation to the success of P&G (claiming a greater than 50% success rate for new products against the industry average of 15% to 20%). And what is innovation for Lafley? It is connecting creativity and innovation "to the customer in the form of service that meaningfully changes their lives." An example of this process was taking the innovation of a highly water absorbent material and recasting it into a diaper product--"Pampers", which "created this entirely new product category and that created an industry." In so doing, P&G can create the kind of brand that supports the premium pricing that lies at the heart of the P&G business model.

Now here comes, in my view, the really interesting observation. Lafley characterizes "Pampers" as an example as a "discontinuous innovation", and further declares that P&G wants "discontinuous innovations" to constitute up to 25% of the P&G product mix. Maddeningly, the article does not elaborate on this comment. So let my make my own observations. Especially since Clayton Christensen's pathbreaking book of 1997, "The Innovator's Dilemma", changes of products must take into consideration whether the product innovation is "disruptive" or not.
As a first approximation, relying with some trepidation on the Wikipedia entry on "disruptive technology", three categories of innovation can be identified:

"Revolutionary or discontinuous--An innovation that creates a new market by allowing customers to solve a problem in a radically new way. (E.g., the automobile)

Evolutionary--An innovation that improves a product in an existing market in ways that customers are expecting. (E.g., fuel injection)
Disruptive--An innovation that creates a new (and unexpected) market by applying a different set of values. (E.g., the lower priced Ford Model-T)"
Christensen focused on "disruptive technologies", whereby a new product based on a combination of innovation and/or technology displaces the market leader. The key here is the process. A disruptive technology usually comes from an niche player that blindsides the market leader by parlaying its product into a lower-priced alternative, which ultimately creates a new market category.

This is not the P&G paradigm. In particular, P&G does not have the interest in relying on product innovation to drive down price in the process of creating a new product category. The opposite is true. As Lafley states, the P&G goal is innovate in the service of creating brands that can support "premium pricing." Indeed, Lafley is dismissive of private label competitors, describing them as being concentrated in the food industry, where commodification is the name of the game. "Private labels are imitators. P&G brands and products are innovators," according to Lafely.

So here are my questions:

1. Is the Lafley goal of 20%-25% of all P&G innovation being "discontinuous"
itself a departure from the way that P&G has carried out product innovation in the past?

2. Is there a difference between "private label" and "generic products"?

3. Are "generic products" bereft of innovative contribution?

4. What will be the role of patents and trade secrets in the P&G discontinuous innovation process?

5. To what extent is this focus on "discontinuous innovation" a response to the broadening challenge of "generic products" across a wider array of product classes?

6. Can P&G continue to rely on the nexus between innovation, branding and premium pricing to carry them through this recession and the possible tepid recovery that will follow?

7. If the answer to (6) is less than a resounding "yes", are we at the cusp of a reconceptualization of branding and the pricing that goes with it?

Any thoughts?

Where exactly is that medium-priced product?

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