Finance's key role in new product development: successful innovation is as much about portfolio management, resource allocation and business analysis as it is about breakthrough ideas. Finance may be in the best position to provide the tools, discipline and insight needed to succeed by providing "innovation insurance.".

• Author: Muldowney, Patti
• Position: Cover story - Company overview

At this moment in time, the innovation imperative has never been stronger--particularly at consumer-goods companies where new products are the engine that drive growth and, along with it, shareholder return.

Consumer and retailer demand for new products led to a record number of introductions in 2006, when more than 180,000 new products were introduced, according to Mintel's Global New Products Database.

Investors and analysts have taken note and joined in the growing chorus for innovation. Over the past two years, 10 of the top food, beverage and packaged-goods companies have provided some level of formal guidance on sales related to new products or "innovation." Indeed, one company has gone so far as to provide a target for innovation-driven sales growth for 2008.

In the company's 4th-quarter conference call, Dan Heinrich, the senior vice president and CFO of The Clorox Co., said: "We anticipate the new product innovation will deliver 1 to 2 points of incremental growth, within our targeted sales growth range of 3 percent to 5 percent. The majority of fiscal 2008 new products will be introduced in the second half of the fiscal year."

Unfortunately, however, for many other companies, this engine of growth is sputtering. Across the consumer goods industry, new product failure rates of 40 percent to 60 percent are common in many categories. Based on IRI data, less than a quarter of the new products that actually made it to the shelf attained sales greater than $7.5 million in year one.

In fact, "new" is often a misleading term. Over the past 10 years, the proportion of new products in the food and beverage segment that represent truly new brands has declined to less than 5 percent, according to IRI data.

Despite their expression of commitment to growth through innovation, companies still falter when it comes to building a successful approach to investing and managing innovation dollars. And, when those growth estimates are overly exuberant and not realized, investor and analyst criticism can sting.

In early 2006, when many food companies had whittled their innovation efforts down to splinters, at least in the view of analysts, one analyst took the whole sector to task. "There is a lack of innovation, lack of reinvestment and lack of news in the category. We're not recommending any large-cap food names," commented analyst Timothy Ramey with the research firm D.A. Davidson.

CFO's Responsibility in Innovation

The CFO and Finance team bear as much responsibility for the success or failure of innovation as any other senior executive. In a public company, the CFO has the added responsibility of providing detailed explanations to anxious and model-driven analysts.

CFOs are appropriately suspect of the ever-increasing pull on resources from R & D and innovation activities. Successful innovation is rarely cheap and often hit-or-miss. But with Finance organizations undoubtedly owning some of the responsibility for innovation waste, an effective role is often elusive.

In attempting to manage the risk associated with new product development, a bias toward the familiar and historically successful initiatives favors "close in" innovation (such as line extensions, bonus packaging, more displays).

Finance may exacerbate this tendency by squeezing R & D budgets in lean years. Line extensions can be called upon to plug holes in revenue goals and rapidly be rushed to market. Unfortunately, they also tend to provide only marginal return, or worse, excessively cannibalize existing products.

Finance functions are frequently culpable in the push to launch new product programs into the market for near-term revenue before the products--and the necessary product support--are really ready for launch. Finally, there is the age-old problem of cutting advertising and promotion to make earnings goals--rarely a successful recipe for a new product launch. Here, again, Finance is often playing a key role.

What precisely can and should the CFO do to support a successful innovation process and secure what has become a critical component of shareholder value...