What happens when you believe in a project that no-one else believes in? Sometimes your gut tells you that an idea is so good that you can’t afford to drop it. These situations are tricky: if you go “underground” with the project and it turns out to be viable then you are a hero, but if the idea is bad you will likely be sidelined by labels such as “maverick”; “not a team player”, or worse still “unmanageable”. In these situations I have asked my group to quietly do some feasibility work on the idea and hoped that I could find someone in Marketing to become excited in the idea. Or if I thought, for example, that a large retailer was going to require customized packaging for a product, then I might start conducting stability testing under the radar. These projects are commonly called “skunk projects”.
I was having my coffee this morning and thinking about how to write about managing skunk projects when there it was….right in front of me. We recently bought a Nespresso coffee machine and milk frother and I started to read about the history of the development of this product. It’s amazing how innovation is all around you if you look closely enough. The more I read about the development of the Nespresso system, the more I realized it was a perfect choice as a case study in how to manage a skunk project, but more about this later.
Innovation Status Quo in Large Corporations… Recently I have been wondering if true innovation can really exist in large corporations. Can innovation actually happen in a large company where managers are trained for and evaluated against their ability to keep things running smoothly i.e. “the status quo”? These managers follow detailed procedures and systems and for many this leads to inflexibility. Venturing out into new and unexpected territory is something that these managers just do not do, nor are they expected to. Initiating a skunk project is certainly something most of these managers would avoid. So, given this type of status quo management culture in many large companies, is disruptive innovation possible or is it relegated only to small, nimble companies?
Key Factors in Managing Innovation in Large Corporations… So how can an entrepreneurial and innovative culture be nurtured in a large company or corporation? I believe several key factors are required:
1) A competitive imperative is required. It may be useful to think of competition in business as like “war” for market share. Wartime is when many new technologies are pushed into development. It’s a “necessity is the mother of invention” kind of mindset. Jet engines, radar and cryptology are a few examples of wartime innovation. Innovation workers in today’s large organizations need to be motivated to innovate by a competitive imperative, whether it is a declining market share, fear of what a big competitor might do, fear of the business failing, or aggressive internal goals; remember Jack Welsh’s imperative that “GE businesses had to be number 1 or 2 in the market”. These competitive imperatives seem to be necessary to generate innovative ideas.
2) Identify and protect entrepreneurs and innovators within your organization. These people can be “pains”, difficult to manage and often do not follow the rules, but that is exactly why you need them….they also think outside the box, are passionate about their projects/ideas, can take an idea, believe in it and take it to market successfully against all odds. Skunk projects start with these people.
3) Find a high level champion with long term vision. If entrepreneurs and innovators cannot find internal high level champions, their projects will be doomed more often than not. This means that organizations need a communication mechanism between Upper Management and entrepreneurs/innovators. This needs to be something other than a formal NPD governance meeting; it should preferably be something more informal. High level champions will protect the project from the many internal critics who will provide resistance, while they simultaneously create value by building a robust product pipeline.
4) Persistence to get to market against all odds. In case studies about disruptive innovation this stands out as a key factor. Many innovations make it to market only because of the persistence of a few key individuals in a company who totally believe in the idea, which often starts as a skunk project. Obviously this must be balanced by objective data. Negative market research data should be taken seriously but I am struck by the number of important innovations that did not have very positive market research data initially (or some other form of bad data like high production costs) but were pushed to market in spite of this data and eventually were very successful.
5) Right timing. The timing of a new market introduction can be everything. If you launch too early the product may not take off. If you launch too late you might be a me-too product, undifferentiated in the market.
The Nespresso System … So getting back to my morning cappuccino, the development of the Nespresso System  by Nestlé  is a great case study that exemplifies innovation in a large corporation utilizing the five key factors listed above. The Nespresso system consists of high quality coffee specially processed and packed in aluminum capsules for use in specially-designed machines. It is targeted to the home market. The distribution system for the capsules utilizes direct consumer marketing via a “club” that can be contacted online or by phone. Nestlé is a large conservative food company; it’s essentially a consumer packaged goods company, so how were they able to develop a machine, a new coffee packaging system and sell these products using a non-traditional (for Nestlé) distribution system and turn this into a very successful business?
Nestlé … Nestlé  is one of the world’s leading food companies, with sales of SFr 92 billion [2,3] in 2012 and approximately 330,000 employees. It is a very large, conservative organization; one where innovation might be expected to have a large number of barriers and where innovation might be difficult. Yet Nespresso was developed and slowly nurtured into becoming a mature business. Nespresso sales in 2012 were SFR 4.3 billion , nearly 5% of total sales but it took more than 25 years to get there.
Beginnings … As with the start of many innovations, the idea and technology originated from the R&D group at Nestlé’s research center when they acquired the rights to commercialize the idea in 1974 . Nestlé dominated the instant coffee market at the time but had no significant presence in the much larger roast and ground (R&G) market. The idea was that Nestlé would be able to develop and market an individual-portion coffee system that provided premium-end or “gourmet” coffee that was easy to make and did not require complicated equipment and operator skill. The project started as a skunk project. R&D developed the system without talking to marketing and pushed the project forward in spite of considerable internal skepticism. Nestlé’s food service division eventually showed some interest and a market test was conducted in Swiss restaurants but that strategy was soon switched to the bigger office coffee segment .
The Satellite Company or “Skunkworks”… Around this time in 1986, Nestlé did a surprising thing. They created a separate company, called Nestlé Coffee Specialties (NCS), to further develop, produce and market the Nespresso System. In other words, they converted the skunk project into a “skunkworks”. They also hired an “outsider”, Yannick Lang, to manage the new company, which was an unusual thing for Nestlé to do. Lang soon realized that affluent middle-aged consumers would enjoy drinking restaurant-quality espresso at home and that they were his best target market segment.
At the time, cafes were opening up in Europe and coffee stores like Starbucks were starting up in the US. Very little market research had been done on the household market and what had been done was not that favorable, but Lang was able to convince Upper Management in 1989 to launch the new household strategy in Switzerland as a test market for one year. Interestingly, Lang was able to convince them to disregard those early market tests by pointing to similar tests of fax machines and mobile phones which were also initially disappointing and persuasively arguing that consumer research for disruptive innovation is not necessarily accurate .
Lang also changed the distribution strategy and created a Nespresso Club, using a direct marketing channel to stay close to the customer. By 1995 he had achieved breakeven and soon thereafter Nespresso became one of Nestlé’s fastest growing business units. However the “skunkworks” days were over and in 1997, Lang left and a new manager, Willem Pronk, took over NCS. Pronk was a Nestlé man and was tasked to scale the business from SFr 150 million to SFr 1 billion in ten years . By 2006 sales reached SFr 1 billion for the first time and have continued to grow to the current rate of Sfr 4.3 billion in 2012 .
Lessons learned from the Nespresso Development…
a) Persistence: R&D needs to be passionate about the projects it believes in. Without the R&D push in the face of skepticism, the Nespresso product would never have made it to market.
Marketing also needs to be persistent. New, disruptive innovations often do not test well in market research, at least initially. Market concepts have to be refined and marketing strategy might have to be completely rethought until a winning product concept can be marketed. In the Nespresso case all the initial market research for the household market was disappointing but the team continued to believe in the concept and kept pushing it. This exemplifies the persistence factor.
b) High level champions: Eventually some executive Senior VPs and the CEO got behind the idea even though many others still were not and supported the creation of an affiliate company. They understood the value of a skunk project, created a “skunkworks” which was the seed for a new business and as the business matured, converted the management style back to a main stream management approach.
c) A competitive imperative was in place. Coffee was a core business for Nestlé and they were already number one in instant coffee, but sales were flat and they had no offerings in the much larger R&G (roast & ground) market. If they wanted to be a dominant player in coffee, they needed an offering in the R&G market.
d) Identified innovators were protected: Nestlé created a new company for this initiative (i.e. the skunkworks) because it realized this was a completely new type of business and operated very differently to Nestlé’s existing businesses. By creating separate marketing and/or R&D entities for major innovations, an organization can gain insight into how the innovation can be developed differently from the base business.
e) Infusion of talent from outside the company will often result in different thinking and help propel the innovation to market. Nestlé understood that the Nespresso initiative would fail if a traditional Nestlé manager ran it, so they hired Yannick Lang from the outside.
f) Finally senior executives had a long term vision for their company and timing was on their side. Nespresso rode the wave of popularity in espresso drinking as it evolved over time. Initially, their targeted market segment was very small but continued to expand rapidly and Nestlé was able to grow the business from scratch consistently over two decades into the major brand it is today. They were ahead of the curve, ahead of their competitors and unencumbered by short term success goals.
Summary… The Nespresso case study is a good example of innovation being implemented in a large corporation as well as a good example of a successful skunk project. Large corporations and companies tend to have high barriers to innovation, but with some risk taking by R&D in the form of starting skunk projects, some risk taking by upper management to protect innovators and step into the role of high level champions, and attention to the other key factors described above, these barriers can be overcome and true innovation can occur.
© Dennis Nelson 2014