Can a corporation start a completely new category? Perhaps the only way to succeed is to embrace a start-up mentality and start as an independent, risk-taking business.

It was a sunny day of 1988 when Peter Brabeck-Letmathe, CEO of Nestle, was sitting in his office in Vevey with a view on the quiet surface of Geneva lake and snow-capped peaks of Chablais Alps. His thoughts however were far from calm as he contemplated the situation with this business unit created several years ago and still struggling to find its strategy and place within the organization. Its B2B business model apparently was a question mark, the issues with the quality of products delivered by the supplier were only piling up and its new unconventional head clearly didn’t fit in into the well-managed, polished culture of the corporation.

That’s probably how a Harvard Business School case would start. We don’t know whether this day actually took place. What we do know is that the B2B unit in question was called Nespresso and the rebel personality’s name heading the business was Jean-Paul Gaillard.

What happened next is well known and described in detail in a number of articles, cases and books. Jean-Paul Gaillard, hired from Philip Morris where he had just launched Marlboro clothing line, was able to completely change the business model, strategy, target consumers, established “Nespresso Club”, set up a new distribution system and a network of Nespresso boutiques and completely reviewed the communication approach, creating the company as we know it today.

While it’s hard to argue with all the analysis of Nespresso success, including the novel business model, distribution etc., in my view there is one thing without which the company would have never made it: it was a separate entity from the start. It also helped that Peter Brabeck and Camillo Pagano, then SVP in charge of strategic business divisions, protected and fenced Gaillard from the larger corporation, giving him space and freedom to take risks and to make his own decisions and mistakes.

Start-ups vs corporations

Surprisingly on average corporations are not any better in new products than start-ups. Based on 2016 US data 56% of start-ups make it to their 3^rd year and in some sectors, like finance, impressive 58% still operate after 4 years!

Corporations don’t like to announce failures and to delist products, so it’s difficult to make direct comparisons. However looking at the performance, it appears that new product launches reach their objectives in sales, profits and market share roughly in (only) 50% of the cases. So it seems that actually be it a multinational or a start-up – chances to succeed are more or less the same.

If we take best of the best – they learned how to be more successful in developing and commercializing new products with roughly 70% success rate (data from the same PDI study). There are all kinds of well-thought structures, new business accelerators and processes in place within many companies from P&G and Reckitt Benckiser to Unilever and Mondelez. However this is mainly related to products and brands that are intended to play a role within existing portfolio and to be distributed via the same distribution system. What happens if a multinational tries to establish a new category? Can a multinational at all successfully establish a new category?

Examples of corporations establishing new categories are rare. Apart from Nespresso, brands like Swatch, Sony Playstation and iPhone come to mind. Being protected as a separate entity helped Nespresso blaze its own path. Sony PlayStation team, headed by Ken Kutaragi, had to be shifted from Sony’s headquarters to Sony Music, a completely separate financial entity to retain the project and maintain relationships with Philips. Not only this resulted in a best ever selling game console, but also led to the creation of the DVD! While iPhone and Swatch were not separate companies, those were so closely controlled and monitored by the charismatic heads of the businesses – Steve Jobs and Nicolas Hayek, that it was as close as it gets to being separate.

What are the benefits of being separate?

1. Ability to take risks. Corporations tend to avoid risks. There are a lot of good reasons for that, one of them – lack of personal motivation to take risks. If things go out of hand, that’s when top management starts paying extra attention. For any innovative project chances of things going out of hand at some point are probably close to 100%. At the same time personal cost of making a mistake for an employee in a corporation is high and might include bonus, next career move or a career in the company. Frequently the difference in personal gains between exceptional and on-target results is not worth to take risks. So after a CEO with all his/her knowledge and power goes hard on a team facing issues, the next time these individuals want to take risks would probably be in the next life.
2. Avoiding internal fight for resources. Sooner or later new and existing products are bound to have a clash for resources. Many corporations with first-class processes, people and products get in this trap over and over again. For example, in the early 2000^s Kraft and Braun started a partnership for Tassimo – coffee-on-demand system competing with Nespresso in affordable segment. Within Braun a significant portion of executive attention and R&D resources was devoted to the new venture. As a result much-needed innovation pipeline for existing products dried out. While Braun business still was strong, its profitability was much lower than the rest of the company (Braun was part of Gillette). That probably was one of the reasons why Gillette didn’t meet shareholder expectation for several years in a row and eventually was acquired by P&G. Tassimo changed hands several times and never reached the size of Nespresso.
3. Faster decision-making and spending less time on corporate policies. The more attractive and “sexy” the new product idea is, the more people in the organization have something to say. As a result project teams grow disproportionately large, strategic meetings become crowded and decisions gravitate towards safe choices, which are easier to justify for shareholders. Frequently in case of new products safe choice equals failure.
4. More time to stick to chosen course and higher resilience to external influence. Time, along with money, is probably one of the most valuable resource for a new venture. Even a great idea needs time to flourish. Eric Favre, then an engineer in Nestle, patented Nespresso system in 1976. Nespresso SA company was founded in 1986 and reached breakeven in 1995. Over these 9 years when the company didn’t make money most certainly there were all kinds of suggestions about selling this business before it’s too late or changing the strategy. Being a separate business probably meant survival for the company.

Pioneering a new category in Philip Morris: quiet revolution in tobacco happening now

At this particular moment extremely interesting innovation case is developing with Philip Morris (PMI) new reduced risk products, iQos – e-cigarette-like devices that heat tobacco, rather than burning it like traditional cigarettes. This is a revolutionary product that can completely change the whole category usage patterns. Similar efforts are underway within PMI key competitors – BAT and JTI and all three seem to follow along the same route: emerging products stay as parts of the companies along with other brands. In fact PMI recently went even further – as it claimed in a recently re-launched web-site, the objective of the total company is to convert smokers to the new reduced risk proposition. Bold statement, putting an idea of a corporate start-up upside down.

That looks brilliant, but would this new direction be susceptible to the corporate headwinds discussed above? Most likely yes. Based on open information, share of the new products is still low. Biggest is probably Japan with 5% market share, which is huge result in itself, however money is still within the traditional business.  So within any big PMI market, where a local team has an additional workload of launching new products, the pressure to deliver on new ambitious objectives is high, but business performance (and managers’ bonuses) are still highly dependent on traditional products. Any corporation in this situation would try to spread existing resources between traditional and new businesses. As a result traditional business suffers because its support budgets are decreased in favor of new business, and new business doesn’t get enough money for growth, because traditional business is still very important for the company! This doesn’t mean that PMI can’t succeed, – tobacco profits is a good argument in making things happen. However to maximize the chances to succeed one bold move that company could take is to follow in the footsteps of previous great successes and to make this business separate.

To keep up with the fast pace of changing consumer preferences, many corporations target certain share of revenues (typically from 15 to 30%) received via new products. While this works fine with innovating within existing portfolio, corporate disruptive innovation might live up to different laws. Internal resistance and existing checks-and-balances might make it close to impossible for a corporation to create something truly different. Perhaps the only way to overcome this is to adopt a small company mentality first. Sometimes the best a corporation can do for a new business unit is to let it take risks and set it free!