13. How to Recognize and Use the Strengths of Incumbency – From Incremental to Exponential


How to Recognize and Use the Strengths of Incumbency

CHAPTER SUMMARY: This chapter covers how incumbent companies are recognizing their strengths and using them to foster innovation and growth. Common incumbent advantages are scale, distribution, data, and expertise: things that are expensive to acquire and difficult for startups to replicate.

Part of what can make effective innovation so powerful inside legacy firms and older organizations is the ability to leverage the existing strengths. We will provide examples of how innovative companies are doing this well and provide some insights and guidance on how you can apply this leverage in your own organization.

Salmon Crisps and Going off the Eaten Path at Sainsbury’s

In November 2019, Danone bid adieu to Ayem, a breakfast-bowl product studded with almonds and healthy omega 3 oils.1 The product had been part of Danone’s efforts to break into the fast-growing functional food market. It was the first product to emerge from the Danone incubator, an internal innovation bureau mandated to produce real products and engaging brands to meet burgeoning consumer needs.2 With a small team of scientists, marketers, and brand experts, Ayem launched in a fraction of the time usually required by the food giant to place a new product on the shelves. When Ayem didn’t gain traction after a year, Danone shut it down and cut its losses.

Undeterred, Danone’s incubator is launching several other internally incubated food brands, including an allergy-friendly snack line that allows parents to customize their snack purchases to prevent their children’s exposure to potentially harmful allergens. Another Danone incubator product, a glass-jarred chic chocolate-ganache dessert called Pati & Coco, landed in the market and graced the shelves of the United Kingdom’s second-largest grocer, Sainsbury’s, in a distribution and new-product partnership.3

This is where Sainsbury’s own Future Brands innovation team took up the baton. Launched in April 2018, Future Brands, a small unit inside the supermarket giant, identifies, recruits, and nurtures new brands in any category, including groceries, drinks, cosmetics, and gifts. In exchange for helping them get placement in Sainsbury’s, Future Brands asks for a limited period of exclusivity in major supermarket distribution. In the summer of 2019, Future Brands launched a “Taste of the Future” program, which gives customers the chance to try 30 products in the first U.K. supermarkets to offer them. Products include alcoholic kombucha Bootleg Booch, and Sea Chips, a new variety of salmon-skin crisps. With 27 million customers, Sainsbury’s is one of the premiere placement options for any food or beverage brand in all of Europe, let alone the United Kingdom.

What Sainsbury’s seeks to benefit from is the increasing willingness of shoppers to try new brands and new products—which is especially relevant in the realm of tastes. The Future Brands team represents a wide range of internal disciplines, from buying and marketing to brand and strategy. The diversity is designed to help these small brands navigate Sainsbury’s systems and tackle any internal barriers. The team also hires several external specialists with expertise in marketing smaller brands. “We’re here to support the business to be a bit bolder and take a few more risks going into the areas we believe will blow up,” the unit’s head, Rachel Eyre, told MarketingWeek.4 When a brand is selected for stocking at Sainsbury’s stores, the Future Brands team creates a marketing and growth plan using data from Sainsbury’s Nectar loyalty program to create online marketing, guerrilla campaigns, and in-store spots through which to pump the new products.

More Customers to Watch, More Data to Learn From, More Ways to Try New Things

The basic idea is simple: see what shoppers buy, and utilize data arising from the trial runs of challenger brands to determine which come into demand and which don’t. The brands also enjoy an online presence on Sainsburys.co.uk. There is no prescribed end date for the Future Brands arrangements, effectively acknowledging that different brands may require different amounts of time to achieve critical mass. Data from the grocer’s Nectar program offer granular detail on brand performance, aiding decision-making.

In addition, the Future Brands team serves as trend spotters for the entire company and often works with other major food companies to bring up-and-coming brands to the United Kingdom. For example, the Future Brands team collaborated with PepsiCo subsidiary Rare Fare Foods to bring the Off the Eaten Path brand of veggie snack foods to shelves in Britain. The team works closely with company buyers, sharing product information and trend information, and it consults with venture-capital firms and accelerators to learn what it is that investors are placing their faith in.

Sainsbury’s Future Brands team has the advantage of several strengths of incumbency to stoke sales growth. For example, because sales of functional foods and beverages are expected to grow by 8 percent annually,5 outstripping growth of legacy food items, Future Trends is using its present distribution network, marketing expertise, and sales data to help itself by helping its customers. A startup health-food company distributing, say, kale chips sautéed in pumpkin oil would endure a lengthy, expensive path to reach the shelves of a large supermarket by the usual route. It would first need to convince smaller outlets to stock its wares locally. Having proven the wares’ market worth, it would need to secure distribution through a regional distributor. Then it would need to attend major exhibition events for grocery-food buyers in order to gain exposure. Once it succeeded in obtaining a large order, it would need to take out a large line of credit, at high interest rates, for its production runs and print packaging. For Future Brands, Sainsbury’s provides distribution and store exposure to customers and also allows the startup brands to gain better rates on production runs of food because the contract factories feel more assured that the product’s sales won’t fail right away. All told, Future Brands saves both Sainsbury’s and its Future Brands partners time, dollars, and stress.

This is a perfect example of how incumbents can use their existing strengths to drive and accelerate innovation. A startup cannot access data from millions of customers, use extant marketing channels, or quickly identify reliable overseas production sources for products. For similar reasons, it cannot readily obtain feedback from a large extant base of users or customers. It must fight for distribution of its products and never has the extent of distribution networks and channels that an incumbent enjoys.

The Many Advantages of Incumbency

As we stated previously, common incumbent advantages are scale, distribution, data, and expertise: things that are expensive to acquire and difficult for startups to replicate. Smarter incumbents are recognizing how to use these advantages to build newer platforms or marketplaces.

As we see with Sainsbury’s, incumbent distribution networks and expertise can be valuable to external partners; and the same benefits apply to internal product efforts. Increasingly, companies seek both to engage challenger brands and upstart products and, learning from working with them, to “startupify” some of their own internal new product efforts.

The world’s largest beer, wine, and spirits company, Anheuser-Busch InBev (ABInBev), for example, recognized several decades ago that, in the United States, regional microbeers were growing faster and selling at a higher premium than incumbent national beer brands such as Budweiser.

So ABInBev started aggressively buying stakes in these microbeer brands, in part to understand how they marketed themselves and how they crafted stories. In exchange, it plugged the smaller brands into a national distribution channel, giving them unparalleled market access. It also offered production expertise and allowed these beer brands to produce in its large facilities. Often, when the relationship proved sound, ABInBev bought out the entire microbrewery company. ABInBev became so fluent in the microbeer market that it has successfully launched a number of brands that mimic microbeers but are entirely its own creations, such as Shock Top, a Belgian-style brand that is nearly impossible to distinguish from hip microbrews.

Other breweries have followed ABInBev’s lead. Dutch brewing giant Heineken bought out all remaining shares in Lagunitas, a well-respected, widely distributed independent U.S. beer brand, in 2017; the two-stage acquisition cost Heineken more than $1 billion. MillerCoors, likewise, both buys microbreweries and launches its own labels.

Large Capital Expenditures Can Be a Weapon Rather Than a Weakness

The story of beer companies also highlights a smart way to take ready advantage of an aversion common to newer business models, venture capitalists, and startups: their aversion to capital expenditures.6 Few venture capitalists still want to invest in businesses that require major capital investments, because larger investments are perceived as riskier and not as lucrative.

As in the beer market, we are seeing similar stories of large automotive companies smartly working with startups to market their innovations. Cruise Automation, a prominent maker of autonomous-vehicle technology, was purchased by General Motors both because of its technology and because the Cruise team decided that it would rather innovate inside a giant incumbent than go out and raise massive amounts of capital. GM’s interaction with Cruise—helpful but at arm’s length—has perfectly demonstrated how not to smother a startup acquisition.

The Six Resource Advantages of Legacy Brands

Legacy brands enjoy six significant resource advantages:

1. access to funding

2. access to production and infrastructure

3. access to expertise

4. access to distribution

5. access to data (for A.I. and machine learning)

6. the power of their legacy brands

Any of these six resources can be used to accelerate innovation by themselves. Collectively, they can make innovation truly formidable and can facilitate and accelerate legacy companies’ abilities not only to innovate from within but also to quickly increase the production, marketing, and sales of acquired firms.

In the case of ABInBev, craft brewer acquisitions and new internal brands alike were able to tap into several of these established resources: production, distribution, marketing dollars, expertise, and funding. The one they could not use was brand: in the world of microbreweries, large corporate brewers are the bad guys.

To give you an idea, it often takes a new brewery several years to gain a toehold in shelves and bars in a single city. As soon as ABInBev entered Kona Brewing’s Longboard Island Lager into its production and distribution chain, the Hawaii-based brewer could sell beers from San Francisco to New York City without hiring drivers or buying expensive brewing equipment. Selling at prices double or triple those of older, less sought-after beers, Longboard Lager provides ABInBev with much-needed growth in what was a stagnant category.

If we consider the potential for applying A.I. analysis across all the brewing activities undertaken by ABInBev, of all the customer sales data and all the bar consumption data, we get a sense of the potential power of incumbency. With this intelligence, ABInBev could spot seasonal historical trends by product and by individual store and thereby tune distribution strategies to maximum effect; or it could spot trending product flavors and use that insight to focus acquisition strategies or product development.

In an era of exponentially increasing innovation, these resource advantages can be even greater. As we saw it do for Future Brands, access to data and machine-learning capabilities can provide a critical leg up for incumbents. Used in conjunction with the incumbents’ marketing reach and marketing expertise in digital promotions such as Google AdWords and Facebook advertising, the power that an incumbent business can wield increases considerably.

Not surprisingly, though, competition for access to these resources is intense. High-quality expertise in any organization is prized, and time with experts becomes a precious resource. Any marketing campaign dedicated to a startup idea or an internal (or external) challenger brand means fewer marketing resources for a legacy product. For this reason, innovations need clear, public executive sponsorship, affording them access to the resources as needed. Companies can achieve that by various means.

Checklist: Incumbent Superpowers

  Do your organization’s innovation projects get ready access to internal domain expertise?

  Does your organization have a dedicated innovation or experimentation program to ensure that the organization holds resources in reserve to supply innovation efforts?

  Is your organization’s brand a plus or a minus for innovation projects?

  What variety of people do teams on innovation projects include?

  How does your organization publicly demonstrate clear support for innovation (excluding window dressing!)?

  What happens to the leads of innovation projects after they fail? How commonly do they attempt another innovation project?

  Do innovation projects have full access to any useful data and intelligence gathered by the larger company or organization?

  What types of innovative marketing strategies do the innovation projects enjoy?

Coca-Cola, which has a track record of terrible failures (e.g., the New Coke), gives internal innovators permission to fail and shows sponsorship by what it calls the Celebrated Failure Award. This award is one of the categories, listed among the great successes, in the company’s annual Global Innovator Awards. In 2017, Ali Akbar, a director of sparkling beverages for the firm’s Middle East and North Africa business unit, won the prize for an unsuccessful try at launching an energy drink called Sprite 3G in Pakistan to challenge a dominant incumbent.7

The resources available chiefly to incumbent companies become advantages only when they are available to innovators and when people at the highest levels of the company are willing to commit time and resources to supporting the innovation. Are you using your legacy resources to best effect?