Why do large international companies such as Pepsi and Coca-Cola buy innovation instead of leading the innovation? That is a multimillion dollar question!

I suggest that the new product innovation business paradigm is upside down when the top two international brands need to buy innovation rather than drive innovation. This concept was highlighted in the Feb. 10 Wall Street Journal article titled “Coke Tests Health-Tea Waters”.

The WSJ reported that “Innovation in non-carbonated drinks largely come from start-up companies.” This sounds eerily similar to the debate within our economy that small businesses drive most new job growth. As for me, I am drinking this Kool-Aid – excuse me "Tea."

The article continues to say “Coke has had a mixed record of creating new beverage categories, including high-profile flops in 2006 with coffee flavored Coca-Cola Black and Enviga, a sparkling green tea.” Now I want to disclose that I have worked for Pepsi in my career, and have a lot of close friends at Coke in Atlanta. My commentary does not reflect negatively on the people at both companies, but I want to dissect why large companies buy innovation rather than develop it and lead it.

Another innovation strategy that Coke embarked on in 2007 was to set up a Venture and Emerging Brands (VEB) unit to spur innovation. This concept is not necessarily bad, because it does adhere to one principle of innovation: Set up a separate innovation team with no connection to existing R&D or company operations. Coke’s EVB unit takes stakes in small beverage companies, creates its own drinks and looks around the world for Coke products that could be sold in other markets.

The WSJ article sites Coke’s recent purchase of Sokenbicha (pronounced SO-can-BEE-cha) as the latest example of purchasing outside innovation. The beverage giant plucked Sokenbicha from its lineup in Japan in 2009 and launched U.S. sales last fall at Whole Foods Market Inc. – a company known in the beverage industry as an incubator for trendy products according to the WSJ. The article also reports that like Coke’s Odwalla juice brand, Sokenbicha bottles don’t tout the corporate parent’s name.

By the Way, What is Sokenbicha?

According to the WSJ, “Sokenbicha in Japan is a slightly bitter-tasting brew, a mix of 15 ingredients such as loquat leaves and azuki beans. Coke reformulated the drink for the U.S. market by eliminating exotic ingredients that troubled regulators, such as an herb called lizard’s tail. Coke also slightly tweaked the taste for American palates. Sokenbicha’s name – Chinese for ‘refreshing healthful beauty tea’ was kept intact to evoke its Asian roots.”

Positive Innovation Leadership

Coke has taken a positive step in establishing new product innovation by setting up it VEB to facilitate innovation. This is a step in the right direction, and fulfills a fundamental requirement for new product innovation that people like me who study innovation daily expound – set up an innovation team separate from traditional normal daily corporate operations that also has a separate budget and reporting relationship to the CEO.

But why buy outside innovation?

Theory 1: Large Companies are Risk Adverse

In my opinion, it is a shame that large food companies like Coke default new product innovation (at least some) to smaller company innovation teams. I believe it represents the traditional concept of managing new product development and marketing with risk adverse strategies so that they can “protect the brand value."

But that is certainly not what Apple continues to do – lead innovation! This philosophy also explains the focus in most food companies on “line extensions.” And it also explains why people in their 50s buy Coke and Pepsi stock for their retirement vs. younger people who buy stock in innovative companies such as Apple.

Theory 2: Most Companies Avoid Setting up Independent Innovation Teams

I believe food and beverage companies don’t set up innovation teams because they flat out don’t know how to do it, many consultants don't know how to do it, and the CEOs don’t want to step up to the plate and do it. Instead, CEOs authorize their new product development and marketing teams to contact “recipe factories” to "Wow" them with 50 new recipes (not products) at elaborate "dog and pony food shows."

Some Companies Do Understand Innovation and Its Rich Rewards

On the positive side, some companies embrace new product innovation and reap its rich rewards. I have been working with one company in an industry that many have written off as impervious to innovation. Fortunately for them, they have found unique product innovation could catapult them into the leadership position of their market segment.

 Please contact me at dsuderman@foodbevbiz.com or follow the Food Innovation Institute website (www.foodbevbiz.com) for more information on our 2011 Food Innovation Workshops.

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