Gleaning Fresh Ideas from Your Board Members or Franchisees

Firms invest significant resources to come up with innovative new products. Two new studies suggest less costly alternatives: franchisees and outside directors.

Based on the research of Raji Srinivasan

What do the Big Mac and the drive-thru window have in common? They’re both game-changing inventions that first came to McDonald’s Corp. from outside normal corporate channels. Franchisees originally developed them.

To Raji Srinivasan, a marketing professor at Texas McCombs, they’re examples of crucial sources of innovation that many companies don’t try to tap. Tech firms spend freely on R&D, joint ventures, or acquiring startups to stoke their new-product pipelines. But other industries get ideas from less costly places, she says. They get them from players who have one foot inside and another foot outside a corporation: franchisees and independent directors.

Both sorts of entities are affiliated with a company, yet separate at the same time. “You can get your innovations from people who are at the boundary of the firm, not completely outside it,” she says.

In a pair of new papers, Srinivasan explores how such players can pump up a company’s levels of innovation, and how companies can encourage them to do even more.

Borrowing What Works in Other Industries

Key to the effect, she says, is market intelligence. Consumer goods companies don’t innovate in bold leaps like iPhones, Srinivasan says. They evolve in small tweaks, like Heinz’ recent announcement that it would start marketing a blend of mayonnaise and ketchup. Such incremental innovations make up 97 percent of new products from food and beverage firms.

Those tweaks are primarily consumer-driven, she says. “You’re competing for shelf space, and you have to shake them up with new products when they come to the store. But they’re generally looking for small changes, not breakthrough products. So you’ve got to get information from consumers about what they want.”

That’s where outside directors might help. Many serve on two or more corporate boards: like Colgate-Palmolive CEO Ian Cook, who’s also a director of PepsiCo. He can report on consumer trends in soaps and toothpaste and potentially apply them to sodas and snacks.

The more boards someone serves on, she suspected, the more innovations they might have to suggest. “The more well-connected you are, the more information you have, and the more information you bring into the system,” Srinivasan says. “You can say, ‘This company has done that, we could try to do the same.”

To test her theory, along with colleagues Stefan Wuyts of Koc University in Istanbul and Girish Mallapragada of Indiana University, she analyzed 30 food and beverage firms from 1997 to 2002. They measured the intensity of connections a company’s board members had with other companies and compared it with that company’s new product introductions.

Firms with low levels of interlocks, they found, introduced an average of only eight new products a year. Those with high interlock levels, by contrast, added 18.

Innovation got the most significant boost, they found, when a company’s CEO or other top management had marketing backgrounds. Such leaders, Srinivasan says, “are better able to run with the information when they get it.”

Listening to Front-Line Franchisees

While board members propose new products from the top, franchisees create them from the bottom — out of day-to-day contact with customers. McDonald’s franchisee Jim Delligatti needed a sandwich to compete with Burger King’s Whopper when he invented the Big Mac in 1967, and his Pittsburgh-area sales went through the golden roof.

“Franchisees understand the market better,” Srinivasan says. “They know more information about trends and tastes. They’re idea-generation labs.”

They also have hands-on knowledge of operations, which helps them experiment with processes as well as products. Steve Bigari, a McDonald’s franchisee in Colorado, shaved 30 seconds off the average drive-thru order by routing it to a call center — a trick the chain later adopted nationwide.

“The franchisee has to pay a percentage of their sales in royalties, so they’re always looking for ways to improve their net profits,” Srinivasan says. “That gives them the incentive to come up with process innovations.”

If that’s so, then companies which franchise more should also innovate more. In a second study, Srinivasan and Girish Mallapragada of Indiana University examined 38 U.S. restaurant chains over 13 years. They compared the percentage of franchised units in each chain with its numbers of innovations in that period.

They found that a 33-percentage-point increase in franchised units corresponded with a 16 percent jump in product innovations and 10 percent for processes. Concludes Srinivasan: “Managers should look to franchisees as a source of innovation.”

Adding Innovators to Your Board

As an alternative to seeking novelty through partnerships and acquisitions, Srinivasan says, companies can look within their own networks.

Public companies, she notes, are already required to have at least half of their directors be outsiders. When they’re recruiting those directors, they often seek skills like accounting or governance. They might also look for innovation.

“Try to mix in directors from outside industries that are complementary to yours, with a view to increasing new product introductions,” Srinivasan says.

She suggests, too, that those board agendas include discussions of potential new products by formally soliciting ideas from outside directors.

Likewise, systems like restaurants can create channels to ask franchisees for input. It’s particularly valuable for chains that have franchised for a long time. They’re less prone, she found, to adopt innovations from franchisees.

“It’s like courtship versus a long marriage,” Srinivasan says. “Over time, these relationships fray, and companies get less open to ideas.”

The larger lesson is that companies often have more sources for new ideas than they realize — and they need to take advantage of them. “When you have to deal anyway with directors and franchisees, it makes sense to think about their effects on innovation,” she says. “Innovation is like a spigot. You can turn it off or turn it on.”

“Innovativeness as an Unintended Outcome of Franchising: Insights from Restaurant Chains” was published in Decision Sciences.

“Corporate Board Interlocks and New Product Introductions” was published in the Journal of Marketing.

Story by Steve Brooks