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Large company innovation gone wrong: Kashi vs. Kellogg's

Cereal-maker Kellogg's tried to expand its market by acquiring a vibrant upstart. Things worked well until corporate antibodies took over.

Innovation and startups are important topics in my discussions with senior business leaders on CXOTalk. For many large companies, startups can jump start innovation and bypass corporate antibodies that favor stability over growth.

Although the value of startups to established firms is clear, managing the relationship can be fraught with difficulty. In this guest post, my colleague, Lisbeth Shaw, examines how cereal maker, Kellogg's, stumbled in its relationship with organic upstart Kashi. The lessons are instructive for both startups and large company executives partnering with each other.

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Several CXOTalk guests have explored how large companies innovate to refresh their products and enter new markets. Some of these companies acquire a market-leading startup or leading niche player to expand into new markets or feed their innovation pipeline.

Although acquisition sometimes works extremely well, the results often fall short because larger companies tend to force their systems, processes, and culture onto the organizations they acquire. The net effect - a loss of creativity, reduced speed to market, and weakened relationships with the customer.

Top enterprise venture capitalist, Bruce Cleveland, compares this process to a host sending antibodies to attack the innovation:

Once we get to be a company of a certain size and magnitude, everything in that company exists to preserve status quo. It's an anathema to have innovation. Innovation means you disrupt everything; it's unstable, non-predictive.

[T]hat's why you end up having a challenging time doing in-house innovation.

Kellogg's acquisition of organic cereal company, Kashi, illustrates Bruce Cleveland's point. The Wall Street Journal describes how corporate antibodies inside Kellogg's eventually faltered on the company's strategy for Kashi, resulting in a 35% market share loss to newer upstarts.

During the first eight years following the acquisition, Kellogg's allowed Kashi to operate with great autonomy. Kashi's sales grew 42% annually on a compound basis, to about $600 million in 2008, helping Kellogg's to reclaim its leading position in the US cereal market.

What was Kashi's secret for success?

Kashi made decisions about suppliers, product roll outs and pricing using teams of three or four people, allowing "the business to be very authentic and to move very fast." In about 12 months, Kashi launched over 15 products, many of which became hits.

When they acquired Kashi, Kellogg's carefully placed younger people in management positions, so the larger company would "become Kashi, rather than having Kashi become Kellogg's."

As part of this hands-off policy, Kellogg's also allowed Kashi to remain in La Jolla, California rather than move to Kellogg's headquarters in Michigan. Kellogg supplied resources to help Kashi grow but generally maintained a hands-off policy.

This approached worked well until 2007, when Kellogg's stopped giving Kashi the freedom to operate independently.

Kashi / Kellogg's - innovation gone wrong

In reducing Kashi's autonomy, Kellogg's forced its own complicated processes on the smaller company, making it difficult for Kashi to keep pace with rivals and reducing its ability to understand what customers wanted.

Operating as a Kellogg's brand, Kashi expanded into Kellogg's traditional markets, channels, and products. It also started including GMO and non-organic ingredients, losing the trust of Kashi's traditional customer base and marketing channel.

By 2013, Kashi had relocated from La Jolla to Battle Creek, MI, home of Kellogg's. Not only did Kashi see a 21% decline in revenue, but key employees also left.

Today, Kellogg's is trying to repair the Kashi brand and recapture its former market position in the organic and non-GMO sector. The turnaround effort started in the summer of 2014, with the decision to move Kashi back to California.

Although relocating Kashi and attempting to rehire lost Kashi employees are positive steps, accomplishing the goal will require Kellogg's to invest in Kashi, and grant it real autonomy.

The real question is whether Kellogg and its shareholders have the fortitude to wait while Kashi proves to customers, channels, and employees that the old company is back, better than before.

Rebuilding an organization and culture requires patience and time, something shareholders usually don't have.