Saturday, June 24, 2006

Connect & Develop Innovations the P&G Way

Instead of formal alliances to find the best and brightest research and innovations, Procter and Gamble (P&G) now circulates problem stories amongst a network. The sources of innovation in the network are technology entrepreneurs around the world, suppliers and open networks (like NineSigma, YourEncore [retired scientists and engineers], and [an online marketplace for intellectual property exchange]). The problem stories are presented to these groups, and anyone with an answer can respond--and usually do, quickly. The traditional R&D department on site doesn't have the answers, but among the myriad small and medium businesses, someone does.
This strategy was developed to meet the goal of 50% of innovations coming from outside the company--a seemingly strange strategy for an industry-dominant research-based company! However, the goal was not to replace internal innovators, but to supplement. The strategy is called "connect and develop." It's part of a movement called "open innovation" by some, which allows the boundaries between internal and external knowledge to become porous in pursuit of market advances (see Henry Chesbrough "The Era of Open Market Innovation," Sloan Management Review, Spring 2003).
The nuts and bolts of execution depend upon the top 10 customer needs, which P&G identifies. Those needs are turned into "science problems" which are sent out to the network for solutions. When more innovation is sought, P&G experts analyze the products that appear next to their products on the shelves--like competitor's brands of toothpaste. They then pose a "science problem" to the network about a feature they'd like to adopt from that rival product. The science problems are ways of simplifying big questions so that knowledge can be easily transferred (see Geoff Walsham see “Knowledge Management: The Benefits and Limitations of Computer Systems," European Management Journal, 19(6), 2001.).
P&G's main cultural stumbling block was the "not invented here" syndrome, which made it hard for R&D to capitalize upon the solutions the network offered. Innovation diffusion had to be supported from the highest levels of the company, and jobs had to remain secure and interesting while the network solved some of the many problems P&G could think up. By expecting change and creating it instead of reacting to market shifts, P&G's innovative problem outsourcing succeeds. But don't listen to me. Listen to the company's vice presidents:
"The model works. Today, more than 35% of our new products in market have elements that originated from outside P&G, up from about 15% in 2000. And 45% of the initiatives in our product development portfolio have key elements that were discovered externally. Through connect and develop - along with improvements in other aspects of innovation related to product cost, design, and marketing - our R&D productivity has increased by nearly 60%. Our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a percentage of sales is down from 4.8% in 2000 to 3.4% today. And, in the last two years, we've launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company's stock collapse in 2000, we have doubled our share price and have a portfolio of 22 billion-dollar brands." (see Larry Huston and Nabil Sakkab, “Connect and Develop,” Harvard Business Review, 84 (3), 2006).

[Summary Prepared by: Caroline]

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