Procter & Gamble – Using Open Innovation to Become a World Class Innovator

Note: This is part of a series of posts discussing The Innovation Matrix. See this post for a description of the full model and what can be done with it.

We can use The Innovation Matrix to help us understand how the innovation capability of firms evolves over time. A great case study in this regard is Procter & Gamble. Starting from the late 1990s, this is the path that they’ve travelled:

In the late 1990s, their innovation program had lost its way. Successful product innovation was at the centre of their competitive strategy, but their performance had been slipping. P&G had reviewed their Research & Development strategy and increased their budget for the five years leading up to 1999, even though they already had one of the largest R&D budgets in the world.

The problem was that the increased R&D spend didn’t improve their performance – a classic case of Innovation Commitment increasing without an equivalent increase in Innovation Competence.

By 1999, R&D expenditure as a proportion of sales had increased from around 4% to nearly 7%, new product success rates were stuck at 35%, P&G had developed a huge collection of patents, but fewer than 10% of them were being used in actual products. The last one is the fact that still blows me away. The outcome of this was a drop in the P&G stock price from $118 per share to $52.

At this point, P&G was Bewildered. They were sinking a huge amount of resources into innovation, but they were not getting a very good return at all on this investment.

Their response to this state of affairs is well documented now – they initiated the Connect & Develop program, which was designed to use open innovation to improve their innovation outcomes.

The interesting thing here is that this wasn’t just another increase in Innovation Commitment – P&G’s first move was actually to decrease their innovation infrastructure. They significantly reduced their R&D spend, they changed their innovation metrics and they cut back on activities that weren’t leading to the kinds of outcomes they needed.

The next step was to use Connect & Develop to get more ideas out into the world – one of their major weaknesses previously. As they did this, they moved into the Fit for Purpose category. P&G got better at executing ideas, and they were learning about how to use their resources more effectively within the new open innovation approach.

The outcome of that learning was a diagonal move into the World Class Innovator category. Once they consolidated their learning, they reinvested money into innovation and improved their idea selection process, increasing their Innovation Commitment. They also started to come up with breakthrough ideas again – such as Swiffer. Their Innovation Competence took another jump forward.

In an interview with Stefan Lindegaard, Chris Thoen of P&G outlines some of the outcomes from the Connect & Develop initiative. Some of these stats come from him, while others come from other sources:

• They have extensive research networks (both proprietary and open ones) that that regularly lead to the development of new ideas.
• The percentage of patents in use in products has increased from less than 10% to better than 50%.
• Their new product success rate has increased from 35% to better than 50%.
• The percentage of new P&G products that include elements developed outside of the firm has increased from 15% to over 35%

The end result is that Procter & Gamble is now considered to be one of the most innovative companies around, and is certainly a world leader in using open innovation.

This case illustrates a couple of important points about The Innovation Matrix:

• You can’t become a World Class Innovator in one jump. The dangerous thing about a lot of the case studies that we hear about is that they often make it sound as though highly innovative firms were either born that way, or that they were improved their innovation capability very rapidly to become world class. Neither is true. Becoming a World Class Innovator is always a process – it takes time and effort, and multiple steps.
  If things go well, you can move up diagonally – when an increase in support for innovation is matched by an increase in innovation outputs – the ideal outcome. Nevertheless, it will require the patience and focus to make multiple moves to improve.
• If you’re Bewildered, a step backwards can help. When things aren’t going well, it doesn’t make sense to just increase what you’re currently doing. Instead of spending more again on R&D, Procter & Gamble instead cut it. What they realised was that they were not effective all the way through the idea management process.
  
  They were generating TONS of ideas in 1999 – they had one of the largest patent pools in the world at the time. The places they had difficulty were in selection and diffusion. They would only pursue new product ideas with the potential to be $1 billion businesses – so they cut a lot of promising ideas. Connect & Develop enabled them to bring these ideas to market in collaboration with partners that better equipped to deal with the relatively smaller returns.
  This also led to more experimentation – no one expected Swiffer to become as big as it did. This is an idea that almost certainly would have been patented but then killed in the old system. These moves improved both their selection and their diffusion processes.
  None of this would have been possible without that first backward step.

I’m going to work on more case studies like this, because it’s critical to gain an understanding of how firms move through The Innovation Matrix. Such an understanding will help us figure out the best routes to take, and the best tools to use in different circumstances.

The value of that first step backwards if you’re Bewildered never occurred to me until I started to think about the Procter & Gamble case in more detail.

Stay tuned for more thoughts about how to use The Innovation Matrix to improve your innovation capability.

Note: most of the facts here came from two papers on P&G – one by my colleagues Mark Dodgson, David Gann and Ammon Salter, and the other by P&G employees Larry Huston and Nabil Sakkab.