A majority of senior executives know that fostering innovation is a key strategy in building and sustaining competitive advantage. While most organizations are committed to nurturing innovation and instilling innovative practices, only a small number of them have been successful in building new innovation models that significantly improves the effectiveness and efficiency of R&D and product commercialization. One of them, Procter & Gamble, is worthy of study because of its cutting-edge approach to reigniting its innovation engine.
Over the past 100 years, P&G has led the way in consistently developing innovative products and creating new product categories. Much of this success has been attributed to market-leading R&D expertise and spending, based on a rich understanding of consumer and customer needs.
Despite a strong track record, P&G began experiencing problems with their R&D engine in the 1990s. Like many of its peers, P&G began experiencing a number of problems including diminishing returns on R&D spending and a difficulty in generating breakthrough innovation. Moreover, the Company began to notice that consumer products innovation was increasingly occurring in small to medium sized centers in a variety of geographies, out of sight of most large scale R&D efforts.
Search and Reapply
During the early part of this decade, P&G management looked at how R&D was impacting the top and bottom lines. From a revenue perspective, a $60 billion top line business that competes in mature categories needs to generate $1.5 billion in new revenue each year just to achieve 2.5% GDP growth. Price increases and acquisitions were risky strategies, leaving product innovation as the major lever. However, the ability to launch blockbuster products like Tide or Pampers was a thing of the past Furthermore, at almost 5% of total sales, R&D expenditures of approximately of $3 billion had become a significant cost center. Fundamentally, a new approach to innovation was called for.
The result was the Connect & Develop initiative. Connect & Develop is a collaborative and global innovation network and process that dramatically expands the search and reapplication of new product innovations to P&G's product portfolio and customer relationships. Leveraging a large global network makes a lot of sense by: delivering global scale; enabling access to non consumer goods best practices and; more tightly aligning internal R&D to the industry ecosystem.
Connect & Develop radically retooled how P&G fostered innovation and implemented its fruits through launching new products and creating new categories. Basically, Connect and Develop is about finding good ideas in universities, start-ups, independent labs and suppliers, vetting them against business requirements and consumer needs and then leveraging them back through internal core capabilities of purchasing, marketing and R&D.
The results have been compelling. Between 2004 and 2006, Connect and Develop delivered over 100 new products, created new categories (e.g., Mr. Clean Magic Eraser) and accelerated the commercialization of a host of other innovations. According to a 2006 Harvard Business Review article, Connect & Develop delivered 35% of all successful innovations, up from 15% pre-rollout. As well, there have been significant efficiency gains around commercialization. R&D productivity rose by 60% while spending as a percentage of sales had fallen by 30%.
Making it Work
How did P&G recast and implement Connect and Develop? Simply put, P&G-
Lessons for Others
- Raised innovation to a key corporate priority, with a senior leadership mandate (VP Innovation and Knowledge) and ambitious metrics. P&G targeted 50% of innovations to come via Connect & Develop.
- Empowered "technology entrepreneurs" to find and investigate global innovations (third-party companies, patent databases, academia, trade fairs, suppliers etc) and then leverage the most suitable ones back through the organization
- Pushed the culture from mere acceptance to active championing of the new approach, including the development of collaboration and reward systems that supported the change required
- Focused on continuous improvement while retaining a sense of pragmatism in implementation
The Connect and Develop model provides many lessons for other companies. Beneficiaries could include:
- Organizations in fast moving and knowledge-intensive industries
- Companies that sell globally but have centralized R&D
- Firms that do not have direct and consistent access to end users and buyers
- Enterprises that have a high degree of vertical integration
Copyright 2009 Quanta Consulting Inc.
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