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What is the reason for success of P&G business and that the company is so competitive? The competitive advantage resides not in a firm's product but in its competencies. (Hamel and Prahalad, 1994) In the core of the organization's ability to use its assets to perform value creating activities in case of P&G there are such strengths like consumer understanding, brand building, go-to-market capability, scale and innovation. The company sales growth in the past nine years was due to the launch of new brands and new or improved product innovation. The important part of this success is the result of the way how the innovation is managed and how the work of R&D department is organized in P&G.
Previously before the year 2000 P&G was using traditional invent-it ourselves innovation model with global research facilities and best talent in the world. The company implemented incremental changes improving collaboration between marketing and R&D, tightening go-to market criteria and strengthening product portfolio management, but it did not listen to and learn enough from the outside world. The explosion of new technologies outside the company was putting pressure on its innovation budgets. The R&D productivity and innovation succession rate had levelled off as the percentage of new product launches that met financial aims stagnated at about 35%.4 That was the result of operating with a closed innovation system. At that moment the company understood that the important innovations were increasingly being developed at small and mid-size entrepreneurial companies, university and government labs and even the individuals were ready to license and sell their intellectual property. It was evident that the external connections could be a source of highly profitable innovations. That was the shift in the innovation environment and the strategic management had to appropriately adapt, integrate and re-configure internal and external organizational skills in order to use the dynamic capability as a source of competitive advantage. (Teece and Pisano, 1994) The decision was to reinvent the company's innovation business model. As in the model of open innovation the solution was to use the external ideas as well as the internal ideas to advance the technology. (Chesbrough, 2003)
A.G. Lafley, a newly appointed CEO at that time, had put the aim of acquiring 50% of all the innovations outside the company. But the strategy was not to replace the skills of 7500 R&D staff and researchers but to better leverage them. The challenge was to access the external resource of 1.5 million researchers around the world working in the same 150 areas of science and technology and to change the culture within P&G to encourage searching for innovations outside the company.
P&G created its own innovation model called "Connect and Develop". It is not the same as just outsourcing innovation by contracting with the outsiders to develop innovations for the company for a lower cost. In contrast it is about searching for the nice ideas and bringing them in to enhance and capitalize on internal capabilities of the company. (Huston and Sakkab, 2006) In order to make this model work it is important to stick to the carefully defined targets in searching ideas and products. First of all, the company looks for the ideas, working products, prototypes or technologies and products that have some degree of success and customer interest. Secondly, the focus is on those of them that would benefit from applying companies capabilities like technology, manufacturing, purchasing, marketing, distribution and other. And consequently, the third target is to search for proven ideas in the areas of company competence like personal hygiene, household-cleaning products, snacks and beverages, pet nutrition, prescription drugs, fragrances, cosmetics and many other out of 150 science areas of company interest including materials, biotechnology, imaging, nutrition, veterinary and even robotics. But the point here that the company focus idea search not on the problems it finds interesting but on those problems that fulfils the consumer needs and therefore will drive the growth of the company brands. P&G invests $350 million a year in consumer and market research, more than any company in the world.2 Also the company is looking for those new products or concepts that can help it to take the advantage of existing brand equity. P&G is the leader in brand-building in its industry with 23 billion-dollar brands and 20-half-billion-dollar brands.2 For example, P&G was not the pioneer in disposable napkins or in biological washing powders but theirs brands like Pampers and Ariel dominate the market. (Trott, 2008, p.375) Resourcing of the innovation projects in P&G depends on how they contribute to short-term and long-term business goals and the decisions to accelerate or cut the budgets are based on resource consumption and their market potential, and in case of failures the innovation leaders in the company see them as opportunities to learn. (Ram Charan, 2008)
As a result of new innovation model the company R&D productivity increased by nearly 60% and the R&D investment as a percentage of sales was down from 4.8% in 2000 to 2.6% ($2.044 bln.) in 2009.2
It means that the innovation success rate more than doubled but the cost of innovation went down.
In 2008 company was introducing new brands and products with the commercial success rate of 50 to 60 percent. (Lafley, 2008) For today more than half of all P&G product innovation includes at least one major component from an external partner.
The role of strategic alliances and collaborations in innovation processes
The innovative capability of the company depends on its absorptive capacity - the ability to recognize the value of new external information, assimilate it and apply it to commercial ends. (Cohen and Levinthal, 1990). Here comes the importance of strategic alliances and collaborations as a source for external information. In P&G this ability can be seen in absorbing the information through its proprietary and open networks. Using them, P&G searches for the ideas in state and private labs, universities and other research institutions; the company taps suppliers, retailers, competitors, development and trade partners, VC firms, and individual entrepreneurs. There are 70 technology entrepreneurs around the world working for P&G, who create external connections by for example meeting with university and industry researchers and organizing supplier networks. They operate in six connect-and-development hubs in the world: in China, India, Japan, Western Europe, Latin America and the United States. Each hub focuses on that products and technologies that are the specialties of its region. The networks of P&G with its suppliers, the top 15 of which have estimated combined number of R&D staff of 50,000, show very effective collaboration. In 2006 there was a 30% increase in innovation projects that were led jointly with the suppliers' researchers. There are cases when the suppliers' researchers work in P&G's labs, and vice-versa, showing the example of what P&G call "cocreation", a better type of collaboration than the traditional joint development. (Huston and Sakkab, 2006)
As Dodgson et al. claim in their research: "P&G strategy for growth through innovation, and innovation through building connections is, therefore, not so new. What are new are the organizational practices and technological media that assist its implementation." As the major new organisational practice the new connect-and-develop business model can be seen itself; and as a part of technological media, there are Internet-based platforms that operate as innovation intermediaries. Such platforms are NineSigma, Innocentive, YourEncore and Yet2.com. Each of them with their own peculiarities and the purpose it was created for, have valuable impact on innovation processes with the real outcome in a form of completed projects, agreements for further collaborations and wide licensing opportunities.
As an example of successful collaboration the case with Pringles can be described. In 2002 P&G was thinking of making the snack Pringles more novel and attractive and there came a great idea of printing pictures and fun texts on each crisp. As the way of printing it could be ink-jetting pictures onto the potato dough, so every crisp would have to be printed as it came out of frying. This process supposed to be very complex, because the sharp images had to be printed in multiple colours upon thousand of crisps each minute, when they were still at a high humidity and temperature. And the hard thing was to develop edible dyes that could meet these needs. Previously the company would have spent a lot of money and time just to develop the workable process. Instead of doing so, company was looking for ready solution of this problem throughout the global network of individuals and institutions. P&G discovered a ready-made solution through the European network: in Bologna, Italy, there was a small bakery headed by university professor who also had a baking equipment production. His invented ink-jet method for edible images on cakes and cookies was the key for solving the problem. The technology was rapidly adapted and Pringles Printers were launched in 2004 from concept to a product in less than a year. Over the next two years North America Pringles business achieved double-digit growth. (Huston and Sakkab, 2006)
SUGGESTIONS AND CONCLUSION
2. P&G 2009 Annual Report, accessed on 13.01.2010. http://www.pg.com/en_US/downloads/investors/annual_reports/2009/PG_2009_AnnualReport.pdf