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In recent times, the world economy has been experiencing extraordinary transformation in technological advancement, and demand for more sophisticated and novel products. Stable, domestic competition in the past has been replaced by intensified global competition. Sales growth and survival of both large and small companies across many industries are driven by technological innovation. Furthermore, competitiveness depends on organizations' absorptive capacity of knowledge from the external environment. Nowadays, several companies are collaborating with competitors, customers, suppliers and governments, and are seizing the opportunity to exchange new knowledge through cross-national collaborative arrangements including Procter and Gamble (P&G). The company had been ranked twelve in the list of fifty most innovative companies by Business Week (Business Week, 2009). Founded in 1837 and based in Ohio, Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. It has its operation in 80 countries and markets over 300 brands globally. The company functions in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. (P&G official website: www.pg.com).
The following essay discusses the following realms with reference to the company's innovation strategy.
Role of strategic alliances and collaborations in innovation processes and;
Intellectual Property (IP) strategy and management.
2. Role of strategic alliances and collaborations in innovation processes
P&G operates in an extremely competitive global market. As a result, the company has to constantly come up with novel ideas to operate globally. The company had always benefitted from its knowledge produced in-house and thus operated with a closed innovation system until 1990s when it was faced with a massive decrease in its sales growth. This was explained by the company as an outcome of inability to keep up with customers' changing demand and acknowledged the need to increase their innovative activities significantly to improve profit margin (Dodgson, Gann, Salter, 2006). The fast pace of complex scientific discovery makes it challenging for companies to have all the answers to problems in-house. By the year 2000, P&G realized, apart from its 7,500 in-house researchers there were 1.5 million talents outside the organization(Huston, Sakkab, 2006; page: 4-5/11). Moreover, there were small and medium businesses that were pursuing important innovations. Thus, in the year 2002, the company reinvented it innovation business model and came up with a radical idea of "Connect and Develop" (C&D) (Getty, 2007).
2.1. Connect and Develop
The main objective of the program was to acquire 50% of all innovation from outside the company without abandoning the "R" in R&D. Hence, P&G built a wide network of "outside contacts" that included government and private labs, academic and research institutions, suppliers, individual entrepreneurs, etc. This network has two broad categories and several elements in each:
Yet2.com (Huston, Sakkab, 2006; page: 6-8/11)
2.1.1. Proprietary Network
Technology Entrepreneurs: P&G's network of seventy of technology entrepreneurs are based in six connect & develop hub in China, India, Japan, Western Europe, Latin America, and the United States who seek out individuals and organizations doing interesting projects. These entrepreneurs work with the business leaders of P&G to determine needs of customers or problem areas of the company and link them to promising product ideas and innovative technologies. Entrepreneurs in each hub focus on finding products and technologies that are specialties in that specific zone. For example, China hub looks in particular for new high-quality materials and cost innovations. It was a technology entrepreneur in Japan who came up with what has become the Mr. Clean Magic Eraser (Huston, Sakkab, 2006; page: 4-5). This is illustrates in the figure below.
Source: Harvard Business Review
Suppliers: Nabil Sakkab (2002), P&G's senior vice president of R&D considers their network of supplier top fifteen suppliers "Critical Supplier Partnership". Hence, P&G created an IT platform where technology briefs can be shared with suppliers, who may have the solution for specific problems. Researchers from R&D department of both parties work together in each others labs which enhance the customer-supplier relationship, allow knowledge flow, and thus lead to innovation. Some parts of P&G have taken this approach even further and established what is known as Master Collaboration Agreement where team of three suppliers work with P&G and share information regarding a specific project. This provides P&G and the collaborators intellectual property and exclusivity rights over a range of principles and saves time that would otherwise have needed to negotiate Joint Development Agreements on individual projects (Sakkab, 2002; page - 42).
2.1.2. Open Network
NineSigma: NineSigma is a firm which connects several companies with science and technology problems, with universities, government and private labs, and consultants that can provide solutions. The firm prepares technology brief for the company is question and circulates it among several solution providers. Any solver can present non confidential proposal which NineSigma communicates to the client. If the proposal gets approved by the client then NineSigma connects the company and the solution provider, and the project gets inaugurated. By 2006, P&G had communicated over 100 projects to solution providers through NineSigma and among those 45% had lead to agreements (Huston, Sakkab, 2006; page: 6).
InnoCentive: InnoCentive is similar to NineSigma but they provide solution to more narrowly defined problems. For example, if a particular problem can be solved in shorter steps then P&G puts the question to the 75,000 scientists of InnoCentive for proving solutions. InnoCentive's contract scientists include graduate student in Spain, chemist in India, consultant in USA, etc. By 2006, InnoCentive had solved one-third of P&G's posted problems (Huston, Sakkab, 2006; page: 6).
YourEncore: This business was established by P&G in 2003; however, currently it operates independently. There are more than 800 experienced retirees including scientists and engineers who work in contacts for P&G. A retiree with relevant experience can be contacted trough Your Encore for a specific short-term assignment. This helps P&G to navigate novel ways of problem solving and experiments at a low cost. P&G may even have 20 retirees working for them at the same time (Huston, Sakkab, 2006; page: 7).
Yet2.com: There are web-based systems, a market place for intellectual property exchange. This will be explained further in the next section.
3. Intellectual Property (IP) strategy and management
P&G claims to invest around $2 billion in each year in R&D, owns 34,000 patents worldwide and averages more than one patent a day (P&G official website). This gives them the right of ownership over an invention and has the right to sell the patent, license it, or prevent other from making, using or selling the invention without permission. The company has one of the strongest portfolio of trusted and quality brands which includes PampersÂ®, TideÂ®, ArielÂ®, AlwaysÂ®, WhisperÂ®, PanteneÂ®, Mach3Â®, BountyÂ®, DawnÂ®, PringlesÂ®, FolgersÂ®, CharminÂ®, DownyÂ®, IamsÂ®, CrestÂ®, Oral-BÂ®, ActonelÂ®, DuracellÂ®, OlayÂ®, Head & ShouldersÂ®, GilletteÂ® etc. Therefore, Trademark licensing is a vital component to P&G. The company has collaboration with The Beanstalk Group and Nancy Bailey & Associates; the former is a brand licensing consultancy agency that helps to identifying and developing licensing programs that build upon P&G's three brands: PampersÂ®, AlwaysÂ® and Max Factor; the later has a long-standing partnership with Nancy Bailey & Associates who has been handling licensing for P&G brands for seven years (P&G official website).
Until the 21st century, P&G followed a closed innovation model, thus, neither needed to reach out to others outside the company nor intended to sell their own ideas. However, movement from closed to an open model of innovation made licensing vital to the company's strategy. According to Chesbrough (2003), companies need to commercialize internal ideas to generate value for the organization. One main reason stated by the scholar was, increased mobility of workforce which makes it difficult for companies to control their proprietary ideas and expertise. Besides, P&G like other companies following the same innovation model, follows the structure illustrated in the following figure, where boundary between the company and its external environment is porous (represented by a dashed line), enabling innovations to move I and move out very easily. Therefore, P&G, along with internalizing external ideas, are moving their own ideas outside as well.
Source: Chesbrough, 2003; page - 37.
According to P&G's vice president of R&D, P&G has a world class technical staff and receives around 3000 patents each year, of which, only 10% goes through production. The remaining 90% has huge potential value for the society. As a result, they came up with a new patent strategy where technologies are licensed out five years after patent approval and the revenue is allocated to the business unit which owns the particular patent. This in turn generates more money for the shareholders. P&G's Licensing group looks over four main areas: technology and know-how, donation, trademark and internet commerce (Sakkab, 2002; page - 43).
Yet2.com has been considered to be the company's first B2B equity investment by P&G. This web-based company works as a broker by working with clients like P&G and helping them to write technological briefs explaining the technologies that the companies are seeking or are making available to the external environment. The briefs are then distributed to other businesses, labs and institutions that are part of the network. Yet2.com then introduces both parties to negotiate directly with each other (Huston, Sakkab, 2006; page: 6).
According to George B. Graen (2009), the global financial crash of 9-11-08 has moved the entire structure of corporate stability and ushered in the knowledge era of discontinuous context. Moreover, the financial crisis has been proved to be more treacherous for the inflexible corporations and has established the ground for a new more adaptable model needed for survival (Graen, 2009). Companies that had been making money yesterday are incurring loss today and may go bankrupted tomorrow. Corporations in today's world need to be adaptable to new knowledge and innovation because of the unexpected threats coming from all directions. In order to do so, there is need for new talents. P&G's C&D strategy has made it more flexible and adaptable to change and bring more growth for the company by exploiting the diversity of merits all around the world. For example, the opportunity to leverage suppliers' R&D facilities has proved to be very beneficial for P&G. According to Nabil Sakkab (2002), "the output of this partnership has been terrific. New chemicals have been developed in record time. And machine developments in diaper and feminine protection have been accelerated by having P&G engineers in suppliers' facilities" (Sakkab, 2002; page 5). By the end of year 2006, more than 35% of P&G's products in the market had some component of C+D, by the year 2007 it had grown to about 50% and it has been predicted to continue to grow (Getty, 2007).
It is understood that, in order to be able to absorb knowledge generated in the external environment, a company needs to have a culture that welcomes these promising knowledge and is skilled in project management and project evaluation. Dodgson (2006) stated, P&G uses ICT (computers, internet, communication devices, etc) for data-mining, simulation, prototyping, and visual representation, which supports this strategy of open innovation very well. As a result, by the end of 2006, ratio of R&D to sales went down from 4.8% in 2000 to 3.4%; R&D productivity has improved by 60% and share price has doubled in the market (Huston, Sakkab, 2006; page: 3).
P&G's intellectual property enhances reputation and credibility of the company, generate funds, and high calibre staff and market value.