Yesterday I received my copy of the Working Knowledge series from Harvard Business School. Larry Huston and Nabil Sakkab, both executives for P&G., wrote one of the articles, “P&G’s New Innovation Model.” The authors note that, by the year 2000, the challenge for P&G of growing organically by 4 to 6 percent each year meant the equivalent of building a $4+ billion business annually. They note that P&G was able to meet those top-line growth challenges in the past by building global research facilities and retaining the world’s best talent. Yet, the authors indicate that by the year 2000 P&G recognized it could not support the necessary growth using the “invent-it-ourselves” model, what I’ve previously termed self-oriented innovation.
The company lost half its market cap as its stock slid from $118 to $52 a share, and it became clear P&G could not sustain top-line growth. At that same time, the CEO of P&G, A.G. Lafley, made it the company’s official goal to acquire 50 percent of P&G’s innovations from outside sources, embracing open innovation. P&G created it’s connect and develop innovation model as a result. The strategy was to leverage all the outside talent the company could engage using the 7,500 researchers and support staff employed by P&G. Huston and Sakkab summarize the challenge as follows:
“As we studied outside sources of innovation, we estimated that for every P&G researcher there were 200 scientists or engineers elsewhere in the world who were just as good—a total of perhaps 1.5 million people whose talents we could potentially use. But tapping into the creative thinking of inventors and others on the outside would require massive operational changes. We needed to move the company’s attitude from resistance to innovations “not invented here” to enthusiasm for those “proudly found elsewhere.” And we needed to change how we defined, and perceived, our R&D organization—from 7,500 people inside to 7,500 plus 1.5 million outside, with a permeable boundary between them.”
The authors indicate that connect and develop has lowered R&D investments as a percentage of sales by increasing R&D productivity nearly 60 percent, and nearly doubling the innovation success rate.
Businesses benefit from clearly understanding which of their innovation practices are self-oriented in origin. A recent survey by Booz, Allen, Hamilton, “Money Isn’t Everything,” used the R&D-to-sales ratio as the measure of how much real spending companies do on R&D and what their return is on that investment. One of the most interesting points made in the study is that “when a company is seeking to grow through innovation, it’s more important to develop a robust business model and good cross-functional capabilities than to boost the R&D budget” (p. 6). The Booz, Allen, Hamilton research suggests the following lesson for companies interested in leveraging their own R&D efforts by connecting with resources from outside their company.
Develop more organizational ways to engage ideas from outside the corporation and encourage dialogue with the individuals or groups offering them.
It looks like P&G offers a good model of how this approach works.
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