Excerpted from Strategy + Business, “P&G’s Innovation Culture”
by A.G. Lafley, Autumn 2008
The heart of a company’s business model should be game-changing innovation. This is not just the invention of new products and services, but the ability to systematically convert ideas into new offerings that alter the very context of the business.
A number of game-changing innovators are operating today, including such household-name enterprises as General Electric, Nokia, Lego , Apple, Hewlett-Packard, Honeywell, DuPont, and Procter & Gamble.
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Procter & Gamble CEO A.G. Lafley has worked hard to make innovation part of the daily routine and to establish an innovation culture.
Lafley and his team preserved the essential part of P&G’s research and development capability — world-class technologists who are masters of the core technologies critical to the household and personal-care businesses — while also bringing more P&G employees outside R&D into the innovation game.
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The critical factors . .. include keeping a laser-sharp focus on the customer; establishing a disciplined, repeatable, and scalable innovation process; creating organizational and funding mechanisms that support innovation; and demonstrating the kind of leadership necessary for profitable top-line growth as well as cost reduction.
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When I became CEO of Procter & Gamble in 2000, we were introducing new brands and products with a commercial success rate of 15 to 20 percent. In other words, for every six new product introductions, one would return our investment. This had been the prevailing ratio in our industry, consumer packaged goods, for a long time.
Today, about half of our new products succeed. That’s as high as we want the success rate to be. If we try to make it any higher, we’ll be tempted to err on the side of caution, playing it safe by focusing on innovations with little game-changing potential.
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We sold off most of P&G’s food and beverage businesses so we could concentrate on products that were driven by the kinds of innovation we knew best.
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We also focused on creating a practice of open innovation: taking advantage of the skills and interests of people throughout the company and looking for partnerships outside P&G. This was important to us for several reasons.
First, we needed to broaden our capabilities.
Second, building an open innovation culture was critical for realizing the essential growth opportunity presented by emerging markets … the days of achieving automatic growth by entering new markets are essentially over.
A third reason for focusing on open innovation had to do with fostering teams. The idea for a new product may spring from the mind of an individual, but only a collective effort can carry that idea through prototyping and launch.
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“The Consumer Is Boss”
In the early 2000s, our people were not oriented to any common strategic purpose. We had a corporate mission to meaningfully improve the everyday lives of the customers we served. If 15 seconds with a deodorant or two minutes with a disposable diaper have made a small part of your life a little bit better, then we’ve made a difference.
We expanded our mission to include the idea that “the consumer is boss.” In other words, the people who buy and use P&G products are valued not just for their money, but as a rich source of information and direction. If we can develop better ways of learning from them — by listening to them, observing them in their daily lives, and even living with them — then our mission is more likely to succeed.
We began by clearly and precisely defining the target consumer for each brand, and identifying subgroups of consumers for some brands.
We focused on a few big launches and on innovation that was meaningful to consumers, including distinctive packaging, provocative marketing, and delightful in-store experiences. We also took advantage of our global scale and supply chain to reduce complexity and enable a significantly lower cost structure.
We experimented with new ways to build social connections through digital media and other forms of direct interaction. We designed Web sites to reinforce consumer connections, to better understand consumers’ needs, and to experiment with prototypes.
For example, we show people digitally created alternatives in an onscreen virtual world. If the consumers we’re talking to have an idea, we can redesign it immediately and ask them, “Do you like that better? How would you use it?” It allows us to iterate very quickly. In effect, we are building a social system with the purchasers (and potential purchasers) of our products, enabling them to codesign and co-engineer our innovations.
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Integrating Innovation
We keep refining our product-launch model — from idea to prototype, to development, to qualification, to commercialization.
Scalability is critical at a company the size of Procter & Gamble. If we can’t scale our processes, they don’t have much value for us. In fact, scalability is often the justification for our existence as a multinational, diversified company.
In fostering this approach and building the social system to support it, the P&G leadership has had to be very disciplined. For instance, we are now set up to see many more new ideas. Last year, the business development group reviewed more than 1,000 external ideas. This year, they’ll see 1,500. We tend to act on about 5 to 7 percent of them.
In the past. Innovation used to travel primarily from developed markets to developing markets. Today, more than 40 percent of our innovation comes from outside the United States.
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The Talent Component
P&G used to recruit for values, brains, accomplishment, and leadership.
We still look for these qualities, but we also look for agility and flexibility. We believe the “soft” skills of emotional intelligence — fundamental social skills such as self-awareness, self-fulfillment, and empathy — are needed to complement the traditional IQ skills.
Curiosity, collaboration, and connectedness are easy to talk about but difficult to develop in practice. We have tried to carefully identify and ease out people who are controlling or insecure, who don’t want to share, open up, or learn — who are not curious. And in the process, we have discovered that most of our people are naturally collaborative.
We give our most promising people time in both functional and line positions, because we think our best leaders are great operating leaders and great innovation leaders. We also move people around geographically. We bring people into our Cincinnati headquarters from around the world, and we make a point of moving our headquarters people to our global businesses. Almost all of us have worked outside our home region. Almost all of us have worked in developing or emerging markets. And almost all of us have worked across the businesses.
We have also recently brought in people from outside to enable and stimulate creative thinking. This was unprecedented for a company that has traditionally hired only entry-level people and promoted from within.
Virtually every leading practitioner of our new design capability came from the outside as a mid-career hire. They arrived from BMW, Nike, and some of the best design shops in the world.
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The result of P&G’s focus on innovation has been reliable, sustainable growth. Since the beginning of the decade, P&G sales have more than doubled, from $39 billion to more than $80 billion; the number of billion-dollar brands, those that generate $1 billion or more in sales each year, has grown from 10 to 24; the number of brands with sales between $500 million and $1 billion has more than quadrupled, from four to 18.
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Full article:
http://www.strategy-business.com/press/article/08304?pg=all
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