Case Study P&G’s New Corporate Strategy

CAS E 9 P&G’s New Corporate Strategy: “Connect+Deyelop`

DURING MOST OF the 20th century, the closed- innovation approach was the dominant research and development (R&D) strategy for most leading indus- trial corporations: They tended to discover, develop, and commercialize new products internally. Although this approach was costly, it allowed firms to capture the returns to innovation.

Several factors led to a shift in the knowledge land- scape from closed innovation to open innovation. They include:

The increasing supply and mobility of skilled workers

The exponential glowth of venture capital

The increasing availability of external options (such as spinning out new ventures) to commer- cialize ideas that were previously shelved ‘

a The increasing capability of external suppliers

Together, these factors now force even the larg- est companies, such as AT&T, IBM, GE, and Sony, to shift their innovation strategy toward a model that blends internal with external knowledge-sourcing via licensing agreements, strategic alliances, joint ven- tures, and acquisitions.

In the open-innovation model, a company attempts to commercialize both its own ideas and research from other firms. It also finds external alternatives such as spin-out ventures or strategic alliances to com- mercialize its internally developed R&D As Exhibit MC9.1 shows, the boundary of the firm has become porous (as represented by the dashed line in the right panel), allowing the firm to spin out some R&D projects while “sourcing in” (developing in-house) other promising projects. Exhibit MC9.2 (next page) compares and contrasts open-innovation and closed- innovation principles.

EXHIBIT MC9.1

Closed Innovation vs. Open Innovation source: Adapted from: H. Chesbrough (2003), The area of open innovation,” MIT Sloan Management Review, Spring: 35-41.

Boundary of the Firm

Boundary of

the Firm

4 New Market

Research ‘ – Current

Projects Market Research Projects

:The Market

Research Development

Research Development

379

380 MINICASE 9 1 P&G’s New Corporate Strategy: “Connect+Develop”

EXHIBIT IVIC9.2 Contrasting Principles of Closed and Open Innovation

Closed-Innovation Principles Open-Innovation Principles

The smart people in our field work for us.

To profit from R&D, we must discover it, develop it, and ship it ourselves.

If we discover it ourselves, we will get it to market first.

The company that gets an innovation to market first will win.

If we create the most and best ideas in the industry, we will win.

We should control our intellectual property BP), so that our competitors don’t profit from it.

Not all the smart people work for us. We need to work with smart people inside andoutside our company.

External R&D can create significant value; internal R&D is needed to claim (absorb) some portion of that value.

We don’t have to originate the research to profit from it; we can still be first if we successfully commercialize new research.

Building a better business model is often more important than getting to market first.

If we make the best use of internal and external ideas, we will win.

We should profit from others’ use of our IP, and we should buy others’ IP whenever it advances our own business model.

Source:Adapted from H. VV. Chesbrough (20031, Open Innovation: The flew Imperative for Creating and Profiting from Technoiogyfflaston: Harvard Business School Press).

An example of open innovation is Procter & Gamble’s “Connect+Develop,” or. C+D (a play on research and development, or R&D). Due to the maturing of its products and markets, P&G was forced to look outside for new ideas. P&G is an $80 billion company whose investors expect it to grow 4-6 percent a year; which implies generating between $3 and $5 billion in incremental revenue annually. P&G was no longer able to generate this amount of growth through closed innovation. By 2000, P&G’s closed-innovation machine had stalled, and the company lost half its market value. It needed a change in innovation strat- egy to drive organic growth.

P&G’s Connect+Develop is a web-based interface that connects the company’s internal-innovation capa- bility with the distributed knowledge in the global community. From that external community, research- ers, entrepreneurs, and consumers can submit ideas that might solve some of P&G’s toughest innovation

challenges. The C+D model is based on the realization that innovation was increasingly coming from small entrepreneurial ventures and even from individuals. Universities also became much more proactive in commercializing their inventions. The Internet now enables access to widely distributed knowledge from around the globe.

External collaborations fostered through the world- wide Connect+Develop network now play a role in roughly 50 percent of P&G’s new products, up from about 15 percent in 2000. P&G’s innovation produc- tivity has increased, and its innovation costs have fallen. The economic benefits to an open-innovation strategy are captured in Exhibit MC9.3. Successful product innovations that resulted from P&G’s open- innovation model include “Pringles meets Print” (sold for $1.5bn to Diamond Foods in 2011), Mr. Clean Magic Eraser, Swiffer Dusters, Crest SpinBrush, and Olay Regenerist.I

MINICASE 9 P&G’s New Corporate Strategy: “Connect+Develop’ 381

EXHIBIT MC9.3

Economic Benefits of an Open-Innovation Model Soume: Adapted from H. Chesbrough 120071, “Why companies should have open business models,” MIT Sloan Management Review, Winter:22-28.

The Economic Pressure on Closed Innovation

REVENUES

COSTS

The New Business Model of Open Innovation

REVENUES

COSTS

Closed Business Model (Before)

Closed Business Model (After)

Closed Business Model (Before)

Closed Business Model (After)

As product life cycles become shorter and as development costs rise, the net result is that innovative companies are finding it harder to justify their investment in new products.

DISCUSSION QUESTIONS

Review Chapter 4: Internal Analysis: Resources, Capabilities, and Activities.

Review Chapter 7: Business Strategy: Innovation and Strategic Entrepreneurship.

Review Chapter 9: Corporate Strategy: Acquisitions, Alliances, and Networks.

  1. Weigh the benefits and costs of closed innovation versus open innovation. What conclusions do you

draw?

  1. What are some of the risks of an open-innovation strategy that a company should consider before

embarking on it?

  1. Apply the resource-based view of the firm (dis-

cussed in Chapter 4). Do you believe P&G’s

Connect+Develop (C+D) open-innovation system

has the potential to create a competitive advantage

To offset rising development costs and shorter product life cycles, companies are experimenting with creative ways to open their business models, use external ideas and technologies in internal product development and allow internal intellectual property to be commercialized exten ally.

for the firm? If you believe that C+D does have the

potential to create a competitive advantage, do you

believe it is sustainable? Why or why not?

  1. Do you agree with the statement by Larry Huston and Habil Sakkab, executives at P&G, that “Connect+Develop will become the domi- nant innovation model in the 21st century”?2 Why or why not? What would its dominance do to C+D’s potential to create a competitive edge for a firm?

5, After reading Chapter 11: Introducing the C+D innovation model requires tremendous organiza- tional change. As Huston and Salckab noted: “We needed to move the company’s attitude from resis- tance to innovations ‘not invented here’ to enthusi- asm 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

382 MINICASE 9 I P&G’s New Corporate Strategy: Connect+Develop”

boundary between them.”3 Identify some of the major obstacles a manager would encounter at- tempting this kind of organizational change. What recommendations would you make on how to accomplish such large-scale organizational change successfully?

Endnotes

I. This MiniCase is based on: Chesbrough, H. W. (2003), Open Innovation: The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press); Chesbrough, H. (2003), “The area of open innovation,” MIT Sloan Management Review, Spring: 35-41; Chesbrough, H. (2007), “Why companies should have open business

models,”MIT Sloan Management Review, Winter: 22-28; Chesbrough, H. W., and M. M. Appleyard (2007), “Open innovation and strategy,” California Management Review, Fall 50: 57-76; Huston, L., and N. Sakkab (2006), “Connect & Develop: Inside Procter & Gamble’s new model for innova- tion:’ Harvard Business Review, March: 58-66; Rothaermel, F. T., and M. T. Alexandre (2009), “Ambidexterity in technol- ogy sourcing: The moderating role of absorptive capacity,” Organization Science, 20: 759-780; Rothaermel, F. T., and A. M. Hess (2010), “Innovation strategies combined,”111IT Sloan Management Review, Spring 51: 13-15; and “Diamond buys P&G’s Pringles,” The Wall Street Journal, April 6,2011. 2. Huston, L., and N. Sakkab (2006), “Connect & Develop: Inside Procter & Gamble’s new model for innovation.”

  1. Ibid.

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