In this essay I will elaborate on the Open Innovation model in the context of an article which highlights the difficulties Procter & Gamble currently faces with delivering innovation through internal R&D in contrast to line extension of existing products. We will see that the open innovation model is an important contribution on how to exploit and to explore knowledge and technology, but that it has its limitations and threats when this R&D strategy is not combined with processes and organizational competencies that ensure that the external knowledge is leveraged to create innovations also internally. We will see that Procter & Gamble seemed to rely too much on simply the acquisition of external technology rather than absorb the gained knowledge to significantly invent internally.
Principles of Organization and Management: Procter and Gamble and the Open Innovation Model.
Introduction
In this essay I will elaborate on the Open Innovation model in the context of an article which highlights the difficulties Procter and Gamble currently faces with delivering innovation through internal R&D in contrast to line extension of existing products. We will see that the open innovation model is an important contribution on how to exploit and to explore knowledge and technology, but that it has its limitations and threats when this R&D strategy is not combined with processes and organizational competencies that ensure that the external knowledge is leveraged to create innovations also internally. We will see that Procter & Gamble seemed to rely too much on simply the acquisition of external technology rather than absorb the gained knowledge to significantly invent internally.
Summary of the article
The article shows that P&G was known for most of its 175 year old history as a branded science company, which didn’t just launch new products, but it also created new product categories. They came up with product innovations like the first synthetic detergent (Dreft), the first fluoride toothpaste (Crest) and the first stackable potato chips (Pringle’s). This may explains why 1/8 of all employees have a PhD and the company is operating 26 innovation facilities around the world. (Coleman-Lochner & Hymowitz, 2012)
The article also says that former (2000-2009) and current (again since 2013) CEO Lafley used the concepts of the open business model and shaped it the Connect and Develop program, which stressed the collaboration with outside partners to monetize external ideas, research and development. Prominent examples therefore are a $ 5 electric toothbrush (Chesbrough, 2003)and a wrinkle-reducing ingredient developed by a French company which is used in a skin cream. What Faley also did is decentralized R&D, giving business unit-heads the responsibility for developing new products. According to an R&D chief officer that led to an unwanted slow of innovation as research spending was now closer affected of profit concerns. Between 2003 and 2008 the sale of new products decreased by 50%. In 2009 big product breakthroughs were only at a level of fewer than six on average per year. This may be the reason as unit heads focused on near-term results. (Coleman-Lochner & Hymowitz, 2012)They therefore may cut the research spending to achieve better financial results.
Furthermore the article says that as a consequence, P&G is having some problems to come up with innovating category-building products. All the internally developed products that had a tremendous impact were all developed and initially marketed at least ten years ago. P&G must focus on R&D again, as Peter Golder (a professor at the Tuck School of Business at Dartmouth College) says, “P&G is built on creating new categories, and innovation is in its DNA, but they need to rediscover it.” A look at R&D spending show that they decreased: In (the fiscal year) 2012 it was 2.03 $ billion, which represents 2.4 percent of sales. 2006 it was still 3.0 percent of sales. The decrease of R&D investments can be a big threat for P&G as their business strategy is to take a premium price for a novel product. Leveraging already employed technologies and combining them in a novel context seemed to be especially important for the quality of innovation within P&G. This fashion of invention vanished as according to Victoria Collin the main focus was on reformulation rather than invention, which leads to losing customers to low budget products as they don’t see the point for paying the premium price P&G is charging for a homogenous product. (Coleman-Lochner & Hymowitz, 2012)
The company was aware of this issue as Bob McDonald, CEO from 2009-2013, assembled a team of specialists of different fields to outline a bolder and it that sense a more disruptive innovation course, but with no immediate effect as all products needed at least another year to be market ready. He also defined beauty as a key category (responsible for one quarter of annual sales in 2012) where P&G lost a clear strategy. To encounter the problem of insufficient funds for R&D for particular product categories and regions around a third of P&G’s research efforts were centralized to save money. By cost-cutting P&G hopes to have money to invest in product development but this can be a vicious circle, because it could harm the sustainable categories more than new category can gain. Besides that he created a new role that is responsible for coordinating product launches, because P&G was lagging in product launches in their key categories compared to competitors. L’Oréal, for example, can roll out up to 500 products a year. Unilever is now even able to roll out ten new products in 60 countries in the same time they once needed for only ten countries. Kimberly-Clark is also chasing P&G as they just opened research centres in South Korea and Colombia and increased R&D spending to keep up with the international business growth. (Coleman-Lochner & Hymowitz, 2012)
According to the article P&G is still a big player in the game, which is able to come up with plenty of new products, proved by a report which shows that P&G is accountable for one third of the top 25 non-food innovations. They also acquired important and successful brands such as Gillette in recent years but according to a former innovation officer there is still a challenge with the internal research & development to come up with novel and diffusing products. (Coleman-Lochner & Hymowitz, 2012)
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- Citation du texte
- Kai Wright (Auteur), 2014, Procter and Gamble and the Open Innovation Model, Munich, GRIN Verlag, https://www.grin.com/document/295655