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A case study on open innovation on Procter & Gamble. Part I: Innovation strategy over years

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2015 IOP Conf. Ser.: Mater. Sci. Eng. 95 012149

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

A case study on open innovation on Procter & Gamble. Part I:

Innovation strategy over years

I G Agafitei1 and S Avasilcai1

1
Gheorghe Asachi Technical University of Iasi-Romania, Department of Engineering
and Management, 28 Mangeron St., 700050, Iasi, Romania

E-mail: [email protected]

Abstract. The purpose of the present paper is to analyse how product innovation process has
been organized by a multinational company, such as Procter & Gamble. Since open innovation
is a new approach on the local market, we have chosen to conduct a research in form of a case
study showing the steps that the company has taken in order to involve other organizations to
contribute to the development of new products. The paper will first describe what innovation
management theory is suggesting. Following this, the mission and vision of Procter & Gamble
will be analysed emphasizing its innovation efforts in time. The approach that the company has
nowadays, related to development of new products, has its roots in several complex initiatives
in the past, initiatives that have in their central attention the customer. Finally, it provides the
research limitations and implications for future analysis on the case of Procter & Gamble open
innovation approach.

1. Introduction
An increasing interest has been shown in the last few years for all that is connected to innovation: new
products and services, management of innovation, innovation models and innovation tools. What
modern economic theories have proven for sure is that innovation has an effect on a company’s
capability to differentiate itself. Paul Romer has further developed the theories of Schumpeter, the so
called neo-Schumpeterian economic growth theory, suggesting the main idea that firms will try to
increase their profits by directing all their efforts into developing new products and services [1]. At the
opposite side of neo-classical economics that looks at industry and economic performance without
taking into consideration the differences between firms, the Schumpeterian view strongly supports that
the manner in which a company manages its resources over time and develops its capabilities will
influence its innovation performance [2].

2. Introduction
A mutual consideration on innovation concept places this process in the area of new products and
services, which are produced by using new information and that take place in two phases: invention
and exploitation [1, 2]. Looking at innovation as a management process allows us to see the distinction
between an innovation and a product, which is the output of innovation [2]. Another key aspect
regarding innovation as a process is the distinction between innovation and invention. Others have
concluded that innovation has to do more with the commercial and practical application of an
invention. The latter is the conception of an idea and intellectual effort of putting together scientific
information comparing to innovation being the subsequent result of invention into the economy [2].

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

Since the benefits of welcoming innovation into a firm have been proven by economic theories, the
next step would be to see how those interested can influence successfully the innovation process. One
way of listing the specifics is to do empirical studies as this to see how other companies organize
themselves. In table 1 below we can see the most important key features that can easily transpose into
the vision and mission of a company in order to sustain an innovation process [2].

Table 1. Summary of characteristics that facilitate the innovation process.

Organizational requirement Characterized by:
A commitment to long term growth rather than short term
Growth orientation
profit
Organisational heritage and innovation
Widespread recognition of the value of innovation
experience
The ability of the organisation to be aware of its threats
Vigilance and external links
and opportunities
Commitment to technology and R&D The willingness to invest in the long term development of
intensity technology
The willingness to include risky opportunities in a
Acceptance of risks
balanced portfolio
Cross-functional cooperation and
Mutual respect among individuals and a willingness to
coordination within organisational
work together across functions
structure
The ability to be aware of, to identify and to take effective
Receptivity
advantage of externally developed technology
An ability to manage the innovation dilemma and provide
Space for creativity
room for creativity
Strategic planning and selection of technologies and
Strategy towards innovation
markets
Coordination of a diverse range of Developing a marketable product requires combining a
skills wide range of specialised knowledge

Still, in order to differentiate itself a company has to design an innovation model that has the role
of defining that specific structure, resources, target customers, value proposition and other details that
eventually will help the company focus on what they want to accomplish. As Vargo el al. appreciated
[3], value is created when the customers reach the context and integrate the products or services
offered. In other words, based on a service-dominant logic, the focus is not on the offering per se but
on the customers’ value-creation process [3]. Year 2000 has brought a new perspective over the
interaction of firms and consumers showing the customers are taking active roles expressing what they
expect from companies experiences. Later on, in 2004, the official debut of the term co-creation has
been made by Prahalad and Ramaswamy, the authors explaining that co-creation of value is an
initiative of the customers who are "dissatisfied with available choices" [4].
All companies, similar in size with Procter & Gamble and even those who are smaller face the
pressure of reducing costs of production and constantly improving their operations. Repetitive tasks
and a well-organized environment allow the firm to deliver their product under the right specifications
but at the same time, in the same environment there is a need for creativity in order to make room for
new ideas, approaches and products [2]. To sum up, it is the firm’s challenge to balance this kind of
environment if they want to allow innovation in their house. Precisely due to this heavy mission that a
firm may have, balancing its resources and activities, open innovation has taken a lot of attention in
the last years. Adding the input of customers and integrating outside company knowhow on top of all
other resources that the company has, has proven to be a success in the case of many companies. Open
innovation, implies that “firms can and should use external ideas as well as internal ideas, and internal

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

and external paths to market”, in their pursue to advance their technology. One view of the actual
author who coined the term is that open innovation can be thought of as the antithesis of the traditional
vertical integration model where internal research and development activities lead to internally
developed products that are to be distributed by the firm [5].

3. Case study: Procter & Gamble innovation in time

In order to draw conclusion on how did Procter & Gamble organized its activities over time, we have
conducted an analysis of its evolution pointing to the most important moments. Founded in 1837, the
company has its headquarter in Cincinnati, United States and gathers an impressive portfolio of
products with 23 brands with annual sales of $1 billion to more than $10 billion, and 14 with sales of
$500 million to $1 billion - many of those with billion-dollar potential [6].

3.1. Procter & Gamble: company evolution and product development

After 50 years since it was established, in 1887, P&G comes up with a new way of involving its
employees in the company activity. It was the first time the company initiated a special program that
offered the opportunity for employees to take shares in the company and define their role in what its
success was. In 1919 William Cooper Procter, the son of William Procter continues with his efforts to
institutionalize the relationship between the company and its employees. In 1924 it was for the first
time in the United States when a company has taken the decision to grant all resources for a research
study with a strong focus on its consumers. The goal of this activity was to offer a better
understanding on what consumers needs are, anticipate it and respond by creating products that would
improve the quality of their day by day life [7]. Following the same strategic direction, in 1941, P&G
develops a customer relationship department to handle all inquiries in a formal way. In the years to
follow, by 1980 there were several toll free numbers assigned and email correspondence was growing,
all for the same purpose to be close to the consumers and, allow them to contact the company by all
means. All the strategic movements the company has done over time have created a tremendous
advantage of being one of the companies that best knows its consumers. Along the way Procter &
Gamble has grown through many acquisitions and product developments which made its portfolio to
be one of the most complex at that time and even today. In table 2 we can see just a few of the most
important events in the history of the company indicating the desire to improve its production and
research capabilities, be the first to use the technological breakthroughs and connect with its
consumers.
Presently the company has several research facilities in different parts of the world, from Western
Europe – 8 research centres, to Asia, where the Singapore Innovation is considered the third high-tech
innovation centre in the Asian region [9].
With a declared purpose of improving the life of its consumers, the company states that the results
will be that satisfied consumers will turn the company into a market leader [10]. When it comes to its
values the company mentions integrity, leadership, ownership, passion for winning and trust. One of
the key attitudes that strongly suggest the desire to innovate is the fact that all employees are
encouraged to act as owners and also constantly challenge the status quo. Since employees are truly
considered to be an asset, The Clay Street project has been initiated with the purpose for creative
thinking to deliver great innovative product and change the culture. Teams inside P&G were exposed
to diverse ideas and methods that caused them to think differently about their challenge and
themselves [11]. Among the eight principles that lay at the heart of P&G foundation there is also
innovation. This principle articulates the fact that the company places great value on new consumer
innovations and this is why challenges convention and wishes to reinvent the way it does business
[12]. Leadership is an important coordinate placed by the company as one of its values. The
importance of leadership is crucial to the innovation process as it allows all ideas to come to the
surface and not to be blocked at a certain hierarchical level or by internal procedures. So the company
is committed to eliminate organizational barriers in order to deliver its strategy [12].

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

Table 2. Important historical events over time [8].

Year Event
1890 P&G sets up an analytical lab at Ivorydale to study and improve the soap-making
process. It is one of the earliest product research labs in America.
1896 P&G’s first colour print advertisement – an ad for Ivory – appears in Cosmopolitan
magazine picturing this “Ivory Lady.”
1915 The Company builds its first manufacturing facility outside the United States, in
Canada. Employing 75 people, the plant produces Ivory soap and Crisco.
1931 Procter & Gamble’s brand management system is born.
1939 Just five months after the introduction of television in the U.S., P&G airs its first TV
commercial (for Ivory Soap) during the first televised major league baseball game.
1943 The Company creates its first division – the Drug Products Division – to sell its
growing line of toilet goods.
1952 A new research facility, Miami Valley Laboratories, opens in Cincinnati. MVL is the
Company’s first facility dedicated solely to upstream research.
1965 The first paper plant built by P&G opens in Mehoopany, Pennsylvania.
1988 The company starts to produce its goods also in China, 1st operation in the world
largest consumer world.
1995 P&G opens its Health Care Research Centre in Cincinnati to serve as the worldwide
hub for the Company’s health care business. The Health Care Research Centre is
designed to promote innovation and efficiency in bringing new health care products to
market faster.
1998 P&G announces Organization 2005, a new global organizational design to drive
innovative ideas to world markets faster.

3.3. Open innovation approach: working with external partners & employees
By analysing its capacity to launch new product on the market, Procter & Gamble has been considered
for quite some years now one of the most innovative consumer products company. But this
performance it’s not the result of chance but more of a systematic and disciplined approach [13].
When using The Initiative Diamond approach based on a stage gate model, the company stated to have
aligned the entire organization on how to use Stage Gate success criteria, portfolio and resources to
deliver better innovations. SIMPL (Success Initiative Management & Product Launch) process
designed in 1990 was a rigorous one and it explained the steps to take the idea through launching it
and post-launch. There are four drivers of performance that worked in the case of P&G during the
usage of stage-gate model: a product innovation and technology strategy for the business; an effective
and efficient idea-to-launch system; resource commitment, focusing on the right projects and portfolio
management; a positive climate and environment for innovation [13]. Beginning of the year 2000 the
company has changed its focus from research and development since the growth generated by it was
not efficient anymore. The budgets allocated to innovation were under pressure due to the high costs
of the new technologies, at the same time only 35% of the new products were achieving their financial
objective. The new focus has become developing new products by enhancing external relations and
the company’s new goal was to reach 50% of the innovations from collaborating with external parties
[14]. In the following year P&G had a designated team in charge to share the principles of disruptive
innovation. Quite often A.G. Lafley, the CEO of P&G, has been mentioned as one of the leaders who
master the skills of disruptive innovators. For example, by asking a lot of questions, he is considered
to have changed the way the company worked. Another example supporting this is the fact the all
employees are encouraged to devote 25% of their time on finding ways to improve what they do [15].
One of the new directions set by the company’s CEO was to increase the organizational support in
order to develop new business. For this, new teams were appointed, with main purpose to grow the
business, teams with resources kept separate from the core business.

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

At the same time that Connect & Develop platform has been launched to support the strategy
mentioned above, TAG (Technology Acquisition Group) was one of the initiatives that have been
defined with the purpose to search, outside the company, for technology [16]. In table 3 we can see
examples of, internal & external connections, used by the company in order to leverage its technical
capabilities into new as well as existing products [17]

Table 3. External and internal activities supporting open innovation [17].

Procter & Gamble’s connections for innovation
External connections Internal connections
Joint Developments Innovation Net
National Laboratories Smart Learning Reports
Technology Acquisition Group Communities of Practice
Complementary Technology Innovations Global Technology Council
Critical Supplier Partnerships Corporate Innovation Fund
Endorsements
Patent/IP Licensing & Donation
University Research Fellow Program

The group TAG has become a primary portal for soliciting external technologies and allowed
inventors to submit their ideas for evaluation, supporting this way the new approach that P&G had for
licensing technology. The strategy was to improve the innovation process and turn it into a much
simpler approach: license all technology at the latest three years after market introduction or five years
after patent approval [17].

4. Conclusion
In a very official manner the company stated that has gone from being „protective” with its technology
resources to being „proactive” with the clear intention to open the door to see their innovation in the
marketplace, not only in their products. The purpose was to generate revenue for their stakeholders
and any type of collaboration, from selling, donating, trading with suppliers was taken into account
[17]. A good example to understand the change in the company’s approach, that will create the right
environment for great product innovation, is to look at the new strategy based on licensing. As Sakkab
mentioned [17], previously the company had been under the negative impact of the Cold War when no
type of collaboration was happening. Starting the year 2000 P&G representative declares „will sell,
donate, swap or collaborate with suppliers for capital avoidance, or trade for lower pricing” as long as
it can be measured and also produce value for all stakeholders. The present paper looks at key
decisions taken by Procter & Gamble related to the innovation approach with the purpose to show the
importance of the mentality and internal efforts of all organization members. It look like the open
innovation direction came from top – down creating tools such as TAG or InnovationNet, the latter
one allowing P&G researchers to connect with thousands of innovators across the globe and exchange
information on latest novelty. Part two of the present study will look into the features and impact of
Connect & Develop platform on new product development inside P&G. The goal of this case study
was to emphasize all the initiatives that supported innovation and even earlier – the general interest for
consumer delight which subsequently became conversion for profit. The limitations of the present
study are related to the qualitative approach taken that doesn’t allow statistical inference. A series of
other such analysis would be necessary to see whether companies with successful products fall under
the same approach.

Acknowledgement
This research was undertaken within the framework of the National Research Program PN II, financed
by MEN – UEFISCDI, project PN-II-PT-PCCA-2013-4-1811.

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Modern Technologies in Industrial Engineering (ModTech2015) IOP Publishing
IOP Conf. Series: Materials Science and Engineering 95 (2015) 012149 doi:10.1088/1757-899X/95/1/012149

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