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08/28/08
a strategy+business exclusive
1
P & G ’S
INNOVATION
CULTURE
features strategy & competition
by A.G. Lafley, with an introduction by Ram Charan
which others must adapt. A number of game- Consider the case of Procter & Gamble
changing innovators are operating today, includ- Company. Since A.G. Lafley became chief execu-
ing such household-name enterprises as Procter & tive officer in 2000, the leaders of P&G have
Gamble, Nokia, the Lego Group, Apple, Hewlett- worked hard to make innovation part of the daily
Packard, Honeywell, DuPont, and General routine and to establish an innovation culture.
Electric. Wherever you see a steady flow of note- Lafley and his team preserved the essential part of
worthy innovations from one company, you can P&G’s research and development capability —
probably assume that it is a game-changing inno- world-class technologists who are masters of the
A.G. Lafley Ram Charan Also contributing to this article
(editors@strategy-business (www.ram-charan.com) is a was Geoffrey Precourt.
.com) is the chairman and Dallas-based advisor to
CEO of Procter & Gamble boards and CEOs of Fortune
Company. He was named 500 companies and the author
Executive of the Year by the or coauthor of 14 books,
Academy of Management in including the bestsellers
2007 and serves on the boards Execution (with Larry Bossidy;
of General Electric Company Crown Business, 2002),
and Dell Inc. He is the coau- Confronting Reality (with Larry
thor, with Ram Charan, of The Bossidy; Crown Business,
Game-Changer: How You Can 2004), and Know-How (Crown
Drive Revenue and Profit Business, 2007).
Growth with Innovation (Crown
Business, 2008).
W
core technologies critical to the household and hen I became CEO of Procter & Gamble
personal-care businesses — while also bringing in 2000, we were introducing new brands
features strategy & competition
more P&G employees outside R&D into the inno- and products with a commercial success rate
vation game. They sought to create an enterprise- of 15 to 20 percent. In other words, for every six new
wide social system that would harness the skills and product introductions, one would return our invest-
insights of people throughout the company and ment. This had been the prevailing ratio in our industry,
give them one common focus: the consumer. consumer packaged goods, for a long time.
Without that kind of culture of innovation, a strat- Today, our company’s success rate runs between 50
egy of sustainable organic growth is far more diffi- and 60 percent. About half of our new products suc-
cult to achieve. ceed. That’s as high as we want the success rate to be. If
A.G. Lafley and I coauthored The Game- we try to make it any higher, we’ll be tempted to err on
Changer: How You Can Drive Revenue and Profit the side of caution, playing it safe by focusing on inno-
Growth with Innovation (Crown Business, 2008) to vations with little game-changing potential.
explain how to make game-changing innovation The decision to focus on innovation as a core
drive growth on a consistent, well-paced basis. The strength throughout the company has had a direct influ-
critical factors that we cover in the book include ence on our performance. P&G has delivered, on aver-
keeping a laser-sharp focus on the customer; estab- age, 6 percent organic sales growth since the beginning
3
of the decade, virtually all of it driven by innovation.
lishing a disciplined, repeatable, and scalable inno-
Over the same period, we’ve reduced R&D spending as
vation process; creating organizational and funding
a percentage of sales; it was about 4.5 percent in the late
mechanisms that support innovation; and demon-
1990s and only 2.8 percent in 2007. In that year, we
strating the kind of leadership necessary for prof-
spent US$2.1 billion on innovation, and received $76.5
itable top-line growth as well as cost reduction.
billion in revenues. We’re getting more value from every
One aspect of building an innovation culture
dollar we invest in innovation today.
deserves more attention than we could give it in
The focus on innovation has also had a direct effect
The Game-Changer: designing a social system that
on our portfolio of businesses. The Game-Changer de-
would spark new ideas and enable critical deci-
scribes how we sold off most of P&G’s food and bever-
sions. In the article that follows, A.G. explains the age businesses so we could concentrate on products that
human factors that fostered innovation at Procter were driven by the kinds of innovation we knew best. As
& Gamble. It could be thought of as the “missing it turns out, with this narrower mix of businesses, we can
chapter” to The Game-Changer; a vital component more easily devote the resources and attention needed to
that isn’t always obvious, even to experts, precisely build a broad-scale innovation culture.
because it is so fundamental. We also focused on creating a practice of open inno-
— Ram Charan vation: taking advantage of the skills and interests of
The days of achieving automatic growth
by entering new markets are over. We can grow in
these countries only with new products,
processes, and forms of community presence.
people throughout the company and looking for part- example, already has a market presence in more than
nerships outside P&G. This was important to us for sev- 160 countries, with large operations on the ground in
with a deodorant or two minutes with a disposable dia- do” at P&G. I talked about it that way at dozens of com-
per have made a small part of your life a little bit better, pany town hall meetings during my first months as
then we’ve made a difference. CEO. More and more people began thinking about
But we hadn’t explicitly or inspira- how to apply the “consumer is boss” con-
tionally enrolled enough of our cept to their work. Resources were
100,000-plus people around the still scarce, and there were fierce
world in our mission; it was debates about which ideas
neither fully embraced deserved the most attention
by employees nor fully and where to deploy
leveraged by the com- money and people. But
pany’s leadership. Our this concept came to
innovation efforts suf- matter more than those
fered accordingly. other concerns. People
So we expanded became more willing to
our mission to in- subjugate their egos to
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clude the idea that the greater good —
“the consumer is boss.” to improving consum-
In other words, the peo- ers’ lives.
ple who buy and use It’s natural for a
P&G products are valued mature company to become
not just for their money, more insular. So we explicit-
but as a rich source of in- ly tried to build better con-
formation and direction. If nections with the people who
we can develop better ways of learn- bought our products. For example,
ing from them — by listening to them, in the early 1990s, we had acquired the
observing them in their daily lives, and even living with Max Factor and Ellen Betrix cosmetic and fra-
them — then our mission is more likely to succeed. grance lines from Revlon Inc. Innovation in fine fra-
“The consumer is boss” became far more than a slogan grances had always been driven by fashion. With slow
to us. It was a clear, simple, and inclusive cultural prior- growth of 2 to 3 percent a year, low margins, and weak
ity for both our employees and our external stakehold- cash flow, fine fragrances didn’t seem to be an attrac-
ers, such as suppliers and retail partners. tive business for P&G. But we saw a chance to change
We also linked the concept directly to innovation. the game.
We began by clearly and precisely defining the tar- Integrating Innovation
get consumer for each fragrance brand, and identifying We are constantly innovating how we innovate. We keep
As you read about Procter & Gamble’s ects that don’t clear the hurdles or commercializing a new product.
social system and innovation culture, that simply consume more time or Inevitably, trade-offs will be required
you may be thinking, “There are some money than the business can afford. among these groups. Leaders thus
good ideas here…for someone else. In • Concentrate on possibility. The must ensure that communication
my shop, we can barely keep the process of innovation is inherently channels are open from the start and
trains running on time. How am I sup- uncertain. Innovation leaders live with that facts and sound judgment prevail.
posed to do all this?” ambiguity as ideas are shaped and They must be prepared to break dead-
Leaders of innovation take their reimagined; they don’t let ideas die locks and resolve conflicts by keeping
game to another level through a par- before they’re fully formed or under- individuals focused on their common
ticular set of practices: stood. Once a project is selected, goal: the customer.
• Establish clear criteria and don’t these leaders inspire the team to keep • Reward effort and learning.
hesitate to shift resources. Great going even as they encounter obsta- Failure is a fact of life for companies
innovation leaders keep a sharp eye cles and go through iterations. At the that pursue innovation seriously, and a
on their short-term and long-term same time, leaders are vigilant for leader’s response to it has a huge
features strategy & competition
business goals and think through how indications that the project’s market effect on company culture and there-
and when various innovation projects potential has diminished. fore on future projects. Innovation
will contribute to them. They deter- • Cross boundaries and help oth- leaders know that failures represent
mine which projects to accelerate or ers do the same. Innovation becomes opportunities to learn. They keep peo-
cut on the basis of resource consump- riskier when there are gulfs between, ple energized by publicly recognizing
tion as well as market potential. They for example, technologists, marketing their earnest efforts and willingness to
don’t hesitate to pull the plug on proj- people, and those responsible for venture from the tried and true.
the cycles shorter, or developing new commercial ideas, Latin America, and some African countries have become
or working on new business models. And all innovation part of our social system. Their presence has made us
is connected to the business strategy. more open, and this helps compensate for our natural
In fostering this approach and building the social tendency to become more insular.
system to support it, the P&G leadership has had to be We maintain open work systems in a lot of places
very disciplined. For instance, we are now set up to see around the world. Executives’ offices don’t have doors.
7
many more new ideas. Our external business develop- Leaders don’t have a secretary cordoning them off. All
ment group is very small; all it does is meet with indi- the offices on the executive floor at Procter & Gamble
viduals, groups, research labs, and other potential are open; the conference room is an open, round space.
collaborators, including (as we noted in The Game- We made it round as a small symbol of the new
Changer) P&G’s competitors on occasion. Any of these approach. We’re seeing indications that this new social
may propose new technologies, new product prototypes, process is catching on all over the world.
or new ways to connect us to our consumer base. Last
year, the business development group reviewed more The Talent Component
than 1,000 external ideas. This year, they’ll see 1,500. P&G used to recruit for values, brains, accomplishment,
We tend to act on about 5 to 7 percent of them. and leadership. We still look for these qualities, but we
We are also open to ideas from more regions than in also look for agility and flexibility. We believe the “soft”
the past. Innovation used to travel primarily from devel- skills of emotional intelligence — fundamental social
oped markets to developing markets. When new tech- skills such as self-awareness, self-fulfillment, and empa-
nology appeared in Japan, Germany, or the U.S., it thy — are needed to complement the traditional IQ
flowed across the regions and down the hierarchy. skills. (See “Tea and Empathy with Daniel Goleman,”
Today, more than 40 percent of our innovation comes by Lawrence M. Fisher, s+b, Autumn 2008.) Maybe
from outside the United States. People in India, China, “soft” isn’t the right word: These skills are every bit as
Once people see the simplicity,
durability, and sustainability of an innovation
mind-set, it continually reinforces itself.
hard to master as some tough analytical skills. People headquarters people to our global businesses. Almost all
just learn them in a different way. of us have worked outside our home region. Almost all
employees are more open to fresh, innovative thinking. looked at the research. Lo and behold, 20 percent of the
Since 2000, we’ve lowered the average age of our people first survey group absolutely loved the product.
by almost 10 years because of our acquisitions and our Personally, I wasn’t surprised. I had spent eight years
moves in emerging markets. We have also recently living and working in Japan and I knew that
brought in people from outside to Japanese people can be hypersen-
enable and stimulate creative sitive to malodors. A man can
thinking. This was unprece- smoke cigarettes outside or in
dented for a company that a subway station, but many
has traditionally hired only Japanese women won’t let
entry-level people and their husbands smoke in
promoted from within. the house. When the
Virtually every lead- husband comes home,
ing practitioner of our he may have to take his
new design capability smoky clothes off and
came from the outside wash them before he
9
as a mid-career hire. can sit down.
They arrived from BMW, So we resolved to
Nike, and some of the try again. The P&G
best design shops in the team changed the viscos-
world. We probably have ity of the product. They
150 to 200 such people and, changed the fragrance from
although it’s not a huge pro- high profile to a very low
portion of the P&G staff, it’s big profile scent. They changed
enough to make a difference. They the bottle to a much more delicate
bring us not just the art and science and practice design that more Japanese people felt com-
of design, but an integrative way of thinking. fortable having visible in their homes. They changed the
spray pattern to a mist. They changed everything but the
Integrative Thinking core technology of the product, and it became a phe-
One of our favorite examples of integrative thinking nomenal success in Japan.
involves Febreze, a very successful odor-control product. This is a story we tell ourselves at P&G to drive
One of the active ingredients in Febreze surrounds a home the need for integrative thinking. The project
malodor and removes it, as opposed to covering it up or started with a consumer-centric concept. It involved
people in a variety of functions and at least two regions. through the social networks. It becomes easier for them
It opened our team members’ eyes to other possibilities. to expand their idea of what is feasible. Building this sort