Open innovation: P&G - Essay Example

Open innovation: P&G Introduction An ability to continuously innovate is a way of survival in the present fast changing business environment. 90% of businesses claim that innovation is their priority. The importance of innovation is increasing and ways in which companies innovate is constantly changing. The concept of innovation is not new. However, the approach for innovation has evolved. Innovation can be broadly categorised into open and closed innovation. According to Chesbrough (2003b, p. 23) “successful innovation requires control.” Closed innovation is based on the underlying assumption that successful innovation can only be achieved through control. This is based on an internally focussed logic where external ideas and technologies are deemed ineffective or insufficient. According to closed innovation model, a firm should hire only the smartest and best candidates. The model also believes that in order to achieve highest share in market, it is critical for research and development ideas to originate within the firm. The closed innovation approach also implements restrictive IP strategies, which ensure that other competitors do not profit from technologies and ideas of the firm (Zollo and Winter, 2002). Summarizing the above, it can be said that in a closed innovation concept, organisations believe to perform in a self-sufficient manner, starting from idea generation to production and marketing to distribution, marketing, financing and services. Another important characteristic of this approach is that once ideas are rejected or projects are cancelled, they get stored in the firm’s internal database and remain unused. Thus, closed innovation is essentially an inward looking model, where many business technologies and ideas are often left unexplored (Chesbrough, 2003a; Euchner, 2010). Open innovation, on the other hand, dissolves the boundary between a company and its external environment, making it more porous. According to Chesbrough (2006, p 1); “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.” Unlike closed innovation, open innovation ideas can be launched by either external or internal technology or idea sources. For example, apart from establishing own channels of distribution, the company can also create innovative projects by the way of out-licensing or spin-off ventures. Hence, summarising it, open innovation employs both external and internal sources for optimising as well as exploiting all possible opportunities. The purpose of this essay is to describe innovation strategy of P &G. The focus of the paper will be to evaluate past and present innovation strategies, which have been implemented by the firm. The essay will then continue to analyse benefits and risks associated with the innovation model. Literature review will focus on concepts of open and closed innovation, similarities and differences as well assessment of open innovation approach. Open Innovation: Basic assumptions In an open innovation theory, firms should use internal as well as external concepts and ideas. These ideas are combined with the firm’s system and architecture in order to achieve technological and strategic competitive advantage. In the process of open innovation, business models are utilised to firstly define these systems and architecture and then form internal mechanisms for utilisation of resources (Cohen and Levinthal, 1990). External resources include market contributors as well as associated parties, which help in generating extra value for the company. In an open innovation, development and research is treated as an open system. According to this approach, valuable ideas and creativity can come from outside or inside the firm as well as can be transferred from company to outside market. Here similar importance is given to external strategic paths and external ideas as internal research and development strategies. Apart from the above, intellectual property in open innovation is considered as a new category of assets, adding efficiency to the present business model. It also helps in examining strategies for new market entries and new business development. Open innovation has successfully established a rationale according to which firms should be both active buyers and sellers of IP (Mowery, Oxley and Silverman, 1996). The open innovation paradigm is based on the fact that essential knowledge is distributed widely and in order to enhance potential and capability of research, firms should be ready to identify, establish connection as well as leverage these external ideas in their core innovation process. Scholars argue that ideas and concepts that once evolved only in big firms are now surfacing in various new settings, such as small, but technically equipped start-ups, individual entrepreneurs and inventors. In addition to that, new and innovation developments are originating from academic research facilities. Even though these conditions are presently confined to limited business industries, scholars warn of a gradual shift taking place in the fundamental principles of innovation, which might force bigger companies to restructure their strategic decision making processes (Chesbrough, 2005). Various underlying assumptions of open innovation have been applied in the connect and develop plan of P&G. 1. Combination of internal and external resources As have been mentioned above, open innovation employs external as well as internal resources in order to achieve a sustainable competitive advantage. A similar approach has been used by P&G by the way of connecting with numerous engineers, scientists as well as other firms across the world. Building on the above premise, P&G successfully developed an open innovation platforms, named Connect+ Develop; and another platform for crowd sourcing, named Co-Create (Huston and Sakkab, 2006). Through the Co-Create platform, P&G is collaborating with other international companies for developing innovative products and ideas. For instance, Swiffer Dusters was an innovative product, which was formed purely on the basis of customer demand. At present, almost 40 percent of innovative products have come from markets outside US, such as China, India, Africa and Latin America (Von Hippel, 1988; Procter & Gamble, 2014a). 2. Sharing IP The process of open innovation at P&G is two-way in nature. While breakthrough innovations occurring inside the organisation are shared within the industry and supporting companies, innovative and creative ideas from various backgrounds such as, packaging, trademarks, engineering, marketing models, design and business services are welcomed (Procter & Gamble, 2013). The company uses its intellectual property as an asset for generating additional revenues as well as opportunity for entering into new markets (Vanhaverbeke, Duysters and Noorderhaven, 2002). 3. Multi sectorial cooperation The company has established a dedicated team that continuously works with potential partners for launching innovative products in the market. This team is working on global development of P&G, focusing on C+D empowerment, innovation search and strategic partnering as well as initiating innovation from the company into the market. Innovation can also be achieved through building and strengthening strategic capabilities for gaining sustainable competitive advantage (Eisenberg, 2011; Procter & Gamble, 2014b). P&G conducts regular review sessions on brand equity and business strategy, where innovation is seen a tool for competitive advantage. Each business unit of P&G, whether global or local, is examined on a regular basis, where focus is on innovation strategic, business goals, planning as well as implementation of major initiatives (Huston and Sakkab, 2006; Coombs and Georghiou, 2002). 4. Treating research and development as an open system In an open innovation model, research and developed is treated in the form of open system. In order to further strengthen its connect and develop program, the company had launched a fresh website, where a direct two-way communication approach was available between innovators and essential needs of the company as well as the company’s business leaders and external innovation stimulators. External innovators can now directly work with internal research department of the company. For example, various needs of the company are posted openly on the site and can be accessed by external innovators. Apart from English, the site is also available in Portuguese, Chinese, Spanish and Japanese and receives more than 20 submissions every day (Huston and Sakkab, 2006). 5. The customer is boss An important aspect of open innovation is using information as well as direction provided by consumers. Consumers should not be seen as the users of services and products only. Rather, they should be regarded as a major information provider for development and up-gradation of a product (Chesbrough, 2007). In P&G, consumers are placed at the center of any innovation process. The company now spends more time in observing consumers in different situations and places such as, homes, stores and centres for consumer testing. An innovative approach used in this aspect by P&G is that of achieving two moments of truth; one when the customer buys products and the second when the customer uses them (Huston and Sakkab, 2006). Innovation strategy at P&G back in the days 1. Closed innovation is fundamentally an inwardly focused approach, which went along with internal and external knowledge and business environment during early 20th century. Majority of the knowledge was obtained with the help of processes and steps that occurred inside the organization. The fundamental strategy in closed innovation was total reliance on internal organizational competencies. Before adopting the open innovation system, strategic approach of P&G was predominantly on the line of closed innovation (Lafley and Charan, 2008). 2. During the closed innovation days, P&G like other similar firms, relied on its internal research and development in order to create core competencies and achieve competitive advantage in the market. Almost all technologies, ideas as well as expertise developed were used for sales and manufacturing of the company’s own products. The P&G seldom licensed its products to other firms (Eisenberg, 2011). 4. Before establishing the open innovation program, P&G did not follow any customer oriented approach and majority of decisions were taken on the basis of product development and internal research, as opposed to that of customer demands, trends and patterns. As a result, there was a big gap between customer perception and requirements and company’s product development plans (Huston and Sakkab, 2006). 5. The internal capabilities such as, supply chain, operations and technology, were sufficient for the firm in order to deliver its products to the target market. In addition, the firm had a close network of partners and suppliers who were engaged in developing and delivering new services and products in the market. Hence, the firm rarely sought innovation outside its internal business and research environment (Weerd, 2008). 6. Intellectual property was an important tool for protection of all innovative concepts and ideas produced within the company. P&G implemented stringent rules so that new ideas and concepts remain inside the firm. For instance, in order to make sure that innovation is protected right from the idea generation stage, P&G patented its concepts and ideas during each stage of research and development process (Lafley and Charan, 2008). 7. The company’s intellectual property acts as a wall, which effectively confines new innovative ideas strictly within the company. P&G always had a closed scientific management system. The research and development departments were completely cut off from the external environment and the industry. The company also never opted for collaboration with government research agencies, university research or external research labs as it considered itself to be self-sufficient and capable of generating own ideas and making strategic moves solely on the basis of internal research (Weerd, 2008). Benefits and risks of open innovation After adopting the open innovation model, overall budget allocated to research and development by P&G has reduced significantly. The money spent on research was around 4.5 percent during 1990s and by 2007, it went down to 2.8 percent. The total amount spent on innovation activities was 2.1 billion dollars, during the same year. However, the return on investment was a huge amount of 76.5 billion dollars (Lafley, 2008). So, the company is able to receive more value for every dollar invested in market innovation. In order to broaden its capabilities, P&G started focussing on retention of its world class scientists and technologists, especially those researchers with substantial experience in firm’s personal care and household business. Apart from that, the firm also started involving employees from outside the research field into its innovation process. P&G concentrated upon creating an enterprise social system optimising insights and skills of individuals across the firm as well as provide them with a single focus; consumer (Yoshikawa, 2003). Nevertheless, a major risk from open innovation is loss of service or product ownership and knowledge. Since websites and other sources of open innovation strategy are visible to the general mass, these can also be accessed by competitors and potential new entrants (Roberts, 2007). This can be a serious threat to uniqueness of the program. In addition, crude ideas and concepts for the company’s future service and product decision are available on the website. These ideas and concepts can be copied by competitors in order to be converted and launched as real products before P&G. Apart from the above, there is also a constant threat that confidential data, which are not intended to kept concealed, might also get leaked or shared during the process of open innovation (Slowinski and Sagal, 2010; West and Gallagher, 2006). One of the best approaches while adopting open innovation model is by creating technical competencies. On the contrary, open innovation might prove unfruitful in bigger business or architectural settings (Christensen, 2012). The major benefit of using open innovation is that it helps the firm in breaking organizational boundaries as well as tapping external expertise for enhancing its own performance (Lafley and Charan, 2008). For example, P&G has been successfully using social media as a channel for open innovation by allowing external individuals to participate. The medium has not only helped the firm in broadening its base of potential innovators, but has also enabled formation of strong communities and dedicated followers. With the objective of fastening the innovation process and launching successful outcomes in the market before the competitors, the company is involved in determining top consumer needs as well as establishing strategic proprietary networks for facilitating activities of the ongoing open innovation program (Slowinski and Sagal, 2010). The major benefit of the above strategy is company’s access to more number of ideas. Managers who understand the potential of open ideas is aware of the fact that innovation can come from anywhere and as a result, they always welcome ideas across various industry segments, companies as well as entrepreneurial ventures. Thus, generation of more number of ideas will ensure better quality of services and products. Another concept that is hugely accepted in the open innovation model is that higher variability in ideas will result in generation of unparallel ideas (Crowdsourcing, 2013). Even so, a major issue that the company faces during implementation of this program is to ensure reliability and validity of the data and information presented by external innovators and contributors. There is also a risk of the process getting out of control. Sometimes the management wastes a great deal of time searching through irrelevant information and concepts. Furthermore, identifying the right contributors and best innovators among participants is a time taking and tedious task. Hence, there is a lot of discipline and patience required from the management who handles connect and develop program of P&G as they have to assess numerous ideas and concepts, before selecting those suiting the criteria of company’s future development plans (Crowdsourcing, 2013). Scholars have frequently criticized profitability and revenue generation capability of open innovation process. For instance, while incorporating external contributors and strategic proprietary networks in the innovation process, huge costs are involved. These include making payments to various intermediaries such as, InnoCentive, NineSigma or ChallengePost. They also need to pay for every winning idea or concept. Apart from the above, there are other expenditures such as, legal, campaign management and marketing activities, which reduce overall profitability of the open innovation process (Wolpert, 2002). Conclusion Open innovation is quickly overtaking the trend of closed innovation process in organizations. Nonetheless, it is important for marketers and managers to fully understand the concept and its application according to requirements of the particular industry. The objective of the current study was to understand innovation strategy with respect to P&G’s open innovation programs. The study helped in evaluating core concepts of open and closed innovation, major differences and ways in which these differences force industries to opt for innovative measures in their strategic decision making process. Reference List Chesbrough, H. W., 2003b. The logic of open innovation: managing intellectual property. California Management Review, 45(3), pp. 33-58. Chesbrough, H. W., 2006. Open innovation: a new paradigm for understanding industrial innovation. Oxford: Oxford University Press. Chesbrough, H., 2005. Open Innovation: A New Paradigm for Understanding Industrial Innovation. [pdf] Oxford University Press, Available at: http://www.emotools.es/static/upload/files/Openinnovationparadigm.pdf [Accessed 23 April 2014]. Chesbrough, H., 2007. Why companies should have open innovation business models. Sloan Management Review, 48 (2), pp. 22-28. Chesbrough, H., W., 2003a. Open Innovation. Cambridge MA: Harvard Business School Press. Christensen, C., 2012. Open Innovation and Getting Things Right. [online] Available at: http://www.claytonchristensen.com/open-innovation/ [Accessed 23 April 2014]. Cohen, W. M. and Levinthal, D. A., 1990. Absorptive capacity: a new perspective on learning and innovation. Administrative Science Quarterly, 35, pp. 128-152 Coombs, R and Georghiou, L., 2002. A new industrial ecology. [online] Available at: < http://www.sciencemag.org> [Accessed 21 April 2014]. Crowdsourcing, 2013. Weighing the Costs and Benefits of Open Innovation. [online] Available at: [Accessed 23 April 2014]. Eisenberg, I. 2011. Lead-user research for breakthrough innovation. Research-Technology Management 54 (1), pp. 50 – 58. Euchner, J., 2010. Two flavours of open innovation. Research-Technology Management 53(4), p. 7. Huston, L. and Sakkab, N., 2006. Connect and Develop: Inside Procter & Gamble’s new model for innovation. Harvard Business Review, 84 (3), pp. 58-66. Lafley, A. G., and Charan, R. 2008. The Game Changer. New York: Crown Business. Lafley, A.G., 2008. P&G’s Innovation Culture. [online] Available at: http://www.strategy-business.com/article/08304?pg=all%29 > [Accessed 23 April 2014]. Mowery, D. C., Oxley, J. E. and Silverman, B. S., 1996. Strategic alliances and inter firm knowledge transfer. Strategic Management Journal, 17, pp. 77-91. Procter & Gamble, 2013. P&G Connect+Develop Launches New Open Innovation Website. [online] Available at: [Accessed 23 April 2014]. Procter & Gamble, 2014a. What is Connect + Develop? [online] Available at: [Accessed 23 April 2014]. Procter & Gamble, 2014b. Could your innovation be the next game-changer? [online] Available at: [Accessed 23 April 2014]. Roberts, E. B., 2007. Managing invention and innovation. Research-Technology Management, 50(1), pp. 35-54. Slowinski, G. and Sagal, M. W., 2010. Good practices in open innovation. Research-Technology Management, 53(5), pp. 38 – 45. Vanhaverbeke, W., Duysters, G. and Noorderhaven, N., 2002. External technology sourcing through alliances or acquisitions: an analysis of the application-specific integrated circuits industry. Organization Science, 13(6), pp. 714-733. Von Hippel, E., 1988. The Sources of Innovation. Oxford: Oxford University Press. Weerd, M., 2008. The new era of Innovation. [pdf] Envisioning, Available at: Accessed 23 April 2014]. West, J. and Gallagher, S., 2006. Challenges of open innovation: the paradox of firm investment in open-source software. R&D Management, 36(3), pp. 319-331. Wolpert, J. D., 2002. Breaking out of the innovation box. Harvard Business Review, 80(8), pp. 77-83. Yoshikawa, T., 2003. Technology development and acquisition strategy. International Journal of Technology Management, 25(6-7), pp. 666-674. Zollo, M. and Winter, S. G., 2002. Deliberate learning and the evolution of dynamic capabilities. Organization Science, 13(3), pp. 339-351. Read More