Procter and Gamble - Literature review Example

The notion that a firm's skills and capabilities in new product development can be a source of competitive advantage, especially as almost all industries are becoming more dynamic, is widely accepted by both practitioners and academics. As firms seek to become more innovative and prolific in product development, many have reached outside their boundaries for information and assistance. As such, inter-firm collaborative relationships have become an important component in a firm's new product development strategy. Quite simply stated, in an era of globalization and the intensification of competition over markets, the surest strategy for corporate survival and growth is product innovation. It is equally important, if not more so, that innovation is cost-effective, aligned with consumer demands and addresses a perceived gap in the market. In other words, not only is the strategy for corporate survival continued product development and innovation, but the cost-effective development of innovative products which market research indicates will attract the consumer market. Proctor and Gamble has resolved the seemingly complex equation of cost-effective continued product development and equation through its "connect and develop" strategy. Indeed, P&G's approach to product development and innovation has the potential to serve as a critically valuable lesson to corporations across the world. The hurdles to new product development are cost and innovation. As Huston and Sakkab (2006, p. 60) write, "Most companies are still clinging to what we call the invention model, centered on a bricks-and-mortar R&D infrastructure and the idea that their innovation must principally reside within their own four walls." Confining product development to the company and to individuals working in the company often means that development will be a costly and time-consuming process. The reason, as Huston and Sakkab (2006) illustrate through reference to a case study, is that when a company begins the R&D process with an idea for a new product or an innovation to an existing product, it may not have the technology to translate the idea into a reality. The company's in-house Research and Development team will then have to experiment with several technologies to bring the idea to life and, of course, may and may not succeed. Even if they succeed, success comes at high financial cost. Furthermore, as Brown and Eisenhardt (1995) argue, because the process is often a length one, there is always the risk that a competitor may beat them to the market with the technology and product. In this case, the return on the new product research and development investment may not be realized. Hence, a financial risk factor enters into the equation. Proctor and Gamble stumbled across a high radical approach for new product development and innovation when it found itself confronting numerous technological obstacles to the manufacturing of their innovative Pringle line of imprinted chips. Initially relying on in-house talent for the development of the required technology, Proctor and Gamble soon found the process excessively costly, unrealistic and unfeasible in terms of implementation. It was at this point that P&G decided to look outside its walls for a solution and, with that in mind, developed and circulated a technology brief which outlined the problem. The response was positive and the company was approach by a baker in Italy who had already developed the technology in question. Proctor and gamble obtained the rights to the use of the technology, developed it to suit their specific needs and were, as a result, able to successfully produce their new line of Pringle chips at a fraction of the cost they would have otherwise run into. Huston and Sakkab (2006) concede to the fact that the approach adopted by Procter and Gamble is a radical one. As new product development, inclusive of research and development, often functions as a firm's competitive edge, corporations generally tend to prefer to keep all research, development and product innovation ideas and processes firmly within their locus of control. As Schilling and Hill (1998) have asserted, product development is the key to corporate success and the survival of inter-firm rivalry and competition over markets. Indeed, several researchers have suggested that product innovation is the single most important predicator of a firm's success or failure. Firms, operating in industries such as the automobile, biotechnology, pharmaceuticals, electronics and computer technology ones, accurately identify product development and innovation as the determinant of their ability to survive competition. Indeed, when considering that 50% of their annual sales are generated by their new products, the importance of R&D and product development is clear (Schilling and Hill, 1998; Baker, 2003; Cooper, 2005). It is because of the unrivalled importance of product innovation that firms prefer to keep their Research and Development activities strictly in-house. The implication here is that in reaching out beyond its corporate walls for product development technology, Proctor and Gamble embraced a highly radical, and possibly risky, approach to product development. The radical approach paid off. Proctor and Gamble has consistently applied it since its first trial and the outcome has been greater innovation at reduced cost, leading to higher returns. As Hiuston and Sakkab (2006, p. 61) write "More than 35% of our new products in market have elements that originated from outside P&G, up from about 15% in 2000. And 45% of the initiatives in our product development portfolio have key elements that were discovered externally." Importantly, the cost of product development decreased, R&D activities expanded by 60%, success rate doubled, as have the company's share price. The lesson, therefore, is clear: given the imperatives of continued product innovation and the importance of both the time and the cost factors, corporations should look outside their walls for product development, research and innovation. Proctor and Gamble's lesson appears to contradict conventional wisdom. Ahuja and Lampert (2001) note that product innovation and their associate research and development activities, have the potential to determine a form's market success or failure. Added to that, they are very expensive processes, into which corporations invest substantial human and financial resources into. Accordingly, the processes are treated as highly secretive. Within the context of the stated, looking for product innovation and research and development partners from outside of the firm undermines the secretive nature of the process and, therefore, contradicts conventional wisdom. Comparing product innovation and research and development activities to warfare, Cooper (2005, p. 1) writes that "the costs of this warfare are enormous. By the 1990s the cist of R&D in the G5 countries (U.S., Japan, Germany, Great Britain, France) had exceeded one billion dollars per day." Keeping the process in-house subscribes to conventional wisdom because it ensures that all stages of new product development are within the corporation's locus of control. It is, in other words, a protection of investment. Despite the argument presented above and even before P&G's experience, the advantages of creating an external product innovation and R&D network was explored by business scholars. In 1995, Brown and Eisenhardt argued the advantages of external product innovation and R&D networks and this argument was later emphasized by Cooper and Kleinschmidt (2000), Keller (2001) and Beckman and Haunschild (2002). According to this argument, the intensification of competition over markets and the ever-escalating costs of in-house product development and R&D have underscored the imperatives of continued product innovation at reduced cost. The optimal strategy for satisfying these needs without sacrificing quality or constraining creativity is to engage in inter-firm cooperation, on the one hand, and to create external networks for product innovation and R&D partnership. Through this strategy, firms can continue to engage in timely, cost effective continued product innovation, thereby enhancing their market sustainability (Brown and Eisenhardt, 1995; Cooper and Kleinschmidt, 2000; Keller, 2001; Beckman and Haunschild, 2002). The implication here is that changing market conditions and the globalisation of competition over markets has rendered the conventional wisdom discussed above, obsolete. The new conventional wisdom, as can be inferred from Huston and Sakkab (2006) analysis of Procter and Gamble's experience, is partnership through external networks. The new conventional wisdom is applied by several firms across the world, including Toyota, Sega, Microsoft and Sony, to name but a few. In fact, Keller (2001) lists 93 firms which pursue product innovation and research and development from the external network perspective. For every single one of these forms, this approach maximized their successful new product development rates, substantially contributes to their product innovation, lowered the cost of their innovation and product research and development activities and reduced the costs associated with these processes. Added to that, in his study of the advantages of undertaking product innovation through what Huston and Sakkab (2006) refer to as the "connect and develop" approach, Katila and Ahuja (2002) identify two additional advantages. The first is that it provides organization with continued knowledge and information, expands their knowledge base and therefore, keeps them constantly updated. The second is that it provides corporations with a wealth of new ideas regarding innovative products for which there is a growing market demand (Kattila and Ahuja, 2002). Connect and develop is, thus, a product innovation and development approach has multiple advantages other than cost-effective and timely technological solutions to new product manufacturing problems. It is well-worth noting that Microsoft has adhered to the connect and develop approach for new products through the connect and develop strategy. The company maintains an extensive network of software engineers, encourages them to submit product ideas, develop upon existing ones and provide the company with software programs (Bick, 2006). Through this approach, Microsoft has maintained its dominance in the software industry and, more importantly, has done so without incurring unsustainable costs (Cooper, 2005). Just as Proctor and Gamble has established an external network of innovators and engineers whom it turns to for problem-solving and for innovative technologies and product development ideas, Microsoft has created an international network of software developers. While it does not outsource software development to this external network, it, nevertheless, encourages them to email the Research and Development department with ideas for new products and, possibly, beta copies of software which the company then develops and refines (Bick, 2006). Further to that, in instances where Microsoft's in-house developers are unable to resolve any software programming problem, they turn to this network for possible solutions. The external network, or the connect and develop approach, has always been a Microsoft product development strategy. Its rationale is clear: it significantly expands Microsoft's capabilities; is a continued and very rich source of product ideas; facilitates the quick resolution of software programming problems and keeps Microsoft connected to the needs of the external consumer market from which members of this network ultimately emanate. Most importantly, it is a cost-effective strategy for continued innovation and product development (Bick, 2006). Indeed, the Microsoft example highlights the validity and value of P&G's lesson and underscores the imperatives of the connect and develop strategy to product innovation. The point here is that innovation is the key, not just to corporate survival and sustainability, but to growth in increasingly intensely competitive markets. Prior approaches to innovation did not account for the level of competition which companies face today or for the cost involved in developing new products. It is precisely because of this, because of changing market conditions, that the traditional approach to innovation, research and development must change. Procter and Gamble's experience is invaluable in this regard. Bibliography Ahuja, G. & Lampert, C.M. 2001. Entrepreneurship in the large corporations: A longitudinal study of how established firms create breakthrough inventions. Strategic Management Journal, 22 (6/7), 521-534. Baker, A. 2003. Biotechnology's growth - innovation paradox and the new model for success. Journal of Commercial Biotechnology, 9 (41) 286-288. Bick, J. (2006) All I Really Need To Know About Business I Learnt At Microsoft. London: Atria. Brown, S. L. & Eisedardt, K. M. 1995. Product development: Past research, present findings, and future directions. Academy of Management Review, 20 (2), 343-378. Beckman, C.M. and Haunschild, P.R. (2002). Network learning: The effects of partners' heterogeneity of experience on corporate acquisitions. Administrative Science Quarterly, 47(1), 92-107. Cooper, R. (2005) Product leadership: Creating and launching superior new products. Reading, MA: Perseus. Cooper, R. and Kleinschmidt, E.J. (2000), New product performance: What distinguishes the star products. Australian Journal of Management, 25 (11), 17-45. Katila, R. and Ahuja, G. (2002) Something old, something new: A longitudinal study of search behaviour and new product introduction. Academy of Management Journal, 45(6), 1183-1194. Keller, R. T. 2001. Cross-functional project groups in research and new product development: Diversity, communications, job stress, and outcomes. Academy of Management Journal, 44 (31),547-555. Schilling, M. A. & Hill, C. W. (1998). Managing the new product development process: Strategic imperatives. Academy of Management Executive, 12 (3),67-81. Read More