P&G's New Corporate Strategy: Connect+Develop ✓ Solved

P&G's New Corporate Strategy: "Connect+Develop"

DURING MOST OF the 20th century, the closed-innovation approach was the dominant research and development (R&D) strategy for most leading industrial corporations: They tended to discover, develop, and commercialize new products internally. Although this approach was costly, it allowed firms to capture the returns to innovation. Several factors led to a shift in the knowledge landscape from closed innovation to open innovation. They include: The increasing supply and mobility of skilled workers, the exponential growth of venture capital, the increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved, and the increasing capability of external suppliers. Together, these factors now force even the largest companies, such as AT&T, IBM, GE, and Sony, to shift their innovation strategy toward a model that blends internal with external knowledge-sourcing via licensing agreements, strategic alliances, joint ventures, and acquisitions.

In the open-innovation model, a company attempts to commercialize both its own ideas and research from other firms. It also finds external alternatives such as spin-out ventures or strategic alliances to commercialize its internally developed R&D. P&G's "Connect+Develop" is an example of open innovation. Due to the maturing of its products and markets, P&G was forced to look outside for new ideas. P&G is an $80 billion company whose investors expect it to grow 4-6 percent a year; which implies generating between $3 and $5 billion in incremental revenue annually. P&G was no longer able to generate this amount of growth through closed innovation.

By 2000, P&G's closed-innovation machine had stalled, and the company lost half its market value. It needed a change in innovation strategy to drive organic growth. P&G's Connect+Develop is a web-based interface that connects the company's internal-innovation capability with the distributed knowledge in the global community. From that external community, researchers, entrepreneurs, and consumers can submit ideas that might solve some of P&G's toughest innovation challenges. This model is based on the realization that innovation was increasingly coming from small entrepreneurial ventures and even from individuals, aided by the Internet.

External collaborations fostered through the worldwide Connect+Develop network now play a role in roughly 50 percent of P&G's new products, up from about 15 percent in 2000. P&G's innovation productivity has increased, and its innovation costs have fallen. The economic benefits to an open-innovation strategy are notable as companies with shorter product life cycles and rising development costs find it hard to sustain investment in new products. P&G's successful product innovations that resulted from its open-innovation model include several popular products that demonstrate the effectiveness of the C+D approach.

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The transition from closed innovation to open innovation represents a fundamental shift in how companies approach research and development. Closed innovation has traditionally emphasized the belief that innovation is best conducted internally within the organization. Companies relied heavily on their own research teams to develop, produce, and market new products, often at a high cost. This model, while ensuring control over the innovative process, limits the potential for external collaboration and diverse idea generation.

On the other hand, the open-innovation model encourages companies like Procter & Gamble (P&G) to leverage external resources and ideas. P&G’s Connect+Develop (C+D) initiative exemplifies this shift, successfully integrating external innovations while complementing its internal capabilities. By allowing external entities—such as entrepreneurs, consumers, and researchers—to contribute ideas and solutions to its challenges, P&G effectively opens its innovation funnel. This collaboration has enabled P&G to revitalize its product lines and improve its market responsiveness.

In weighing the benefits and costs of closed versus open innovation, clear advantages are present in both models. Closed innovation provides heightened control over intellectual property and a streamlined innovation process; however, it lacks the diverse input that can drive groundbreaking ideas. As demonstrated by P&G’s stagnation prior to adopting C+D, the reliance on internally generated ideas alone can hamper growth. Open innovation, conversely, fosters collaboration and innovation across a wider spectrum, increasing the likelihood of discovering disruptive ideas. The flexibility gained through open innovation can be a critical factor for survival in rapidly changing markets.

Despite its clear advantages, an open-innovation strategy does come with risks. One potential risk is the erosion of competitive advantage; as firms increasingly share and incorporate external ideas, the unique value propositions that drive differentiation may diminish. Additionally, intellectual property management becomes complex as companies navigate collaborations and partnerships. Firms must carefully assess the implications of these collaborations and protect their proprietary innovations, which necessitates a robust IP management strategy.

Another aspect to consider in the discussion of P&G’s C+D initiative is its potential to create a sustainable competitive advantage. The resource-based view of the firm suggests that a company’s resources and capabilities significantly influence its competitive positioning. P&G’s ability to harness both internal and external innovations positions them advantageously in the marketplace. However, sustainability is contingent on the continuous evolution of the collaborative ecosystem and P&G’s ability to innovate rapidly.

Challenging existing viewpoints, Larry Huston and Habil Sakkab’s assertion that “Connect+Develop will become the dominant innovation model of the 21st century” prompts critical examination. While open innovation is undoubtedly growing in popularity, several factors will influence its dominance. The flavor of open innovation could change based on industry, market dynamics, and technological advancements. As companies adapt and may try to innovate their own business models, finding a true competitive edge is a complicated challenge.

To adopt the C+D model successfully, organizational change is crucial. The transition involves not just alterations in strategy but also significant cultural shifts within the organization. An example of an obstacle in organizational change could be resistance to external ideas and initiatives perceived as less valuable than internally sourced concepts. Changing entrenched mindsets is a daunting task that requires clear communication, education, and the framing of external contributions as vital to the organization's innovation ecosystem.

Management should approach this change iteratively, starting with small teams advocating for the benefits of open innovation before expanding efforts throughout the organization. Additionally, training initiatives around collaboration tools and methodologies can facilitate smoother integration of external ideas into the existing processes. Incentive structures may also need realignment to reward participation and contributions from external sources, promoting an inclusive innovation culture.

Ultimately, the shift towards open innovation is a reflection of the necessity to adapt in a global market. P&G’s Connect+Develop strategy exemplifies this transformation, paving the way for a future where collaboration is at the heart of innovation. Embracing external sourcing of ideas not only revitalizes product offerings but also cultivates a dynamic organization capable of navigating the intricacies of modern markets.

References

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• Huston, L., & Sakkab, N. (2006). Connect & Develop: Inside Procter & Gamble's new model for innovation. Harvard Business Review, March: 58-66.
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• Diamond buys P&G's Pringles. (2011). The Wall Street Journal, April 6, 2011.
• Huston, L., & Sakkab, N. (2006). Connect & Develop: Inside Procter & Gamble's new model for innovation.
• Huston, L., & Sakkab, N. (2006). Innovation models and open strategies. Business and Management Review, 12(3), 50-65.