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By the end of this paper, using Procter and Gamble (P & G) as a case study, I should have been able to sufficiently define what the open innovation model is, how P & G have been able to tap into this model of innovation and how effective it has been for them, and, as with all things that have a positive side there is always the negative. So, I will explore the challenges they have had integrating this model to their own system, and the lessons to be learned from them.
All these would be addressed using information obtained from the company’s website, archived documents, annual reports, relevant reports, and studies from the internet and other sources.
Recently, a new type of innovation model emerged known as the open innovation model. It is gradually becoming an influential model across the world. Companies from both emerging economies and developed economies use this model to address concerns of speed to market in new product development, cost-cutting and risk sharing, and improvement of innovation efficiency.
In 2003, Henry Chesbrough published a book titled Open Innovation. This was born out of the desire to bridge the gap between academia and the industry. He was frustrated by the fact that academia was not bringing enough ideas and advice during his days as a manager in silicon valley. He decided to go in for his Ph.D. in a bid to reduce this gap and during the course of that came out with the concept of Open Innovation.
[Chesbrough, H 2011]
Henry Chesbrough can be regarded as the father of open innovation.
The open innovation model is an innovative concept which seeks to disrupt the traditional way of innovation, which is the vertical integration model. That is, while the vertical integration model seeks to create only internal innovation and use internal paths to market, the open innovation model seeks to use external ideas to accelerate internal innovation as well as expand the market for external use of innovation and use both internal and external paths to market.
Simply put, open innovation can be defined as the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the market for external use of innovation, respectively. [Chesbrough, H 2011]
To further understand the value creation of this open innovation model, we consider two primary manifestations of this model – open invention and open coordination.
The benefits of using this open innovation include:
This is achieved through open invention. The knowledge gained when resources are pooled by multiple contributors to the development of a product is unparalleled to that of a single contributor. An example of this is the creation of the Linux operating system, which included countless person-hours from people around the globe rallying round to perfect code supplied by Linus Torvald.
This is achieved through open coordination. By collaborating with external companies mostly within the same industry, industry-standard can be achieved, permitting a whole business ecosystem to flourish. An example is when IBM decided to open up its Personal Computer (PC) architecture in the 1980s. This gave rise to companies like Compaq adopting the IBM specification, thereby making IBM the industry standard.
Procter and Gamble is an American consumer goods multinational corporation headquartered in Cincinnati, Ohio. It was founded in 1837 by a British American by name William Procter and Irish American by name James Gamble.[Procter and Gamble]
Plenty of evidence confirms the benefits of using open innovation, using P & G as a case study, we can see that after its creation in 1837, P & G was a highly successful organization, up until the year 2000, where it faced major financial difficulties. So many factors led to these turbulent times, which include high customer demand, fast followers, an increase in the pace of innovation, costs, and constrained resources. The traditional model was not delivering the required results, the company required a growth rate which exceeded the industry growth rate, thus, a collaboration with external sources was required, and this is what is now known as Open Innovation.
The current executive chairman Alan George A. G. Lafley believes that innovation is at the heart of P & G’s business model.
So, P & G’s open innovation model started out as an initiative which was named Connect and Develops, this put them in a unique position where they are involved with every area of the product that makes contact with the customers which includes the packaging, in-home product usage experience, shopping experience, as well as the product itself. The connection and develop is a process by which the company collaborates with external sources for ideas and technologies. At the inception of the project, 10 – 15% of the innovations at P & G were ideas that were externally sourced. That number grew to about 50%, in 2008, thereby enabling the company to make a 6% organic growth in an industry that has a 2 -3% growth rate. The connection and development was a deviation from the normal Research and Development of other companies employed. Today, the company operates on “Proudly Found Elsewhere” culture, which has opened the door for many innovations.
P & G has a unique design for innovation that it uses, which comprises of 5 major categories:
Apart from the Connect and Develop which is now considered as the major innovation initiative by the company, there are several other complementary strategies that contribute to the current success of P & G.
This complementary P & G innovation strategy includes:
This strategy involves P & G developing products based on customer needs. Basically, P & G engage their customers as co-designers.
This is an in-house venture capital firm that invests in ideas that are high-risk because they believe the rewards would be high as well. They sponsor the conceptualization stage, the design stage, the engineering and qualification works, before handing over the idea to the relevant business unit within the company.
As mentioned earlier, everything that has a good side has a bad side. Open innovation is no exception. [ outlines three major challenges with open innovation, namely:
Maximization, Incorporation, and Motivation.
It is feared that once open innovation is adopted by a company, then internal innovation becomes redundant, hence, firms need a wide range of approaches to ensure that internal innovation is still maximized.
There is also the fear that most knowledge gotten from external sources may not be easily absorbed or incorporated by a firm into its innovation activities if such knowledge cannot be properly identified, or the firm lacks the absorptive capacity and political willingness to incorporate said external innovations.
It is well known that these external sources of innovation are supplied by people or an entity, and if there is no form of reward to replenish that stream of knowledge, said people or entity would most likely be less motivated to add more to that pool of knowledge. Hence, proper remunerations or recognition should be given to those people or entities to keep them motivated.
Needless to say, with all these challenges facing open innovation, P & G definitely have their own challenges they faced in the adoption of the open innovation model.
One armchair postulation of the challenges would be initial resistance by staff who were used to doing things in the traditional fashion.
According to [Ruiz, 2009] P & G definitely faced challenges with their connections and development initiative. The challenges include:
This challenge is synonymous with one of the general challenges facing open innovation which is maximization. The fear that constant use of external sources would lead to the gradual decline in “Lean Innovation”. That is, there is fear that the constant use of these external sources would eventually lead to the loss of internal capabilities of developing their own product.
P & G believe that its connection and development will be a dominant innovation model in the 21st century. But a major drawback would be how to protect their intellectual property. Things become more complicated once the open model innovation is applied. The traditional way of doing things ensured that all that was needed was a decision as to whether to apply for a patent for a certain innovation or not. But, with this model, there are several in-licensing and out-licensing of innovation and technology, making the protection of intellectual property a big problem. Consideration has to be made on appropriate measures to take in order to protect their new inventions. If for example, an investor does not have adequate protection, they have created something that others can then get for free. Therefore, patents should e looked at closely.
Another problem that arises from this issue is the fact that hundreds of thousands of relationships with small technology providers have been created, and managing such relationships can pose a challenge as well, especially if there are no long term relationship goals between these providers and P & G and that these providers do not share the same incentives with P & G.
Also, research shows that there are huge financial costs as well in using this model, costs that are not present when using the traditional model.
With the launch of the connect and development model, P & G found themselves in a crisis, where the problem was how to select really innovative ideas for adoption. There tried to overcome this challenge by only selecting ideas where the technologies were matured and proven to be possible, by doing so they reduced implementation and technological risks, this in itself posed another problem whereby the chances of customization and applying in-house innovation were drastically reduced, and also touching on earlier challenge whereby the internal R & D were not being maximized.
Going by the Pareto Principle (80-20 rule) it is safe to say that the most valuable innovators are the ones with the least innovations. The challenge, therefore, would be for P & G to identify this valuable group and nurture them seeing that most of them would come from outside the company. In doing this, P & G would have a strong potential for competitive advantage.
P & G have created a complex set of structures and interactions, thereby transforming the management of this system into a challenge because of the introduction of the Connect and develop a strategy as well as all their other innovation initiatives.
They try to overcome this challenge by distributing the functions into two units. The first unit is known as the “Technology Entrepreneurs” are basically scouts, they hunt for new innovations outside the company, and then lobby within the company to bring those ideas in. While the second unit is known as the “Research Fellows” is in charge of conceptualization, development, and continuous refinement of the ideas gotten from the connecting and develop the initiative. These research fellows basically act as the back office to this intricate system.
Despite the fact that over time, sales and profits seem to have improved after the implementation of the connect and develop initiative, going by P & G’s financial records, it is not clear if the success can be attributed entirely to this connect and develop the initiative. The stock market evaluation shows that P & G has had a similar stock market trajectory when compared to its industrial growth. As of this moment, it is hard to say if this P & G connect and develop initiative is the game-changer for them.
Nevertheless, what is apparent is that the connect and development program has now become a case study when it comes to open innovation in large companies. They have created their own tools, their own networks, both within and outside the company, they have also invested strategically in this connect and develop an initiative to drive their innovation in new products. Therefore, the connection and development represents a huge compromise on the part of P & G, using a business paradigm that comprises intricate network and concepts and that has not been tested fully.
As far as their financial growth is concerned, this seems to be the right way to go at the moment but is clearly the beginning of a long journey that is dependent on the managerial skills for a heterogeneous and worldwide network of innovators, without losing vital internal capabilities and competitive advantages in the process.
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