G. Gil Cloyd has done more than contribute to the transformation of what has grown into a $51 billion consumer products goods maker. He has successfully shown how any company can contend with the classic innovator's dilemma -- most innovations fail, but companies that don't innovate die.
His solution, innovating innovation, is the underlying support for the payoff dramatized in P&G's annual report to stockholders for fiscal 2004: "P&G exceeded all its financial goals in fiscal 2004."
The detailed dimensions of his challenge are, of course, specific to a global company whose 300 brands touch, on a daily basis, between 2 billion and 2.5 billion consumers. But the innovation approach taken by Cloyd and his 7,400 researchers can enhance competitiveness in any industry.
"One of the challenges we have is serving the needs of a very diverse consumer population, but yet to be able to do that quickly and very cost effectively," says Cloyd, noting that that is the growing challenge for all of today's global corporations.
P&G's challenge is further complicated by a product scope that stretches across a whole range of everyday items from paper towels to laundry detergents, personal cleansing products, dentrifice, antiperspirants, hair-care products, a wide range of beauty-care products, fragrances, personal over-the-counter health-care products, and a pharmaceutical business.
"The challenge we face is the competitive need for a very rapid pace of innovation. In the consumer products world we estimate that the required pace of innovation has doubled in the last three years," says Cloyd. "That means we have less time to benefit from any innovation that we bring into the marketplace." The nagging problem is to cost effectively meet that challenge globally while focusing on being very responsive on a local basis. Cloyd directs 21 research centers in nine countries.
How has P&G fared? Cloyd's report card is in the financial data reported for the 2004 fiscal year:
- Volume is up 17%, and organic volume is up 10%.
- Sales are $51.4 billion, up 19%, with organic sales up 8%.
- Earnings are $6.5 billion, up 25%. Earnings are up 13% versus prior-year core earnings.
- Earnings per share are $2.32, up 25%. Earnings per share are up 14% versus prior-year core earnings per share.
- Free cash flow is $7.3 billion or 113% of earnings.
- Dividends are up 13%, annualized.
- Total shareholder return is 24%.
To grow and support those results, Cloyd has leveraged a strategy designed to innovate innovation. The focus is on using technology and innovation to compete on multiple fronts simultaneously without spreading the corporate structure too thin. The proof is in the demonstrated ability to deliver a higher frequency of new products across multiple markets.
"What we've done is refine our thinking on how we conduct and evaluate research and development. I look at R&D in terms of two venues -- where do we focus our efforts and secondly, how do we get it done," says Cloyd. "We made some changes. For example, historically, we tended to put the evaluation emphasis on technical product performance, patents and other indicators of internal R&D efforts. Now there is more emphasis on perceived customer value."
"With research centers in nine countries, the strategy is to emphasize our consumer's deepest wants and desires as they vary from culture to culture."
Cloyd describes holistic or 360-degree innovation as a major focus. "What that recognizes is that we're really about creating experiences for our consumers. And when we focus on the experience aspect, it becomes intuitive that all components of that experience must be addressed if we are to be successful in the marketplace."
Components of Cloyd's holistic innovation include the product technology to achieve the desired performance, the manufacturing technology to deliver the product at the right price point, and the conceptual and aesthetic aspects of the product's performance, appearance and packaging. The result is more emphasis on industrial design considerations than ever before, adds Cloyd. "Today's focus is on all aspects of the customer experience."
Cloyd sees the R&D connection to corporate goals beginning on the business side. "The corporation sets certain goals of volume, sales growth in terms of profit and cash delivery," he says. "As you work across a multifaceted business like P&G, there needs to be some iteration in terms of what does the company want to deliver and what will each business unit need to deliver to fulfill shareholder return."
At P&G those deliverables are set in terms of three- and five-year time frames. Then each business unit works with the technical organization to innovate a portfolio with the appropriate timing. The steps begin with setting the right financial targets and then fulfilling them with the right, robust innovation program.
Cloyd sees R&D's theoretical/applied research mix as an industry specific issue. "From a P&G perspective, we feel that it is very important to be very application oriented. We feel that we want to have the majority of the innovation effort directed against core areas or adjacent areas. To accommodate the unexpected, P&G's strategy is to always have some innovation initiatives directed at totally new areas that could lead to a totally new business, a different channel or a different type of consumer.
"An important goal for each of our business units is to identify technology fields that we believe can and will be very relevant," says Cloyd. "After setting priorities some of that basic research will be done within P&G, but increasingly we network to the external [scientific] world where some of the important research is under way and tie it back into our efforts."
Cloyd says his imperative is to open new ideas and connections to speed the delivery of products. He's succeeding by innovating innovation through collaboration, both internal and external.
In addition to integrating commercial and technical innovation more seamlessly (holistic innovation), Cloyd is intent on integrating internal R&D with the outside world via the company's Connect + Develop (C+D) initiative.
Growing the C+D capability is an important way to strengthen the external relationships necessary to access new technology and gain time-to-market advantages.
By innovating innovation, P&G has notably increased the efficiency of its R&D investments. CEO Lafley, in a message to stockholders, boasts that P&G's innovation success rate has doubled. "Our portfolio of initiatives launched in the last calendar year is on track to deliver more than 100% of going-in expectations. At the same time, R&D investment as a percentage of sales is down from 4.5% of net sales three years ago to 3.5% of net sales this past fiscal year . P&G's R&D is now much more effective and efficient."
Cloyd expects R&D's efficiency to continue growing as the company strives to source 50% of its ideas from the outside. He says P&G is currently at 35% up from 20% in 2002. In 2000 only 10% came from outside the company. (See P&G Found Some Ideas! for a list of products C+D made possible).
As C+D evolved as a best practice at P&G, the concept also became popularized as "Open Innovation," as in the book of the same name by Henry Chesbrough, Harvard Business School Press, 2003. Chesbrough, now at the University of California, Berkeley, cites P&G as a role-model user of the concept.
Chesbrough dramatizes the compelling case for C+D or Open Innovation with the following observations:
- "Not all the smart people work for you. There is a need to work with smart people both inside and outside the company.
- External ideas can help create value, but it takes internal R&D to claim a portion of that value for you.
- It is better to build a better business model than to get to market first.
- If you make the best use of internal and external ideas, you will win.
- Not only should you profit from others' use of your intellectual property, you should also buy others' IP whenever it advances your own business model.
- You should expand R&D's role to include not only knowledge generation, but knowledge brokering as well."
Although Cloyd refers to C+D as "a tool to facilitate serendipity," the company has a well-organized process in place to make it happen. Since August 2001, P&G's C+D program has been facilitated by service-provider NineSigma Inc., a Cleveland-based 2000 start-up by Mehran Mehregany, a professor and engineering department head at Case Western Reserve University. NineSigma provides the methodology and infrastructure for linking companies with outside technology. The mission: connect companies in all fields with scientific and technological innovations -- a scientific matchmaker. NineSigma has Ph.D.-level program managers to both search and proactively solicit technological solutions for its clients.
NineSigma says open innovation should not be considered as the outsourcing of R&D, but as a way of making internal R&D more important. "The value we deliver includes shortening of product development cycles to gain an important competitive advantage," says NineSigma's Charles Brez, senior vice president, sales and marketing. Open innovation can also make it possible to harness so-called 'disruptive technologies' instead of being blindsided by them, adds Mehregany. Brez says some of NineSigma's clients apply the open innovation philosophy to both processes and product development. In one instance, a client was able to find a new application for existing technology.
Follow The Leader
For those motivated to emulate P&G's lead in open innovation, Brez offers recommendations. "Start with a formal strategy that includes implementation and tactical plans. Comprehensive planning produces the greatest value. Put all of the elements together -- with senior management committed to the strategy, the implementation, the organization and the funding."
Brez says the P&G approach to open innovation is detailed and complete -- even including a P&G organization called technology entrepreneurs to maximize C+D benefits. He labels them outstanding, leading-edge practitioners.
In February 2003, P&G increased its commitment to open innovation with an agreement with NineSigma to work more closely together on a global basis. With C+D and holistic innovation, Cloyd says P&G's innovation process has become a more collaborative environment that vastly increases the number of different perspectives. "There is no hand-off from one function to another," says Cloyd. "Business units collaborate with each other and R&D from the very beginning of an idea."
By opening up innovation, P&G increases the value of its internal R&D, an organization that holds 26,700 patents worldwide. "Each year we apply for about 500 first-time patents, with about 7,000 filings in key countries globally," says Cloyd. "Our R&D organization is made up of scientists, engineers, technologists and support people from 71 countries, with 1,000 Ph.D.s working in our laboratories."
While open innovation ideas like C+D constantly seek global idea input, P&G people are developed internally. "Except for acquisitions, virtually 100% join us out of school, because the company prizes cultural variety and inclusion," says Cloyd. "By targeting diversity, we gain the understanding needed to satisfy consumer in more than 160 countries," he adds.
To accommodate P&G's accelerated innovation process, Cloyd emphasizes a fast cycle learning methodology to help P&G identify winners earlier and develop them at lower cost. "Remember," he adds, "that the challenge is that most innovations fail!"
Cloyd sees computational modeling and simulation as the evolving solution for fast cycle learning. "Computational modeling once existed primarily in a computer-aided-engineering context to facilitate our manufacturing processes. Now we're using it to help with actual product design. A computational model helps us more quickly understand what's going on. The simulation capabilities are also allowing us to interact with consumers much more quickly on design options. For example, Internet panels can engage consumers in as little as 24 hours. Digital technology is very important in helping us to learn faster."
Eventually Cloyd predicts that as much as 90% of P&G's R&D will be done in a virtual world with the remainder being physical validation of results and options. "Not only will it accelerate innovation, but the approach will greatly enhance the creativity of our people."
In one example, Cloyd cites the significant time and cost savings made possible by using computer models in consumer testing. "In R&D, equally significant savings will be made by better understanding product performance via techniques such as computational fluid dynamics," he says. "It will work better than our visual or physical measurement systems and enable us to be more creative and design better products."