With all the advertisements that the packaged-goods industry hurls at consumers on TV, Procter & Gamble (PG ) might not seem to be a place where innovation is paramount. But in recent years, especially under the leadership of Chief Executive Alan G. Lafley, the Cincinnati-based giant has focused as much on honing its process of innovation as on marketing, hoping to recharge growth. So far, it's working well: In its fourth quarter ended June 30, profits shot up 44%, to $1.4 billion, on a 10% rise in sales before acquisitions.
In particular, says G. Gilbert Cloyd, P&G's chief technology officer, the company has encouraged various departments to work together more closely to trade ideas. At the same time, it has reached outside to tap experts at other companies. In a recent conversation with BusinessWeek's Silicon Valley Bureau Chief Robert D. Hof , Cloyd explained how a seemingly lumbering giant is using cutting-edge methods to accelerate innovation.
Q: How has the way Procter & Gamble innovates changed in recent years?
A:What we've done in recent times is to put more emphasis to what we call the desired consumer experience. That takes in broader thinking than a specific product attribute. It can be the concept, what it looks like, what it smells like, what it feels like. We have industrial design much more integrated into the innovation process than we had in the past.
We're also putting a lot more attention on what we call 360-degree innovation. That has meant that we've brought our commercial and our technical groups together even more closely.
We've put more emphasis on serving an even broader base of consumers. We have the goal of serving the majority of the world's consumers someday. Today, we probably serve about 2 billion-plus consumers around the globe, but there are 6 billion consumers out there. That has led us to put increased emphasis on low-end markets and in mid- and low-level pricing tiers in developed geographies. That has caused us to put a lot more attention on the cost aspects of our products. We call this cost innovation.
Q: What changes in society and industry are altering the way P&G innovates?
A:One, we're facing an ever-faster pace of innovation in consumer-product markets. We think the pace of innovation has roughly doubled in the past 10 years. So when we make an innovation and bring it into the marketplace, it has a much shorter market life than what it had previously. We need to be moving to upgrade our brands even more frequently.
Second, the competition is very fierce. Fifteen years ago, when we had a lot of generic brands or private labels, they were often not true brands; they were products. Now the brands that we face from retailers, from regional competitors, are very well-developed brands.
Finally, consumers are increasingly better-informed about making their choices. But they have a very busy life, and they don't have time to deal with complexity. Our challenge in innovation is to present ourselves well with a lot of different brands and do it affordably.
Q: How does the innovation process work today at P&G?
A:We have a broad program we call "connect and develop." In the academic world, they call it "open innovation." We want to connect internally -- move technologies and ideas across our business units internally -- but we also want to connect externally. This has been a real source of innovation for us.
Q: Can you give me some examples of how you cross-fertilize internally?
A:With Crest Whitestrips, we had the people from our oral-care area who obviously knew about whitening teeth, and we had people in our corporate research and development organization who developed some novel film technology, and then we actually brought in some people from our fabric and home-care area who were experts in bleach.
With Olay Daily Facials, we wanted a product that provided both excellent cleansing and moisturizing. Again, we had multiple units internally -- our skin-care people who understood the surfactants needed in facial cleansing and people from our tissue and towel area brought in substrate knowledge. And [we had] people from our fabric-enhancer area involved with Bounce, which uses a similar technology for putting fragrance on clothes.
Q: How do you make those connections happen in a way that doesn't slow things down from all the coordination that's necessary?
A:On our internal intranet, we have an "Ask Me" feature that goes to 10,000 technical people around the globe. So if someone has a problem or a need, they can push it out there, and it will get directed to people who have expertise in that particular area.
We also have 21 communities of practice within our R&D community built around areas of expertise, such as polymer chemists, biological scientists, people involved with fragrances. These communities become resources when someone has a project need.
Finally, we have a global-technology council, which is made up of representatives of all of our business units, and we meet regularly to bring collective expertise to major opportunities.
Q: How does the company reach outside for talent and ideas?
A:We have developed formal strategies for how to reach out to the external world. We have over 50 people from all our business units whom we call technology entrepreneurs. These people are very facile in searching both for ideas and for solutions. They attend conventions, form supplier-group networks, and use the Internet.
The Internet has been a major advance for us here. If I've got a problem I've got to solve, or if I have an idea in an area, I can be in touch with someone somewhere around the globe within 24 to 48 hours who has the answer or idea that I need. Neither of us knew each other beforehand. It allows you to exploit the entrepreneurial spirit and the tremendous intellectual capability that exists outside the company. We've now got a palette of virtually unlimited colors.
Q: How well has it worked?
A:We estimated when we started about three years ago, we had about 20% of our ideas, products, and technologies that came from totally outside P&G. Today, we've got about 35%, and our target is to get to 50%. It's also a tremendous productivity enhancer. This has actually occurred with a 20% reduction in the R&D investment we make.
Q: Is the decline in corporate R&D spending a problem?
A:It's a question of how productive the R&D investment is. We've made a major push into the area of computational modeling and simulation, and use of the Internet to interact with consumers. So we can do much more of our innovation in a virtual world and then just confirm it in the physical world.
In the past, we spent lots of time and money in generating physical prototypes and testing them with consumers. In the past, that might have taken two months. We can now do that in 24 to 48 hours.
Q: These changes must be hard for people at P&G to contend with. How do you get them to go along?
A:First, we made the choice to serve the majority of the world's consumers. That's something that is rather inspiring to people in P&G. Second, we went through a really tough patch in 2000. That really helped people face the reality of the situation. That got us moving.
Q: Why is it often so difficult for large, established companies to innovate?
A:When you get really big brands that are generating a lot of profit and cash flow, there's a tendency to make changes very carefully. If you do something that your large consumer base doesn't like, it can be a very significant negative financial impact. You've got to be careful, or caution will freeze you in place. Second, if you've been on a particular conceptual and technology approach that's working, there's just this tendency that people have to keep working with what's successful.
Q: How do you get past those tendencies?
A:It's important to set the right goals. Asking people to set their goals in a very conscious, formal process is important to see if the innovation pipeline matches what they want to deliver. The perversion you can get into is that you build an incentive system that causes people to keep trying to make something a success and invest behind it when they ought to just quit. Kill it off, take the learning, and recycle.