At Procter & Gamble, the Innovation Well Runs Dry

The consumer giant pioneered disposable diapers, synthetic detergents, and fluoride toothpaste

For much of its history, Procter & Gamble didn’t just launch new products, it created new product categories, from the first mass-produced disposable diapers to Crest teeth-whitening kits. That’s one reason P&G has more than 1,000 Ph.D.’s among the 8,000 employees at its 26 innovation facilities around the world. “P&G is largely a branded science company,” says Larry Huston, former innovation officer at P&G who’s now managing director of 4inno, a consulting firm.

Lately, though, there’s been a dearth of pioneering brands emerging from the world’s largest consumer-products company. Spending on research and development in fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percent of sales, the same as the prior year and down from 3 percent of sales in 2006. P&G’s most recent homegrown blockbusters—Swiffer cleaning devices, Crest Whitestrips, and Febreze odor fresheners—were all launched at least a decade ago. Says Peter Golder, a professor at the Tuck School of Business at Dartmouth College: “P&G is built on creating new categories, and innovation is in its DNA, but they need to rediscover it.”

Regaining its new-product mojo is crucial because P&G’s business strategy has long been to charge premium prices for cutting-edge products. A 150-oz. container of liquid Tide detergent is $18 at Target, for instance, 20 percent more than the retailer’s house brand. As rising commodity prices have increased the cost of most basic household products, cash-strapped customers may still be willing to pay more for true innovations but not necessarily for the kind of product extensions and embellishments P&G has turned to.

That’s created a challenge for Chief Executive Officer Bob McDonald, who has lowered profit forecasts three times since Jan. 1. He’s trying to cut $10 billion in costs by 2016 and reverse market-share declines in such key categories as U.S. detergents. McDonald is under pressure from activist investor William Ackman, who in July took a $1.8 billion stake in P&G and may seek management changes. Blockbusters have “dried up a bit,” acknowledges Bruce Brown, P&G’s chief technology officer. “We want to get back to more of that.”

McDonald earlier this year assembled a team of researchers, marketing managers, and senior executives from across the company to chart a bolder innovation course. The group spent 10 weeks analyzing P&G’s new-product pipeline and selecting the most promising ideas for development. But most won’t be ready for at least another year.

P&G’s 175-year history is filled with such consumer-product innovations as the first synthetic detergent (Dreft, in 1933), the first fluoride toothpaste (Crest, in 1955), and the first stackable potato chip (Pringle’s, which later dropped the apostrophe, in 1968). Researchers typically have leveraged technologies already used in P&G products to come up with entirely new ideas. For Crest Whitestrips, launched in 2002, they adapted bleaching methods from P&G’s laundry business, film technology from the food wrap business, and glue techniques from the paper business.

In recent years, however, the company’s product pipeline has been mainly focused on “reformulating, not inventing, products,” says Victoria Collin, an analyst at Atlantic Equities in London. Among these are new scents of Tide for Eastern European markets and Secret deodorant’s Natural Mineral line. As a result, analysts say P&G has lost customers in the U.S. and other developed countries, who’ve switched to cheaper products made by such rivals as Unilever, as well as store brands.

When former CEO A.G. Lafley took charge in 2000, he sought to increase the rate of product development by collaborating with outside partners who could help with everything from packaging to product design. Working with outsiders has enabled P&G to gain access to some important technologies, such as a wrinkle-reducing ingredient made by a French company, Sederma, that’s used in its best-selling Olay Regenerist skin cream.

But Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown.

McDonald, who has acknowledged that the company’s R&D has been “inadequate” in some product categories and regions, has now centralized 20 percent to 30 percent of P&G’s research efforts. He also named Jorge Mesquita, already chief of its pet care and snacks businesses, as head of P&G’s new business creation and innovation unit and given him responsibility for coordinating product launches.

One area of focus is beauty, where “we lost our way for a couple of years,” says Brown. That business, which includes deodorants, cosmetics, and hair care and made up 24 percent of P&G’s $83.7 billion in sales in fiscal 2012, has been lagging competitors such as L’Oréal in product launches. (L’Oréal says it rolls out about 500 a year.)

McDonald has said he hopes cost-cutting will free up more money for product development. Yet the squeeze has forced P&G to make tough choices even when it does introduce appealing products. One example: Spending to support a popular new Olay hair removal product last year pulled money from other products, “so the base business lost more than this new thing gained,” Brown says.

Meanwhile, Unilever says it can roll out 10 new products in 60 countries in the same time it once took to introduce them in just 10 countries. Recent new products include Clear anti-dandruff shampoo and a Rexona deodorant that uses proprietary Motionsense technology to activate the product as the wearer moves.

Kimberly-Clark, maker of Huggies diapers and Kleenex tissue, has opened research centers in South Korea and Colombia and increased R&D spending in the first half of this year by double-digits from the year before. “Our international business is growing so rapidly that the demand for innovation has increased,” Chief Financial Officer Mark Buthman says.

P&G still brings plenty of new products to market. SymphonyIRI’s New Product Pacesetters report, which tracks the top-selling non-food innovations, showed P&G with one-third of the top 25 last year. And the company over the years has acquired big brands, including the Olay and SK-II skin care lines and Gillette. Yet homegrown products remain the challenge. Says 4inno’s Huston: “You’ve got to be constantly creating innovation.”

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