P&G's Innovation Culture


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How Proctor & Gamble's A.G. Lafley built a world-class organic growth engine by investing in people.

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P&G's Innovation Culture

  1. 1. P&G’s Innovation Cultureby A.G. Lafley, with an introduction by Ram Charanfrom strategy+business issue 52, Autumn 2008 reprint number 08304strategy+businessReprint
  2. 2. featuresstrategy&competition1
  3. 3. P&G’SINNOVATIONCULTUREfeaturesstrategy&competition2IllustrationsbyMichaelKleinAs they lead to repeat purchases, these offer-ings reshape the market, so that the company isplaying an entirely new (and profitable) game towhich others must adapt. A number of game-changing innovators are operating today, includ-ing such household-name enterprises as Procter &Gamble, Nokia, the Lego Group, Apple, Hewlett-Packard, Honeywell, DuPont, and GeneralElectric. Wherever you see a steady flow of note-worthy innovations from one company, you canprobably assume that it is a game-changing inno-vator, with the distinctive kinds of social connec-tions, culture, and supporting behaviors thatenable it to play that role.Consider the case of Procter & GambleCompany. Since A.G. Lafley became chief execu-tive officer in 2000, the leaders of P&G haveworked hard to make innovation part of the dailyroutine and to establish an innovation culture.Lafley and his team preserved the essential part ofP&G’s research and development capability —world-class technologists who are masters of theHow we built a world-classorganic growth engineby investing in people.THE HEART OF A COMPANY’S BUSINESS MODEL should be game-changinginnovation. This is not just the invention of new products andservices, but the ability to systematically convert ideas into newofferings that alter the very context of the business.by A.G. Lafley, with an introduction by Ram Charan
  4. 4. featuresstrategy&competition3strategy+businessissue52core technologies critical to the household andpersonal-care businesses — while also bringingmore P&G employees outside R&D into the inno-vation game. They sought to create an enterprise-wide social system that would harness the skills andinsights of people throughout the company andgive them one common focus: the consumer.Without that kind of culture of innovation, a strat-egy of sustainable organic growth is far more diffi-cult to achieve.A.G. Lafley and I coauthored The Game-Changer: How You Can Drive Revenue and ProfitGrowth with Innovation (Crown Business, 2008) toexplain how to make game-changing innovationdrive growth on a consistent, well-paced basis. Thecritical factors that we cover in the book includekeeping a laser-sharp focus on the customer; estab-lishing a disciplined, repeatable, and scalable inno-vation process; creating organizational and fundingmechanisms that support innovation; and demon-strating the kind of leadership necessary for prof-itable top-line growth as well as cost reduction.One aspect of building an innovation culturedeserves more attention than we could give it inThe Game-Changer: designing a social system thatwould spark new ideas and enable critical deci-sions. In the article that follows, A.G. explains thehuman factors that fostered innovation at Procter& Gamble. It could be thought of as the “missingchapter” to The Game-Changer; a vital componentthat isn’t always obvious, even to experts, preciselybecause it is so fundamental.— Ram Charanhen I became CEO of Procter & Gamblein 2000, we were introducing new brandsand products with a commercial success rateof 15 to 20 percent. In other words, for every six newproduct introductions, one would return our invest-ment. This had been the prevailing ratio in our industry,consumer packaged goods, for a long time.Today, our company’s success rate runs between 50and 60 percent. About half of our new products suc-ceed. That’s as high as we want the success rate to be. Ifwe try to make it any higher, we’ll be tempted to err onthe side of caution, playing it safe by focusing on inno-vations with little game-changing potential.The decision to focus on innovation as a corestrength throughout the company has had a direct influ-ence on our performance. P&G has delivered, on aver-age, 6 percent organic sales growth since the beginningof the decade, virtually all of it driven by innovation.Over the same period, we’ve reduced R&D spending asa percentage of sales; it was about 4.5 percent in the late1990s and only 2.8 percent in 2007. In that year, wespent US$2.1 billion on innovation, and received $76.5billion in revenues. We’re getting more value from everydollar we invest in innovation today.The focus on innovation has also had a direct effecton our portfolio of businesses. The Game-Changer de-scribes how we sold off most of P&G’s food and bever-age businesses so we could concentrate on products thatwere driven by the kinds of innovation we knew best. Asit turns out, with this narrower mix of businesses, we canmore easily devote the resources and attention needed tobuild a broad-scale innovation culture.We also focused on creating a practice of open inno-vation: taking advantage of the skills and interests ofA.G. Lafley(editors@strategy-business.com) is the chairman andCEO of Procter & GambleCompany. He was namedExecutive of the Year by theAcademy of Management in2007 and serves on the boardsof General Electric Companyand Dell Inc. He is the coau-thor, with Ram Charan, of TheGame-Changer: How You CanDrive Revenue and ProfitGrowth with Innovation (CrownBusiness, 2008).Ram Charan(www.ram-charan.com) is aDallas-based advisor toboards and CEOs of Fortune500 companies and the authoror coauthor of 14 books,including the bestsellersExecution (with Larry Bossidy;Crown Business, 2002),Confronting Reality (with LarryBossidy; Crown Business,2004), and Know-How (CrownBusiness, 2007).Also contributing to this articlewas Geoffrey Precourt.W
  5. 5. featuresstrategy&competition4people throughout the company and looking for part-nerships outside P&G. This was important to us for sev-eral reasons.First, we needed to broaden our capabilities. Eachof our businesses was already practicing some form ofinnovation improvement, but they were not all improv-ing at the same rate. As the CEO, I could lead andinspire the company as a whole, but I could not substi-tute my judgment for that of other leaders who knewand understood their specific businesses far better than Icould. The decision makers in each business would haveto examine their competitive landscape and their owncapabilities to figure out what kinds of innovationwould work best and win with consumers.Second, building an open innovation culture wascritical for realizing the essential growth opportunitypresented by emerging markets. During the next 10years, between 1 billion and 2 billion people in Asia,Latin America, Eastern Europe, and the Middle Eastwill move from rural, subsistence living to relativelyurban and increasingly affluent lives. They will havemore choices, a greater connection with the global econ-omy, and the ability to realize more aspirations. Alongthe way, they will become, for the first time, regular con-sumers of branded products in categories such as per-sonal care, fabric care, and prepared food.It would seem relatively simple to execute a strategyfor reaching these new consumers. But the days ofachieving automatic growth by entering new marketsare essentially over. Just as retailers often reach a level ofsaturation — where it doesn’t make sense to open anymore stores in a particular market — many mature con-sumer products companies are rapidly running out ofthe so-called white space in new regions. P&G, forexample, already has a market presence in more than160 countries, with large operations on the ground inmore than 80 of them. We can grow our business inthese countries only by consistently developing newproducts, processes, and forms of community presence.And to do that, we need to involve people, inside thecompany and out, who are comfortable and familiarwith the values and needs of consumers in these parts ofthe world.A third reason for focusing on open innovation hadto do with fostering teams. The kinds of innovationneeded at Procter & Gamble must be realized throughteams. The idea for a new product may spring from themind of an individual, but only a collective effort cancarry that idea through prototyping and launch. If inno-vation is to be integrated with both business strategy andwork processes, as we believe it should be, it requires abroad network of social interactions.Moreover, our experience suggests that many of thefailures of innovation are social failures. Promising ideas,with real potential business value, often get left behindduring the development process. Some innovations aretimed too early for their market; others are lost in exe-cution. Often, the root cause is poor social interaction;the right people simply don’t engage in productive dia-logue frequently enough.For all these reasons, we consciously set in place aseries of measures for building an open innovation cul-ture at P&G.“The Consumer Is Boss”Procter & Gamble is known for its highly capable andmotivated workforce. But in the early 2000s, our peoplewere not oriented to any common strategic purpose. WeThe days of achieving automatic growthby entering new markets are over. We can grow inthese countries only with new products,processes, and forms of community presence.
  6. 6. featuresstrategy&competition5strategy+businessissue52had a corporate mission to meaningfully improve theeveryday lives of the customers we served. If 15 secondswith a deodorant or two minutes with a disposable dia-per have made a small part of your life a little bit better,then we’ve made a difference.But we hadn’t explicitly or inspira-tionally enrolled enough of our100,000-plus people around theworld in our mission; it wasneither fully embracedby employees nor fullyleveraged by the com-pany’s leadership. Ourinnovation efforts suf-fered accordingly.So we expandedour mission to in-clude the idea that“the consumer is boss.”In other words, the peo-ple who buy and useP&G products are valuednot just for their money,but as a rich source of in-formation and direction. Ifwe can develop better ways of learn-ing from them — by listening to them,observing them in their daily lives, and even living withthem — then our mission is more likely to succeed.“The consumer is boss” became far more than a sloganto us. It was a clear, simple, and inclusive cultural prior-ity for both our employees and our external stakehold-ers, such as suppliers and retail partners.We also linked the concept directly to innovation.From the ideation stage through the purchase of aproduct, the consumer should be “the heart of all wedo” at P&G. I talked about it that way at dozens of com-pany town hall meetings during my first months asCEO. More and more people began thinking abouthow to apply the “consumer is boss” con-cept to their work. Resources werestill scarce, and there were fiercedebates about which ideasdeserved the most attentionand where to deploymoney and people. Butthis concept came tomatter more than thoseother concerns. Peoplebecame more willing tosubjugate their egos tothe greater good —to improving consum-ers’ lives.It’s natural for amature company to becomemore insular. So we explicit-ly tried to build better con-nections with the people whobought our products. For example,in the early 1990s, we had acquired theMax Factor and Ellen Betrix cosmetic and fra-grance lines from Revlon Inc. Innovation in fine fra-grances had always been driven by fashion. With slowgrowth of 2 to 3 percent a year, low margins, and weakcash flow, fine fragrances didn’t seem to be an attrac-tive business for P&G. But we saw a chance to changethe game.
  7. 7. featuresstrategy&competition6We began by clearly and precisely defining the tar-get consumer for each fragrance brand, and identifyingsubgroups of consumers for some brands. We didn’twalk away from the traditional approaches of the finefragrance business. We still maintained partnershipswith established fashion houses, such as Dolce &Gabbana, Gucci, and Lacoste. But we also made theconsumer our boss. We focused on a few big launchesand on innovation that was meaningful to consumers,including fresh new scents, distinctive packaging,provocative marketing, and delightful in-store experi-ences. We also took advantage of our global scale andsupply chain to reduce complexity and enable a signifi-cantly lower cost structure.The result? Our team turned a small, underper-forming business into a global leader. In 2007, P&Gbecame the largest fine fragrance company in the world,with more than $2.5 billion in sales — a 25-foldincrease in 15 years.Elsewhere in our company, we experimented withnew ways to build social connections through digitalmedia and other forms of direct interaction. Wedesigned Web sites to reinforce consumer connections,to better understand consumers’ needs, and to experi-ment with prototypes. For example, we used to hand-make baby diapers for a product test. Now, we showpeople digitally created alternatives in an onscreen vir-tual world. If the consumers we’re talking to have anidea, we can redesign it immediately and ask them, “Doyou like that better? How would you use it?” It allowsus to iterate very quickly. In effect, we are building asocial system with the purchasers (and potential pur-chasers) of our products, enabling them to codesign andco-engineer our innovations.Integrating InnovationWe are constantly innovating how we innovate. We keeprefining our product-launch model — from idea to pro-totype, to development, to qualification, to commercial-ization. Applying this sequential practice on a largescale, and making it replicable, does not mean eliminat-ing judgment. In fact, there’s still a fair amount of judg-ment that’s applied along the way. That’s why we needactive leaders and a strong innovation culture.Scalability is critical at a company the size of Procter& Gamble. If we can’t scale our processes, they don’thave much value for us. In fact, scalability is often thejustification for our existence as a multinational, diversi-fied company. Our innovation practices are thusdesigned for deliberate learning, across all our functions,product categories, and geographic locations. Once peo-ple understand a particular process, they can replicate itand train others. It soon becomes a part of normal deci-sion making.P&G had not treated innovation as scalable in thepast. We had always invested a great deal in research anddevelopment. When I became CEO, we had about8,000 R&D people and roughly 4,000 engineers, allworking on innovation. But we had not integrated theseinnovation programs with our business strategy, plan-ning, or budgeting process well enough. At least 85 per-cent of the people in our organization thought theyweren’t working on innovation. They were somewhereelse: in line management, marketing, operations, sales,or administration. We had to redefine our social systemto get everybody into the innovation game.Today, all P&G employees are expected to under-stand the role they play in innovation. Even when you’reoperating, you’re always innovating — you’re making
  8. 8. Becoming a Great Innovation Team Leaderby Ram CharanAs you read about Procter & Gamble’ssocial system and innovation culture,you may be thinking, “There are somegood ideas here…for someone else. Inmy shop, we can barely keep thetrains running on time. How am I sup-posed to do all this?”Leaders of innovation take theirgame to another level through a par-ticular set of practices:• Establish clear criteria and don’thesitate to shift resources. Greatinnovation leaders keep a sharp eyeon their short-term and long-termbusiness goals and think through howand when various innovation projectswill contribute to them. They deter-mine which projects to accelerate orcut on the basis of resource consump-tion as well as market potential. Theydon’t hesitate to pull the plug on proj-ects that don’t clear the hurdles orthat simply consume more time ormoney than the business can afford.• Concentrate on possibility. Theprocess of innovation is inherentlyuncertain. Innovation leaders live withambiguity as ideas are shaped andreimagined; they don’t let ideas diebefore they’re fully formed or under-stood. Once a project is selected,these leaders inspire the team to keepgoing even as they encounter obsta-cles and go through iterations. At thesame time, leaders are vigilant forindications that the project’s marketpotential has diminished.• Cross boundaries and help oth-ers do the same. Innovation becomesriskier when there are gulfs between,for example, technologists, marketingpeople, and those responsible forcommercializing a new product.Inevitably, trade-offs will be requiredamong these groups. Leaders thusmust ensure that communicationchannels are open from the start andthat facts and sound judgment prevail.They must be prepared to break dead-locks and resolve conflicts by keepingindividuals focused on their commongoal: the customer.• Reward effort and learning.Failure is a fact of life for companiesthat pursue innovation seriously, and aleader’s response to it has a hugeeffect on company culture and there-fore on future projects. Innovationleaders know that failures representopportunities to learn. They keep peo-ple energized by publicly recognizingtheir earnest efforts and willingness toventure from the tried and true.featuresstrategy&competition7strategy+businessissue52the cycles shorter, or developing new commercial ideas,or working on new business models. And all innovationis connected to the business strategy.In fostering this approach and building the socialsystem to support it, the P&G leadership has had to bevery disciplined. For instance, we are now set up to seemany more new ideas. Our external business develop-ment group is very small; all it does is meet with indi-viduals, groups, research labs, and other potentialcollaborators, including (as we noted in The Game-Changer) P&G’s competitors on occasion. Any of thesemay propose new technologies, new product prototypes,or new ways to connect us to our consumer base. Lastyear, the business development group reviewed morethan 1,000 external ideas. This year, they’ll see 1,500.We tend to act on about 5 to 7 percent of them.We are also open to ideas from more regions than inthe past. Innovation used to travel primarily from devel-oped markets to developing markets. When new tech-nology appeared in Japan, Germany, or the U.S., itflowed across the regions and down the hierarchy.Today, more than 40 percent of our innovation comesfrom outside the United States. People in India, China,Latin America, and some African countries have becomepart of our social system. Their presence has made usmore open, and this helps compensate for our naturaltendency to become more insular.We maintain open work systems in a lot of placesaround the world. Executives’ offices don’t have doors.Leaders don’t have a secretary cordoning them off. Allthe offices on the executive floor at Procter & Gambleare open; the conference room is an open, round space.We made it round as a small symbol of the newapproach. We’re seeing indications that this new socialprocess is catching on all over the world.The Talent ComponentP&G used to recruit for values, brains, accomplishment,and leadership. We still look for these qualities, but wealso look for agility and flexibility. We believe the “soft”skills of emotional intelligence — fundamental socialskills such as self-awareness, self-fulfillment, and empa-thy — are needed to complement the traditional IQskills. (See “Tea and Empathy with Daniel Goleman,”by Lawrence M. Fisher, s+b, Autumn 2008.) Maybe“soft” isn’t the right word: These skills are every bit as
  9. 9. featuresstrategy&competition8hard to master as some tough analytical skills. Peoplejust learn them in a different way.Some people at Procter & Gamble have struggledwith this new approach, but most of our best peoplehave done really well with it. Curiosity, collaboration,and connectedness are easy to talk about but difficult todevelop in practice. We have tried to careful-ly identify and ease out people whoare controlling or insecure, whodon’t want to share, open up,or learn — who are not curi-ous. And in the process, wehave discovered that mostof our people are natu-rally collaborative.We also try to de-velop people by givingthem new stimulationand greater challenges.As they move throughtheir careers, we deliber-ately increase the com-plexity of their assign-ments. That might meanentering a market that’s notdeveloped yet or a market with acompetitor already firmly established.Whatever the challenge, it stretches them.We give our most promising people time in bothfunctional and line positions, because we think our bestleaders are great operating leaders and great innovationleaders. We also move people around geographically. Webring people into our Cincinnati headquarters fromaround the world, and we make a point of moving ourheadquarters people to our global businesses. Almost allof us have worked outside our home region. Almost allof us have worked in developing or emerging markets.And almost all of us have worked across the businesses.We track that progress very carefully.We’ve been fortunate that some of this flexible,multifaceted ethic exists in our heritage. Forexample, Procter & Gamble pio-neered a technician-based sys-tem in its manufacturingplants during the 1960sand ’70s. In this system,we avoided the ap-proach in which oneperson was assignedto do only one job.The technician sys-tem still operates to-day: To get the highestevaluation rating in aP&G factory, you learnhow to do all the jobs onthe line. And, once you havethat rating, we expect you tobe capable of problem identifi-cation, problem solving, and in-novation. This background has made iteasier for us to plug manufacturing and engineer-ing into the innovation culture.Once people have succeeded at innovation, youcan see the energy in the company changing. Peopleroutinely say, “We can do this. This is feasible.” The atti-tude changes are incredible to watch; once people seethe simplicity, durability, and sustainability of an inno-Once people see the simplicity,durability, and sustainability of an innovationmind-set, it continually reinforces itself.
  10. 10. featuresstrategy&competition9strategy+businessissue52vative mind-set, it continually reinforces itself.On average, younger managers and youngeremployees are more open to fresh, innovative thinking.Since 2000, we’ve lowered the average age of our peopleby almost 10 years because of our acquisitions and ourmoves in emerging markets. We have also recentlybrought in people from outside toenable and stimulate creativethinking. This was unprece-dented for a company thathas traditionally hired onlyentry-level people andpromoted from within.Virtually every lead-ing practitioner of ournew design capabilitycame from the outsideas a mid-career hire.They arrived from BMW,Nike, and some of thebest design shops in theworld. We probably have150 to 200 such people and,although it’s not a huge pro-portion of the P&G staff, it’s bigenough to make a difference. Theybring us not just the art and science and practiceof design, but an integrative way of thinking.Integrative ThinkingOne of our favorite examples of integrative thinkinginvolves Febreze, a very successful odor-control product.One of the active ingredients in Febreze surrounds amalodor and removes it, as opposed to covering it up ormasking it. Febreze started out as a fabric refresher. Nowit’s also an air freshener in the U.S. and elsewhere.Not long ago we took the Febreze package, product,and brand name to Japan. We tested it on a small scalewith Japanese consumers. They rejected it. As interpret-ed by the P&G team (a relatively junior-level group), thegut reaction of the Japanese was: “Here’s another Westernproduct that’s not going to work in our country.”But we persisted. “Were there any Japanese house-holds or consumers who really liked the product?” weasked. The team didn’t know, but they went back andlooked at the research. Lo and behold, 20 percent of thefirst survey group absolutely loved the product.Personally, I wasn’t surprised. I had spent eight yearsliving and working in Japan and I knew thatJapanese people can be hypersen-sitive to malodors. A man cansmoke cigarettes outside or ina subway station, but manyJapanese women won’t lettheir husbands smoke inthe house. When thehusband comes home,he may have to take hissmoky clothes off andwash them before hecan sit down.So we resolved totry again. The P&Gteam changed the viscos-ity of the product. Theychanged the fragrance fromhigh profile to a very lowprofile scent. They changedthe bottle to a much more delicatedesign that more Japanese people felt com-fortable having visible in their homes. They changed thespray pattern to a mist.They changed everything but thecore technology of the product, and it became a phe-nomenal success in Japan.This is a story we tell ourselves at P&G to drivehome the need for integrative thinking. The projectstarted with a consumer-centric concept. It involved
  11. 11. featuresstrategy&competition10people in a variety of functions and at least two regions.It opened our team members’ eyes to other possibilities.And it came to fruition because we were skilled at hav-ing the kinds of processes and conversations that wouldlead people to synthesize their ideas.Our long-standing middle managers, people whohave grown up in the P&G system (as I did), are start-ing to recognize that better innovation processes canexpand their personal and leadership skills. They’ve allbeen through cost-cutting and productivity exercises.But that’s not the same as creating top-line opportuni-ties that can earn kudos from consumers. Nobody istelling them they have to be the geniuses who invent anidea. They will get credit for turning ideas into replica-ble processes and learning from their mistakes. Inoperating cross-functionally, they are also moving awaynaturally from the old silos.The result of P&G’s focus on innovation has beenreliable, sustainable growth. Since the beginning of thedecade, P&G sales have more than doubled, from $39billion to more than $80 billion; the number of billion-dollar brands, those that generate $1 billion or more insales each year, has grown from 10 to 24; the number ofbrands with sales between $500 million and $1 billionhas more than quadrupled, from four to 18. Thisgrowth is being led by energized managers — innova-tion leaders — who continually learn new ways to growrevenues, improve margins, and avoid commoditization.Our culture of innovation is helping P&G leaders bemore effective, and in the process, they’re renewing ourcompany every day.Once people have succeeded at a game-changinginnovation, the level of energy in the company elevates.Even people who weren’t directly involved are affectedthrough the social networks. It becomes easier for themto expand their idea of what is feasible. Building this sortof capability often has the rhythm of, say, skilled basket-ball practice: a group of people who gradually learnseamless teamwork, reading one another’s intentionsand learning to complement other team members, ulti-mately creating their own characteristic, effective, anduncopyable style of successful play. +Reprint No. 08304ResourcesDaniel Goleman, Emotional Intelligence: Why It Can Matter More Than IQ(Bantam Books, 1996): Developing individual maturity for an organiza-tional innovation culture.Larry Huston and Nabil Sakkab, “P&G’s New Innovation Model,”Harvard Business Review, March 2006: Anatomy of an open approach forattracting ideas and consumer insights from around the world.A.G. Lafley and Ram Charan, The Game-Changer: How You Can DriveRevenue and Profit Growth with Innovation (Crown Business, 2008):Guide for giving large, mature companies the sustainable capacity forbreakthrough innovation.Roger Martin, The Opposable Mind: How Successful Leaders Win throughIntegrative Thinking (Harvard Business School Press, 2007): Gaining theability to overcome the limits of partisan thinking, to enhance innovationor anything else.Steven Wheeler, Walter McFarland, and Art Kleiner, “A Blueprint forStrategic Leadership,” s+b, Winter 2007, www.strategy-business.com/press/article/07405: Context for chief executives, drawing on A.G.Lafley’s example, among others.Procter & Gamble Web site, www.pg.com: Includes Connect + Develop,a portal for engaging innovation partners, and Everyday Solutions,through which the company connects with consumers.For more thought leadership on innovation, sign up for s+b’s RSS feeds atwww.strategy-business.com/rss.
  12. 12. strategy+business magazineis published by Booz & Company Inc.To subscribe, visit www.strategy-business.comor call 1-877-829-9108.For more information about Booz & Company,visit www.booz.comLooking for Booz Allen Hamilton? It can be found at at www.boozallen.com© 2008 Booz & Company Inc.