Does P&G Need Product Innovation or Strategic Innovation?
S+B BLOG JUNE 20, 2013strategy+businessDoes P&G Need ProductInnovation or StrategicInnovation?BY KEN FAVARO
www.strategy-business.com1Consider the following examples of iconic inno-vation over the last century: Just ahead of theroaring 20s, Ford Motor Company introducedthe moving assembly line, which cut the time to buildan automobile from 12 hours to 93 minutes. Soon afterthe summer of love in the late 1960s, Nucor built itsfirst mini-mill facility for producing steel, disrupting themajor integrated steel companies and becoming theleading steel company in the U. S. Just as disco hit itspeak in the ’70s, Southwest Airlines launched as the firsteveryday-low-price airline, making it a national leader.In the aftermath of the Coca-Cola Company’s flop withNew Coke in the mid-’80s, it built the “anchor bottlersystem” (whereby the largest bottler in each geography“rolled up” smaller bottlers), leading to huge productiv-ity and growth gains for the next two decades. As theInternet was becoming mainstream in the 1990s,Netflix introduced a new way to rent films, contributingto the demise of the dominant market leader,Blockbuster, and, indeed, the whole industry of rentingmovies through retail outlets. And finally, as the newmillennium arrived, Google became the first companyto figure out how to monetize search.The common denominator in all of these successstories is strategic innovation—that is, a novel break-through in strategy, rather than in product or service.Each company did—and still does—produce plenty ofproduct and service innovation. But these companiesdidn’t invent the automobile, steel, airlines, carbonatedbeverages, movie rental services, and online search.What made these companies great—and what will keepthem great in the future—is innovation of the way rawinputs become products and services that customers value:the way iron ore and other materials become cars parkedin your garage, and the way ingenuity and capitalbecome movies watched on your TV set.Which brings us to Procter & Gamble (P&G): awidely revered innovation star that invests US$2 billionin R&D annually, 50 percent more than its largest peer.It spends another $400 million each year on what itcalls “foundational consumer research” to uncoveropportunities for innovation across nearly 100 coun-tries. It launched a “Connect and Develop” program tosystematically engage with partners outside the bound-aries of the company to source new-product ideas. Andit marshaled its famous process discipline to create aproduct innovation “Growth Factory.” In 2012, its headof technology announced that P&G had tripled itsinnovation success rate—the percentage of ideas thatmade it successfully to market as new products. Indeed,innovation has long been at the heart of P&G’s success,which took its founding inspiration from ThomasEdison, who created the world’s first industrial researchlab. As former CEO Bob McDonald said, “We knowDoes P&G Need Product Innovationor Strategic Innovation?by Ken Favaro
from our history that while promotions may win quar-ters, innovation wins decades.”But what kind of innovation does P&G most neednow? As A.G. Lafley returns to his former job of run-ning the company, he is faced with stagnant growth, lag-ging productivity, and restless shareholders. What adviceshould a capable strategist give him: “P&G needs more,better, faster product innovation” or “you need to stepback and ask if this is a time when P&G needs to bethinking about bigger, bolder strategic innovation”?Though P&G can never stop bringing out innovativeproducts, I would argue that P&G needs a big dose ofstrategic innovation as well.To be sure, P&G has produced some impressivestrategic innovation over the years. In 2000, it pioneereda new form of relationship with its retail customers andsuppliers, moving from transactional negotiations towhat Lafley calls “win-win partnerships,” in whichP&G seeks relationships that create value for both par-ties, thus ensuring the long-term health of its mostimportant partners to P&G’s own advantage. A fewdecades earlier, P&G invented the now widely imitatedbrand manager role, a focal point of accountability forbringing together its R&D, sourcing, manufacturing,marketing, sales, financial, IT, HR and other functionsin service of a particular brand. It can’t be proven, butone could argue that innovations such as these are whatreally made P&G into the juggernaut it is today. Itsmany groundbreaking product innovations certainlyplayed a part, but its strategic innovations probablyplayed an even bigger part.P&G has been outspending and outperforming itspeers in product innovation for years. Yet sales in itsbiggest market are lagging and its progress in emergingmarkets is not what the company wants or expects.Merely doing more of the same is an unlikely solutionto the challenge Lafley faces in reviving P&G.More likely, P&G needs innovation in its businesssystem—downstream, upstream, internal, or all three.For example, maybe it needs innovation in how it dis-tributes its products in its core grocery, drug, and dis-count channels or to rethink the way it sells or makesbeauty products for the “masstige” category (where it’smade a huge bet). Perhaps the next generation of digi-tal—social, mobile, analytics, and cloud—holds the keyto unlocking more value from its entire business system,both inside and outside its current corporate bound-aries. Or maybe P&G needs a novel approach to howthe corporate center adds value to its businesses, how itsglobal–local operating model works, or whether andhow it delivers more affordable products in a premium-product culture. It will be strategic innovations such asthese—not just product innovations—that helps P&Gget its mojo back. +2Ken Favaroken.firstname.lastname@example.org senior partner with Booz &Company based in New York.He leads the firm’s work inenterprise strategy andfinance.www.strategy-business.com