There’s a great article in this months Harvard Business Review [note: paid subscription required] titled Connect and Develop: Inside Procter & Gamble’s New Model for Innovation.

In 2000 P&G realized that their invent-it-ourselves model couldn’t support the growth they needed. Their R&D productivity had levelled off and their innovation success rate had stalled at 35%. P&Gs stock price fell by more than 50%.

P&G realized that their best innovations came from connecting ideas across internal businesses. Betting that external connections could yield profitable innovations P&G made it a goal to “acquire 50% of innovations from outside the company”.

The article discusses the various ways that P&G identifies, discovers and screens potential innovations. Very smart, very interesting, and surprisingly innovative (no punn intended) for such a large company.

What I found fascinating, however, was P&Gs assessment of the evoloving innovation landscape and their role within it:

Important innovation is increasingly being done at small and midsize entrepreneurial companies. Even individuals are eager to license and sell their intellectual property. University and government labs have become more interested in forming industry partnerships… The internet has opened up access to talent markets throughout the world. And a few forward looking companies… are beginning to experiement with the new concept of open innovation.

Advancing technology and falling prices start to render P&Gs innovation advantage irrelevant (size, available cash, # of researchers, etc.) and what do they do? They realize that the trend is real, and will not only continue but will continue to grow. They reassess their competitive advantage and realize that they can leverage their expertise in a number of other areas: consumer research, marketing, manufacturing, purchasing capabilities.

Brilliant.

They look for innovative products to license, purchase, or codevelop and then plug them into the P&G machine – helping to commercialize and then scale the innovation. Taking a lot of the costly risk out of the product development cycle, P&G is enjoying real results from C&D:

- More than 35% of P&Gs new products have elements that came from outside the company
- R&D productivity has increased by nearly 60%
- Innovation success rate has more than doubled
- The cost of innovation has fallen
- Five years after the stock collapse the stock price has doubled

We’ll continue to see innovation taken off the balance sheet of large companies and this is very exciting for start-ups and entrepreneurs. I’m going to explore this more in the coming weeks/months. If you have any info you can point me to, I’d appreciate it.

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