Corporate Approach to Solutions Innovation

Corporate Approach to Solutions Innovation

It is only natural for one to want to become the best in his area of activity, to completely master all the skills required for it. And should one desire the recognition of being the uncontested leader in a certain domain he must constantly seek to improve nothing else but his own performances and skills. High-achievers are those people certain that success lies within themselves and their own capabilities. They know what their goal is and more importantly perhaps, they know that someone else may have the same goal. Thus, they count only on themselves to achieve it, everyone else being thought of as "the competition." Though this is a typical mentality for individuals, many companies worldwide have adopted it too. And it has been for decades a successful method of doing business. Making sure that your company alone offers the best products on the market using nothing else but its own resources (especially its own personnel) has been the favourite mode of conducting business for years on end.

But it seems that for the 21st century that approach does not guarantee the successes it used to. As this essay shall prove the top companies in the world are changing their perspective with regard to whom they should turn to when in needed of a new, innovative idea. They are applying what is now known as 'Open Innovation," according to Berkley Professor Henry. W. Chesbrough.

In his article, "The era of open innovation," Henry. W. Chesbrough. States the fact that two very different types of innovation exist "the closed innovation model" and "the open innovation model." The former is specific for the old way of generating ideas; whereas the latter is indicative of the way ideas shall be outsourced form various people within and without a certain company. There are practically six major differences between the two models and the best way of exemplifying them is by presenting how a real company has made the transformation from a closed innovator to an open one. The company chosen to illustrate this is "Procter and Gamble." The essay shall first present how the company built an open innovation premise while showing what the major and pressing challenges of becoming an open innovator are.

I have chosen Procter and Gamble due to the fact that they have developed a new and successful model of innovation known as: "Connect and develop." This "radical strategy of open innovation now produces more than 35% of the company's innovations and billions of dollars in revenue.." (Harvard Business Review: Connect and Develop, Larry Huston and Nabil Sakkab).

But what was the determinant factor in their decision to implement the above mentioned strategy?

For years Procter and Gamble registered a phenomenal growth by using only inside innovation delivered by its employees in its global research facilities. Actually this attitude regarding their employees represents the first of the six major differences between open and closed innovation mentioned above. The closed innovators believe that: "The smart people in our field work for us" suggesting that a certain company acknowledges its own people as the top professionals in a domain. They do their best to hire only the most highly trained, skilful employees and use various incentives to deter them from accepting job offers from the competition. The open innovators on the other hand follow a different rule: "Not all of the smart people work for us so we must find and tap into the knowledge expertise of bright individuals outside our company" (MIT Sloan Management Review: The era of open innovation, Henry W. Chesbrough)

And that is what Procter and Gamble did in the year 2002, they sought for a solution to one of their production problems. They were planning to launch a new line of Pringles potato crisps. They had had the brilliant idea of printing pop culture images on each potato chip to make them more fun and appealing for their customers. While everybody recognized the high potential of this idea they also understood that the development process would be quite a complex one, not at all easy to develop in a short period of time or without the investment of a large amount of money for the research and development department. And even if the actual printing process would have been eventually resolved there with still have remained the difficult task of creating edible dyes. The company analyzed all its options. They could have tried to succeed by using their old ways of solving such a problematic issue: after spending a huge amount of money on the development of an adequate process, one of their internal teams would have had to work with an ink-jet printer company to devise the actual process. After that a long period of negotiations with regard to whom would have had the actual rights to use that process. They quickly realized that such an approach, though it had proven to be profitable in the past, would not have been their best solution in the highly competitive and constantly evolving market of the 21st century. According to Larry Huston (the vice president for innovation and knowledge) and Nabil Sakkab (the senior vice president for corporate research and development at Procter and Gamble in Cincinnati) "most mature companies have to create organic growth of 4% to 6% year in, year out," for Procter and Gamble that would mean building a $4 billion dollars business within a year. By the year 20029 when the Pringles idea had appeared) it became obvious to them that such a phenomenal growth could not be long supported by their;" invent-it -ourselves model." (Larry Huston, Nabil Sakkab). That is why instead of resolving the matter within the company they decided to create a technology brief that stated the problems they needed to solve and circulated it throughout their global networks of individuals and institutions, thus trying to find out if anyone else had the required solution. This approach proved to be the best one as they were swiftly informed that a in small bakery in Bologna a university professor had invented an ink-jet method of printing edible images on cakes and cookies.

They adapted the professor's idea and the printed Pringles became a success. Due to that North America Pringles have achieved a double-digit growth over the past two years.

The second and third steps that differentiate a company that uses open innovation from one that is a closed innovator refer to the way the company understands the role of their Research and Development department. It shall be explained why Procter and Gamble switched from this type of mentality: "To profit from R&D we must discover develop and ship it ourselves." And " if we discover it ourselves we will get it to market first." To the open innovation way of thinking: "External R&D can create significant value; internal R&D is needed to claim some portion of that value." And "We do not have to originate the research in order to profit from it."

MIT Sloan Management Review: The era of open innovation, Author: Henry W. Chesbrough)

In the year 2000 Procter and Gamble's newly appointed CEO, a.G.Lafley wanted them to adopt a fresh and different innovation business model. He understood that the company was not able anymore to meet its growth objectives due to its investing considerable amounts of money on the R&D department without gaining the expected returns from those investments.

They realized that the majority of the company's best and most profitable innovations had been obtained by connecting ideas across internal businesses. Understanding that "these connections were the key to future growth," Lafley set a most ambitious goal for the company. He wanted to acquire 50% of their innovations using outside sources. His aim was in no way to diminish the importance and the hard-work of their 7500 research and support staff, on the contrary his goal would benefit them too, by lowering the actual work load they were expected to handle.

Lafley himself best expressed the core of his initiative: "Half of our new products would come from our own labs and half would come through them." The idea, though unheard of until then was accepted as being viable, having high potential and processes to implement it were under way. While studying outside sources of innovation they came across a remarkable piece of information, for every Procter and Gamble researcher there existed 200 scientist and engineers around the world who were equally talented and skilful as them. That meant they had come across 1.5 million people whose ingenuity and creativity they could use.

They decide to change the company's attitude from one that resisted change:" not invented here" to enthusiasm for those " proudly found elsewhere." (Harvard Business Review: Connect and Develop, Larry Huston and Nabil Sakkab) Another change they made was in their perception of the R&D department, from "7500 people inside to 7500, plus 1.5 million outside, with a permeable boundary between them" (Harvard Business Review: Connect and Develop, Larry Huston and Nabil Sakkab). Henry W. Chesbrough uses this exact notion of "permeable boundary," when he gives his definition of open innovation: "In the open innovation model a company commercialises both its own ideas as well as innovations from other firms and seeks ways to bring its in house ideas to market by deploying pathways outside its current business. Note that the boundary between the company and its surrounding environment is porous, enabling innovations to move more easily between the two." (MIT Sloan Management Review: The era of open innovation, Henry W. Chesbrough) Having this in mind Procter and Gamble created their "Connect and Develop" innovation model.

In order for "Connect and Develop" to become what Procter and Gamble envisioned the company realized it was of the outmost important not to use time and valuable resources on ideas that may be interesting at first but later on prove to have no concrete, specific application. And it is what all companies should do when in search of a partnership or a collaboration, they must make sure the idea they agree to develop is a viable one and shall lead to the creation of a product that will meet the needs of a certain target market. Procter and Gamble had to decide early on what their target areas would be, for applying the "Connect and develop" concept. They have decide that the these closed innovation approaches: "If we are the first to commercialise an innovation we will win" and "If we create the most and best ideas in the industry we will win" are obsolete in comparison to "Building a better business model is better than getting to market first" and "If we make the best use of internal and external ideas we will win." (MIT Sloan Management Review: The era of open innovation, Henry W. Chesbrough). They thus took the decision not to limit themselves and their innovation within the company and within a certain industry. That is why even though Procter and Gamble was best known for its house-hold cleaning products and products used for personal hygiene they got involved in other industries too and currently produce more than 300 brands that include snacks and beverages, pet nutrition, prescription drugs, fragrances, cosmetics and various other categories. (Harvard Business Review: Connect and Develop, Larry Huston and Nabil Sakkab) This represents another important challenge for any company that aspires to become an open innovator, not to limit themselves to a single industry, to the area they had started with, but do their best to expand in order to include a large number of brands and products. In addition to that they should not be at all reluctant to "profit from other's use of our intellectual property and we should buy other's intellectual property whenever it advances our own business model." As that is the way, open innovators evolve and improve their quality products, in contrast with "We should control our intellectual property so that our competitors do not profit from our ideas.," representing the closed innovation model." (MIT Sloan Management Review: The era of open innovation, Henry W. Chesbrough).

Making all the necessary changes for a company to transform itself by deciding to use the six principles Open Innovation instead of the principles specific for Closed Innovation is the toughest challenge for organizations. It does not only imply a change in the actual way their business is led, but also a change in mentality. The latter is often difficult to achieve as not many CEO's and companies are willing to so easily discard the way they have done business for generations. Unfortunately there seem to be less and less opportunities for individualist companies to keep their leading positions as top players in today's and especially tomorrow's economic environment. To succeed in the new economy a company faces the difficult task of having to create a large and valuable network to insure that they are in constant connection with the best innovators around the world.

At Procter and Gamble widespread networking is highly valued: "Our global networks are the platform for the activities that, together constitute the connect -and -develop strategy." (Harvard Business Review: Connect and Develop, Larry Huston and Nabil Sakkab). Here are some examples of the networks that have proved to be most useful for Procter and Gamble. They have a network of 70 technology entrepreneurs around the world. These technology entrepreneurs work in six connect- and- develop hubs in China, India, Japan, Western Europe, Latin America and the United States.

Another type of networks they have implemented is Open networks. They include four types of networks. NineSigma mainly deals with connecting companies that have science and technology problems with companies, universities, government and private labs and consultants that can develop solutions to various problems.

The second type of Open Network is InnoCentive and quite similar to NineSigma, but for the fact that it deals with more narrowly defined technological problems.

YourEncore is the third type of Open Network that is responsible for connecting 800 high-performing retired scientists and engineers from 150 companies with client businesses. YourEncore enables companies to use the deep experience of these scientists in fields of activity.