Question:According tothe article P&G's innovationculture, explainhow P&G createsinnovation culture.Do you think P&G (based on this article)practices all seven dimensions ofinnovation culture, and why?

P&G'S INNOVATION CULTURE features| strategy & competition by A.G. Lafley, with an introduction by Ram Charan How we built a world-class organic growth engine by investing in people. THE HEART OF A COMPANY'S BUSINESS MODEL should be game-changing innovation. This is not just the invention of new products and services, but the ability to systematically convert ideas into new offerings that alter the very context of the business. As they lead to repeat purchases, these offer- vator, with the distinctive kinds of social connec- ings reshape the market, so that the company is tions, culture, and supporting behaviors that playing an entirely new (and profitable) game to enable it to play that role. which others must adapt. A number of game- Consider the case of Procter & Gamble changing innovators are operating today, include Company. Since A.G. Lafley became chief execu- ing such household-name enterprises as Procter & tive officer in 2000, the leaders of P&G have Illustrations by Michael Klein Gamble, Nokia, the Lego Group, Apple, Hewlett- worked hard to make innovation part of the daily Packard, Honeywell, DuPont, and General routine and to establish an innovation culture. Electric. Wherever you see a steady flow of note- Lafley and his team preserved the essential part of worthy innovations from one company, you can P&G's research and development capability probably assume that it is a game-changing inno- world-class technologists who are masters of thecore technologies critical to the household and personal-care businesses while also bringing more PtG employees outside REED into the inno- vation game. They sought to create an enterprise- wide social sysrem that would harness the skills and insights of people throughout the company and give them one common focus: the consumer. Without that kind of culture of innovation, a strat- egy of sustainable organic growth is Eu more dif- cult to achieve. AG. lafley and I coauthored The Gem Changer: How Hm Can Drive Revenue amt Prot Growth with Innovation [Crown Business, 2008] to explain how to make game-changing innovation drive growth on a oonsistent, well-paced basis. The critical factors that we cover in the book include keeping a laser-slurp focus on the customer; estab- lishing a disciplined, repeatable, and scalable inno- vation process; creating organizational and funding mechanisms 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 culuue deserves more attention than we could give it in The Germ-Changer: designing a social system that would spark new ideas and enable critical deci- sions. In the article that follows, AG. explains the human factors that fostered innovation at Procter 8c Gamble. It oould be thought of as the \"missing chapter\" to The Gem-Changer; a vital component that isn't always obvious. even to experts, precisely because it is so indamental. Ram Chemo hon I became CEO of Proctor a Gamble in 2000, we were introducing new brands and products with a commercial success rate of 15 to 20 percent. In od'ter words, for every six new product 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 50 and 60 Pal-cent About half of our new products suc ceed. That's as high as we want the success rate to be. If we try to make it an},r higher, we'll be tempted to err on the side of caution, playing it safe by focusing on inno vations with litde gamechanging potential. The decision to Focus on innovation as a core strength throughout the company has had a direct inu- ence on our performance. PELG has delivered, on aver age, 6 percent organic sales growth since the beginning of die decade, virtually all of it driven by innovation. Over the same period, we've reduced RSLD spending as a. percentage ofsales; it was about 4.5 percent in the late 1990s and only 2.8 percent in 2007. In that year, we spent US$21 billion on innovation, and received $76.5 billion in revenues. We're getting more value From every dollar we invest in innovation today. The foals on innovation has also had a direct elTeCt on our portfolio of businesses. The GameChanger de scribes how we sold ofF most of Picis food and bever age businesses 80 we could concentrate on products that were driven by the kinds of innovation we knew best. As it turns out, with this narrower mix of businesses, we can more easin devote the resources and attention needed to build a broadscale innovation culture. We also Focused on creating a practice ofopm inno vation: taking advantage of the skills and interests of strategyluahs issueftz people throughout the company and looking for part nerships outside PSCG. This was important to us for sev eral reasons. First, we needed to broaden our capabilities. Each of our businesses was already practicing some Form of innovation improvement, but they were not all improv- ing at the same rate. As the CEO, I could lead and inspire the company as a whole, but I could not substi tute my judgment For that of other leaders who knew and understood their specic businesses far better than I could. The decision makers in each business would have to examine their competitive landscape and their own capabilities to gure out what kinds of innovation would work best and win with consumers. SECond, building an open innovation culture was critical For rmlizing the essential growth opportunity presented by emerging markets. During the next 10 years, between 1 billion and 2 billion people in Asia, Latin America, Eastern Europe, and the Middle East will move From rural, subsistence living to relatively urban and increasingly affluent lives. They will have more choices, a greater connection with the global econ omy, and the ability to realize more aspirations. Along the way, they will become, for the rst 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 strategy for reaching these new consumers. But the days of achieving automatic growth by entering new markets are essentially over. Just as retailers often reach a level of saturation where it doesn't make sense to open any more stores in a particular market many mature con sumer products compania are rapidly running out of the socalled white space in new regions. PSCG, for example, already has a market presence in more than 160 countries, with large operations on the ground in more than 80 of them. We can grow our business in these countries only by consistently developing new produces, processes, and forms of community presence. And to do that, we need to involve people, inside the company and out, who are commable and familiar with die values and needs oFconsurners in these parts of the world. A third reason for Focusing on open innovation had to do with fostering teams. The kinds of innovation needed at Procter 6i Gamble must be realized through teams. The ides for a new product may spring from the mind of an individual, but only a collective effort can carry that idea through prototyping and launch. lfinno vation is to be integrated with both business strategy and work processes, as we believe it should be, it requires a broad network of social interactions. Moreover, our experience suggests that many of the failures of innovaan are social failures. Promising ideas, with real potential business value, often get left behind during the development process. Some innovations are timed 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 a series of measures for building an open innovation cul ture at PSCG. \"The Consumer ls Boss" Procter 5C Gamble is known for its highly capable and motivated workforce. But in the early 2000s, our people were not oriented to any common strategic purpose. We _,, (L: '1'. 'c U:- Ill 1-. _| l1! ,.. I'D In H: 9 n O 3 'U I'D .m- E O 5 EH n 1934 F .. .1 El .. o la he 9 n O 3 "U o .. 5'. o :I had a corporate mission to meaningfully improve the everyday lives ofthe customers we served. If 15 seconds with a deodorant or two minutes with a disposable dia perhave madea small partofyour life alittle bit better. then we've made a diFFerence. But we hadn't explicitly or inspira tionally enrolled enough of our 100,0004plus people around the world in our mission; it was neither fully embraced by employees nor fully leveraged by the com pany's leadership. Our innovation efforts sufd fered accordingly. So we expanded our mission to in clude the idea that \"the consumer is boss.\" In other words, the pm ple who buy and use PSLG products are valued not just for their money, but as a rich source of in formation and direction. If we can develop better ways of learn ing from them by listening to them, observing them in their daily lives, and even living with them then our mission is more likely to succeed. \"The consumer is boss" became far more than a slogan to 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 a produCt, the consumer should be \"the heart of all we do\" at PECG. I tallied about it that way at dozens of com pany town hall meetings during my rst months as CEO. More and more people began thinking about how to apply the iiconsumer is boss\" con cept to their work. Resources were still scarce, and there were erce debates about which ideas deserved the most attention and where to deploy money and people. But this concept came to matter more than those other concerns. People became more willing to subjugate their egos to the greater good to improving consum . s..\\ 4 ers' lives. It's natural for a mature company to become more insulin. 30 we explicit ly tried to build better con nections with the people who bought our products. For example, in the early 19905, we had acquired the Max Factor and Ellen Betrix cosmetic and a grance lines from Revlon Inc. Innovation in ne Fra grances had always been driven by Fashion. With slow growth oFZ to 3 percent a year, low margins, and weak cash flow, fine fragrances didn't seem to be an attrao tive business For PELG. But we sawa chance to change the game. sirategwluslnassissue S2 We began by clearly and precisely dening the tar get consumer For each Fragrance brand, and identifying subgroups of consumers for some brands. We didn't walk away from the traditional approaches of the ne fragrance business. We still maintained partnerships with established Fashion houses, such as Dolce 5C Gabbana, Gucci, and Lacoste. But we also made the consumer our boss. We focused on a Few big launches and on innovation that was meaningll to consumers, including fresh new scents, distinctive packaging, provocative marketing, and delighthll instore experi ences. We also took advantage of our global scale and supply chain to reduce complexity and enable a signi cantly lower cost structure. The result? Our team turned a small, under-per fonning business into a global leader. In 2.007, PKG became the largest ne fragrance company in the world, with more than $2.5 billion in sales a 25fold increase in 15 years. Elsewhere in our company, we experimented with new ways to build social connections through digital media and other forms of direct interaction. We designed 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 show people digitally created alternatives in an onscreen vir tual world. IF the consumers we're talking to have an idea, we can redesign it immediately and ask them, \"Do you like that better? How would you use it?\" It allows us to iterate very quickly. in effect, we are building a social system with the purchasers (and potential pur chasers} of our products, enabling them to codesign and (Jo-engineer our innovations. Integrating Innovation We are constantly innovating how we innovate. We keep rening our productlaunch model from idea to pro totype, to development, to qualication, to commercial- ization. Applying this sequential practice on a large scale, and making it replicable, does not mean elirninat ing judgment In Eict, there's still a fair amount ofjudg ment diat's applied along the way. That's why we need active leaders and a strong innovation culture. Scalability is critical at a company the size of Procter 5C Gamble. If we can't scale our processes, they don't have much value For us. In Fact, scalability is often the justication For our existence as a multinational, diversi fied company. Our innovation practices are thus designed for deliberate learning, across all our Functions, product categories, and geographic locations. Once peo- ple understand a particular process, they can replicate it and train od'ters. It soon becomes a part ofnormal deci sion making. PiG had not treated innovation as scalable in the past. We had always invested a great deal in research and development When I became CEO, we had about 8,000 Rad) people and roughly 4,000 engineers, all working on innovation. But we had not integrated these innovation programs with our business strategy, plan ning, or budgeting process well enough. At least 35 per cent of the people in our organization thought they weren't working on innovation. They were somewhere else: in line management, marketing, operations, sales, or administration. We had to redene our social system to get everybody into the innovation game. Today, all PSCG employees are expected to under stand the role they play in innovation. Even when you're operating, you're always innovating you're making _,, :1: D) .t- C {Li U: Ill a 'I Ill .1- I'D IO M: 9 n 3 'U I'D an EC 0 = Becoming a Great Innovation Team Leader by Ram Charan As you read about Procter & Gamble's ects that don't clear the hurdles or commercializing a new product. social system and innovation culture, that simply consume more time or Inevitably, trade-offs will be required you may be thinking, "There are some money than the business can afford. among these groups. Leaders thus good ideas here..for someone else. In . Concentrate on possibility. The must ensure that communication my shop, we can barely keep the process of innovation is inherently channels are open from the start and trains running on time. How am I sup- uncertain. Innovation leaders live with that facts and sound judgment prevail. posed to do all this?' ambiguity as ideas are shaped and They must be prepared to break dead- Leaders of innovation take their reimagined; they don't let ideas die locks and resolve conflicts by keeping game to another level through a par- before they're fully formed or under- individuals focused on their common ticular set of practices: stood. Once a project is selected, goal: the customer. . Establish clear criteria and don't these leaders inspire the team to keep . Reward effort and learning. hesitate to shift resources. Great going even as they encounter obsta- Failure is a fact of life for companies innovation leaders keep a sharp eye cles and go through iterations. At the that pursue innovation seriously, and a on their short-term and long-term same time, leaders are vigilant for leader's response to it has a huge business goals and think through how indications that the project's market effect on company culture and there- and when various innovation projects potential has diminished. fore on future projects. Innovation will contribute to them. They deter- . Cross boundaries and help oth- leaders know that failures represent mine which projects to accelerate or ers do the same. Innovation becomes opportunities to learn. They keep peo- cut on the basis of resource consump- riskier when there are gulfs between, ple energized by publicly recognizing features | strategy & competition tion as well as market potential. They for example, technologists, marketing their earnest efforts and willingness to don't hesitate to pull the plug on proj- people, and those responsible for venture from the tried and true. the cycles shorter, or developing new commercial ideas, Latin America, and some African countries have become or working on new business models. And all innovation part of our social system. Their presence has made us is connected to the business strategy. more open, and this helps compensate for our natural In fostering this approach and building the social tendency to become more insular. system to support it, the P&G leadership has had to be We maintain open work systems in a lot of places very disciplined. For instance, we are now set up to see around the world. Executives' offices don't have doors. many more new ideas. Our external business develop- Leaders don't have a secretary cordoning them off. All ment group is very small; all it does is meet with indi- the offices on the executive floor at Procter & Gamble viduals, groups, research labs, and other potential are open; the conference room is an open, round space. collaborators, including (as we noted in The Game- We made it round as a small symbol of the new Changer) P&G's competitors on occasion. Any of these approach. We're seeing indications that this new social may propose new technologies, new product prototypes, process is catching on all over the world. or new ways to connect us to our consumer base. Last year, the business development group reviewed more The Talent Component than 1,000 external ideas. This year, they'll see 1,500. P&G used to recruit for values, brains, accomplishment, We tend to act on about 5 to 7 percent of them. and leadership. We still look for these qualities, but we We are also open to ideas from more regions than in also look for agility and flexibility. We believe the "soft" the past. Innovation used to travel primarily from devel- skills of emotional intelligence - fundamental social oped markets to developing markets. When new tech- skills such as self-awareness, self-fulfillment, and empa- nology appeared in Japan, Germany, or the U.S., it thy - are needed to complement the traditional IQ strategy+ business issue 52 flowed across the regions and down the hierarchy. skills. (See "Tea and Empathy with Daniel Goleman," Today, more than 40 percent of our innovation comes by Lawrence M. Fisher, s+6, Autumn 2008.) Maybe from outside the United States. People in India, China, "soft" isn't the right word: These skills are every bit asmasking it. Febreze started out as a fabric refresher. Now it'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 scale with Japanese consumers. They rejected it. As interpret- ed by the P&G team (a relatively junior-level group), the gut reaction of the Japanese was: "Here's another Western product that's not going to work in our country." But we persisted. "Were there any Japanese house- vative mind-set, it continually reinforces itself. holds or consumers who really liked the product?" we On average, younger managers and younger asked. The team didn't know, but they went back and employees are more open to fresh, innovative thinking. looked at the research. Lo and behold, 20 percent of the Since 2000, we've lowered the average age of our people first survey group absolutely loved the product. by almost 10 years because of our acquisitions and our Personally, I wasn't surprised. I had spent eight years moves in emerging markets. We have also recently living and working in Japan and I knew that brought in people from outside to Japanese people can be hypersen- features strategy & competition enable and stimulate creative sitive to malodors. A man can thinking. This was unprece smoke cigarettes outside or in dented for a company that a subway station, but many has traditionally hired only Japanese women won't let entry-level people and their husbands smoke in promoted from within. the house. When the Virtually every lead- husband comes home, ing practitioner of our he may have to take his new design capability smoky clothes off and came from the outside wash them before he as a mid-career hire. can sit down. They arrived from BMW, So we resolved to Nike, and some of the try again. The P&G best design shops in the team changed the viscos- world. We probably have ity of the product. They 150 to 200 such people and, changed the fragrance from although it's not a huge pro- high profile to a very low portion of the P&G staff, it's big profile scent. They changed enough to make a difference. They the bottle to a much more delicate bring us not just the art and science and practice design that more Japanese people felt com- of design, but an integrative way of thinking. fortable having visible in their homes. They changed the spray pattern to a mist. They changed everything but the Integrative Thinking core technology of the product, and it became a phe- One of our favorite examples of integrative thinking nomenal success in Japan. strategy+ business issue 52 involves Febreze, a very successful odor-control product. This is a story we tell ourselves at P&G to drive One of the active ingredients in Febreze surrounds a home the need for integrative thinking. The project malodor and removes it, as opposed to covering it up or started with a consumer-centric concept. It involvedpeople in a variety of functions and at least two regions. through the social networks. It becomes easier for them It opened our team members' eyes to other possibilities. to expand their idea of what is feasible. Building this sort And it came to fruition because we were skilled at hav- of capability often has the rhythm of, say, skilled basket- ing the kinds of processes and conversations that would ball practice: a group of people who gradually learn lead people to synthesize their ideas. seamless teamwork, reading one another's intentions Our long-standing middle managers, people who and learning to complement other team members, ulti- have grown up in the P&G system (as I did), are start- mately creating their own characteristic, effective, and ing to recognize that better innovation processes can uncopyable style of successful play. + expand their personal and leadership skills. They've all Reprint No. 08304 been 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 is telling them they have to be the geniuses who invent an Resources idea. They will get credit for turning ideas into replica- ble processes and learning from their mistakes. In Daniel Goleman, Emotional Intelligence. Why It Can Master More Than IQ operating cross-functionally, they are also moving away (Bantam Books, 1996): Developing individual maturity for an organiza- tional innovation culture. naturally from the old silos. Larry Huston and Nabil Sakkab, "P&G's New Innovation Model," The result of P&G's focus on innovation has been Harvard Business Review, March 2006 Anatomy of an open approach for reliable, sustainable growth. Since the beginning of the attracting ideas and consumer insights from around the world. decade, PSG sales have more than doubled, from $39 A.G. Lafley and Ram Charan, The Game-Changer: How You Can Drive billion to more than $80 billion; the number of billion- Revenue and Profit Growth with Innovation (Crown Business, 2008): dollar brands, those that generate $1 billion or more in Guide for giving large, mature companies the sustainable capacity for breakthrough innovation. sales each year, has grown from 10 to 24; the number of Roger Martin, The Opposable Mind: How Successful Leaders Win through brands with sales between $500 million and $1 billion Integrative Thinking (Harvard Business School Press, 2007): Gaining the has more than quadrupled, from four to 18. This ability to overcome the limits of partisan thinking, to enhance innovation growth is being led by energized managers - innova- or anything else. tion leaders - who continually learn new ways to grow Steven Wheeler, Walter MeFarland, and Art Kleiner, "A Blueprint for Strategic Leadership, " s+6, Winter 2007, www.strategy-business revenues, improve margins, and avoid commoditization. .com/press/article/07405: Context for chief executives, drawing on A.G. Our culture of innovation is helping P&G leaders be Laffey's example, among others. more effective, and in the process, they're renewing our Procter & Gamble Web site, www.pg.com: Includes Connect + Develop. company every day. a portal for engaging innovation partners, and Everyday Solutions, Once people have succeeded at a game-changing through which the company connects with consumers. innovation, the level of energy in the company elevates. For more thought leadership on innovation, sign up for s+6's RSS feeds at www.strategy-business.com/rss. Even people who weren't directly involved are affected