In 2000 Procter & Gamble (P&G) was at a

crucial point in its long history. One of the worlds

best-known corporations and creator of some of
the worlds most famous and successful brands
was at a crossroads. Its CEO, Dirk Jager had left
after a mere 18 months in the job. In March,
the company announced it would not meet its
projected rst quarter earnings. The stock price
was spiralling downwards falling from $116
in January to $60 per share by March. The
massive loss of $85 billion in market capitalisation
was matched by the loss of condence within.
It provoked a media frenzy. Perhaps most
poignantly, Ad Age headlined its front page
story: Does P&G Still Matter? It was one of
many column inches devoted to the apparently
impending demise of the company.
P&Gs new CEO, AG Laey, provided an instant
dose of reality: We werent delivering on goals
and commitments to analysts and investors.
Major P&G businesses were underperforming;
P&G brands were not delivering good consumer
value: we werent consistently leading innovation,
and prices were too high. We were too
internally-focused. Consumed with the massive
re-organisation, and with so many people in
new jobs, we were all spending too much time
managing internal transactions.
In addition to this litany of problems, P&G had the
abiding corporate challenge of achieving growth.
A mature company, such as P&G, is usually
expected to deliver organic growth rates of around
four to six per cent every year. Historically, this
growth had been delivered by the companys
formidable research and development resources
thousands of researchers spread worldwide.
But with the proliferation of new technologies
and intensifying competition, P&Gs standard
approach to R&D was under threat. Only 35
per cent of its new products met their nancial
objectives. R&D productivity was stagnant.
Laeys prescription for the ailing corporate patient
was wide reaching. Estimating that it would take
three years to get P&G back on track, he focused
the company on four core businesses (accounting
for 54 per cent of sales and 60 per cent of prots);
its big, established leading brands; and P&Gs
top ten countries (80 per cent of sales and 95
per cent of prots). Costs, which had rocketed
under Jager, were cut. Capital spending had
leapt to eight per cent of sales, and was trimmed.
Nearly 10,000 jobs were lost around the world as
under-performing businesses were closed and the
company left businesses now regarded as non-
strategic. Some product lines were discontinued,
investments were written off and brands, such as
Comet, Crisco and Jif, were sold off.
And, perhaps most boldly of all, in the midst of
establishing the new P&G order, Laey announced
an entirely new approach to innovation. P&Gs
corporate innovation fund had increased seven-
fold in four years. Two thirds of these projects
were cut. Laey announced that, in the future,
instead of relying on its internal research and
development, P&G expected that 50 per cent
of its innovation would come from outside the
company. R&D numbers would remain the same,
but the onus would be on maximising ideas
internally and externally.
Procter & Gamble
Innovating Innovation
28
Larry Huston Organisations are
under-led around innovation.
The logic was simple. For every one of the
companys researchers, P&G calculated there
were 200 people scientists or engineers
outside the company who had talents the
company could utilise. Instead of 7,500 people
in corporate R&D, P&G re-calculated that there
were 1.5 million worldwide whose knowledge they
needed to tap into. Research and development
was reincarnated as Connect and Develop with an
organisation of 1,507,500 people.
Green lights; new dawn
For Larry Huston, then 26 years into his P&G
career, Laeys announcement was a crucial
moment, a green light for his work stretching
back much of the past decade. He told his
team: Were in business, things are going
to start happening.
Hustons state of readiness was understandable.
Tracing back the idea which became connect
and develop, he goes back to the mid-1990s
and draws parallels with artists. Its just like
the way some artists will develop models and
sketches before they commit to creating the nal
painting, says Huston. Thomas Hart-Benton for
example, a US-based social realist, would create
clay models and then more models of what he
was eventually going to paint and then he would
start working on the perspectives with all kinds
of sketches. He would work on the concept for a
long, long time before he ever actually created a
successful painting. Thats the way most artists
work, look at all the study pieces that everybody
does. And, in the case of this new innovation
model, we worked, probably, ve or six years on
creating the studies that led to it coming together,
ultimately, in the year 2000.
Huston, along with colleague, Nabil Sakkab,
was initially interested in how to develop a new
organisation form that combined the ability to
deliver high performing results, yet be adaptive.
He spoke, among others, to Dee Hock at Visa
who had instigated a unique organisational form
labeled the chaordic organisation. His attention
then developed to embrace chaos theory. Huston
sought to understand whether there was a way to
attract the best people to projects with a greater
chance of success and to allow bad projects to
die because they would go unstaffed. I wanted
to create an organisation where people would be
uid and move around and could swarm to the
good projects, yet protect the base business.
Huston made contact with Stuart Kauffman at the
Bios Group and spent time thinking through and
developing a detailed organisation design. This
was captured on the walls of a large conference
room in Santa Fe, and Huston was then lmed
giving a guided tour to the organisation design
of the future with Kauffman following with his
own commentary.
By way of further experimentation, Huston
then worked with a start-up software company
to launch a company to facilitate a ow to
the best opportunity model. This web-based
investigation lasted a year while Huston and his
team studied a handful of innovation projects
that had been brought in from outside P&G.
External connections created about twice as much
value as internal initiatives when factors such as
success rates and time to market and after costs
were fully considered. Huston extrapolated that a
connections model of innovation could create a
breakthrough in driving P&Gs business and
its productivity.
Gilbert Cloyd, P&Gs chief technology ofcer,
approached Huston with a challenge: could he
create a new R&D model for the company?
This was a moment in time that allowed us to
really consider a whole new operating method,
Huston summarises. I had run six years of
experiments, and went out and started studying
New frontiers Tomorrows management innovation today 29
Innovating Innovation > Procter & Gamble
real world innovation networks and how value
could be created. Then we created the conceptual
positioning for connect and develop, around
the idea of turbo charging our already strong
base organisation. I had the rationale and some
ideas about the tools and how to get it off the
ground and created a new role called technology
entrepreneurs. AG Laey announced that we
were going to get half of our innovation from the
outside. That was a major intervention and so we
were off and running.
Importantly, Laeys announcement was a very
public one. He put the stake in the ground.
Reactions were decidedly mixed, Larry Huston
recalls: Some peoples rst reaction was, wow,
P&G is getting rid of its R&D. Should we sell the
stock? This is a science-driven company, what are
they doing, have they lost their minds? They didnt
realise that what we were doing was substantially
strengthening our R&D capability.
Reality and development
The positioning of connect and develop was
important. First, it was made clear that connect
and develop was not a matter of outsourcing
P&Gs research and development capability.
Connect and develop was about nding good
ideas and bringing them in to enhance and
capitalise on internal capabilities. In essence, an
insourcing strategy.
The second point was that connect and develop
was not a transformation programme. I think
transformation is a dirty word, says Huston.
If you go and say to a company, Im going to
go transform you, theyll say, its going to be
impossible and well never nish. In the case
of connect and develop we were careful not to
position it as transformation -- even though now
it is. We said, we have a strong, powerful, global
organisation, weve built outstanding capability
all over the world, we have world class people,
what were going to do is take this already strong
capability and turbo charge it. And so the core
idea is based upon how do we turbo charge? And
then, what are the accepted beliefs that people
have about this kind of thing? How do we create
its credentials?
Connect and develop focused on three areas:
the needs of consumers (each business and the
company as a whole identied the top ten needs
of consumers); adjacencies (products or services
which could help P&G capitalise on existing
brand equity); and, what the company labels,
technology game boards (a planning tool which
enables P&G to evaluate how technologies in one
area impact elsewhere in the business).
At the heart of connect and develop is using
networks to gain connections to new ideas. In
the old invention model know how was key and
really this is what we focused on the most. In
the new connections model know who would
become critical. The networks P&G keys into are
varied. Among the most notable are proprietary
networks developed specically for connect and
develop. For example, P&Gs leading 15 suppliers
have around 50,000 people employed in R&D.
P&G built an IT platform to share technology
briefs with suppliers. Closer working relationships
and the sharing of information have brought a
30 per cent increase in projects with staff from
suppliers and P&G working together.
Even competitors offer sources of inspiration.
Larry Huston recalls meeting a competitor from
Japan. He said, Are you comfortable with
talking? I said, of course Im comfortable talking.
I consider your 2,500 R&D people to be my R&D
lab. And this really blew his mind.
P&G also created a network of what it labels,
technology entrepreneurs. They are senior
experienced people who have seen everything,
done everything. They are focused on being the
growth provocateurs for the organisation, Huston
explains. The technology entrepreneurs number
Innovating Innovation > Procter & Gamble
30
70 worldwide. They are effectively the eyes and
ears of connect and develop making contacts
within industry and education, with suppliers,
and with local markets. To date, the technology
entrepreneurs have brought over 10,000
products, ideas and technologies to the attention
of P&G. Each is then evaluated.
Elsewhere, P&G taps into a number of open
networks. It is involved with YourEncore which
connects companies with high performing retirees
from over 350 companies; InnoCentive which
deals with more specic technical problems;
and Yet2.com, an online intellectual property
marketplace.
Once ideas emerge through the networks they are
rigorously evaluated by P&G before deciding to
proceed with further development.
The innovation dividend
P&G accomplished its goal. Over 50 per cent of
the companys innovations now originate outside
the company. When AG Laey rst announced
his bold target in 2000, the gure was under
15 per cent. Connect and Develop has helped
turbo charge more than 250 products into the
marketplace, and generated billions of sales.
Now Procter & Gambles vice president for
innovation and knowledge, Huston believes that
connect and develop offers broader lessons on
how to develop management innovations. The
one thing that is really important is to get the
concept right, says Huston. P&G is a concept-
driven company. A concept for us is how the
products going to make the consumers life better
and providing strong reasons to believe in it. So
we practice concept development here every day,
because we have to move hearts and minds. We
have to win the battle at the store shelf and getting
the concept right is enormously important. In
fact, most product failure, 75 per cent of product
failure, is not because the product doesnt
perform, but because it was the wrong idea. It
didnt provide desired consumer benets at the
offered price. Many organisation failures are due
to both a poor concept and poor execution.
For a number of innovations that Huston has been
involved in, he went through the formal concept
development storyboarding process, applying
what P&G does for products, to management
concepts and businesses. One of the new
business ideas tested was called YourEncore
(www.YourEncore.com). The concept was to
take the experience and expertise of people who
have retired and to utilise it in organisations.
Huston and his team created storyboards for
the concept and then took them to 21 prime
prospect companies. They commented on and
critiqued the idea, how it would work, and the
value proposition. Huston next ran nancial
models to see if the desired concept was capable
of making money. YourEncore now links over
1,800 retired scientists and engineers drawn from
350 companies to organisations in need of their
experience and expertise. Its all about bringing
in new innovation DNA to create new sources of
growth. Thats the core idea, says Huston.
Learn and develop
Clearly, connect and develop offers further
lessons on how companies can utilise external
expertise and maximise internal resources. The
commitment of the companys leadership was
important. Says Larry Huston: This is all about
leadership, number one, being clear about where
to play, how youre going to win and where you
want to grow. Thats the job of the CEO and the
New frontiers Tomorrows management innovation today 31
Innovating Innovation > Procter & Gamble
One thing that is really
important is to get the
concept right.
top management to really gure this thing out.
But, it is trite to say that this is all about starting
with the CEO and changing the rewards system.
For me, it starts with an idea, one that is proven,
one that can be scalable. Then it moves to the top
leadership for support. Then, on to making the
necessary changes in the culture, like rewards, to
enable adoption at scale.
Second, its about building a lot more muscle.
Connect and Develop is about muscle, its about
giving us many more hearts, minds, hands and
feet to do the work. And the third thing is, it is
about equipping people and mindsets. For the
most part our people have good ideas. We dont
really have an idea problem. We have people who
are smart and motivated, but mostly organisations
are under-led around innovation. Its the top
ofcers that have to really create a growth culture
based on innovation rather than just acquisition.
There are also cultural challenges involved in
moving any organisation from an emphasis on
nding solutions internally to tapping into brilliant
minds elsewhere. Most senior managers at P&G
have been with the company for the vast majority
of their careers. You rely on people outside,
to some extent, to help challenge you and put
ideas in your head about what might happen,
Huston admits. In rening your ideas and ideas
of whats possible, you have to expose yourself
outside. Whether its going to see Dee Hock or Stu
Kauffman or some little entrepreneurial company
or studying the movie industry or the toy industry,
or whatever it might be, you have to. The problem
is people dont know the right questions to ask.
And if youre inside a company the only questions
you know to ask are those within your frame of
experience. Its hard to ask a question outside
your frame of experience so you have got to be
moving to other frames of experience to come up
with good questions.
Huston believes that the Connect and Develop
model of innovation is nascent and likely to
become the dominant innovation model of our
times. It is like developing the telephone system.
If Procter and Gamble developed the telephone
system and only we had it in the world, yes, it
would benet our operations. But, if the world has
the telephone, look how much more effective we
are and whats most important with the telephone
system is not the utility but the conversations.
So weve been telling our potential partners,
heres the utility, heres how you do Connect
and Develop, because fundamentally we believe
that our competitive advantage is knowing the
consumers, leveraging the strength of our brands,
and the quality of the conversations that we have.
Its not whether or not there are networks out there
or people know that we are linking to scientists,
its the quality of the conversation.
Today, for many companies, the innovation
phone system, the innovation phone book, and
the idea of innovation conversations barely exists.
For Procter & Gamble, management innovation has
been an important driver of its enduring success.
It pioneered brand management in the 1920s,
it was one of the rst companies to implement a
transnational organisation in the late 1980s in R&D
(also led by Larry Huston), and it is now leading
the world in its approach to open innovation. And
the beauty of such innovations is that they are
sufciently deep-seated that competitors take
a long time to catch up. As Huston observes,
Connect and Develop is a long-term investment: I
think P&G will run on this model for 20 years, and
one-by-one many other companies will embrace it.
Resources
Hock, D. (1999). Birth of the Chaordic Age. Berrett-
Kochler Publishers.
Huston, L. and N. Sakkab (2006). Connect and
Develop: Inside Procter & Gambles new model for
innovation. Harvard Business Review 84(3): 58-66.
Chesbrough, H. (2003). Open Innovation. Harvard
Business School Press.
Innovating Innovation > Procter & Gamble
32
about equipping people and mindsets. For the
most part our people have good ideas. We dont
really have an idea problem. We have people who
are smart and motivated, but mostly organisations
are under-led around innovation. Its the top
ofcers that have to really create a growth culture
and the quality of the conversations that we have.
Its not whether or not there are networks out there
or people know that we are linking to scientists,
its the quality of the conversation.
Today, for many companies, the innovation
phone system, the innovation phone book, and
the idea of innovation conversations barely exists.
For Procter & Gamble, management innovation has