Case study

Spurring innovation through global knowledge management at Procter & Gamble

Procter & Gamble (P&G) was founded in Cincinnati in 1837. Initially, the company produced soap and candles, but the firm eventually diversified into a range of consumer goods. An important reason behind P&Gs growth and success in the decades after the Second World War was its ability to create innovations, like the industrys first cavity-prevention toothpaste Crest, the heavy-duty synthetic detergent Tide, and the two-in-one shampoo product Pert Plus.

P&G had established its first overseas marketing and manufacturing unit through an acquisition in the UK in 1930, and it proceeded to expand abroad rapidly after 1946. The company originally based its R&D activities in the US, but since the mid-1980s, P&G established a worldwide R&D network, with research hubs in the US, Europe, Japan and Latin America (see www.pg.com/translations/history_pdf/english_history.pdf). However, while the company continued to develop innovative new products in the 1990s, by 2000 profits were lacklustre, the stock was underperforming (New York Times, 2008), and P&G was facing decreasing returns on its investments in R&D (Huston and Sakkab, 2006). In fact, from all of its new product introductions, only a minority were returning their development costs (New York Times, 2008).

At the beginning of this century, the US operations were still dominant, with the flow of knowledge and innovations mostly flowing from the centre to its foreign subsidiaries. P&G had some positive experiences of leveraging knowledge from foreign subsidiaries (see Bartlett, 2003) and also with acquiring new products from outside the firm. The problem was that such successes occurred all too infrequently. While the company knew that many of its best innovations came when combining ideas from different parts of the corporation, the inflow of knowledge from the overseas units was limited as was lateral knowledge transfer among the foreign subsidiaries. The foreign units were fairly autonomous and had limited experience in sharing knowledge across borders. For instance, it took P&G five years after the successful launch of the Pampers nappies in Germany to introduce the product in France, allowing Colgate-Palmolive to enter the market with a similar product that gained a dominant market share (Hansen and Birkinshaw, 2007).

While P&G had some positive experiences acquiring new products from outside the firm, these innovations and their connections were too infrequent. Consequently, in 2000, the new CEO, A.G. Lafley, set out to change radically how the company went about innovation. He set a challenging strategic goal that 50 per cent of new products should stem from ideas acquired from outside the company. Lafley believed that this would require a change in the companys attitude, overcoming resistance to innovation and a Not-Invented-Here syndrome and moving it to an enthusiasm for ideas and products proudly found elsewhere. Reflecting on this need for fundamental change, Lafley further observed, And we needed to change how we defined, and perceived, our R&D organization from 7,500 people inside to 7,500 plus 1.5 million outside, with a permeable boundary between them (Huston and Sakkab, 2006: 61).

Clearly, enhancing how P&G captured and shared knowledge across borders would not be an easy undertaking. The functional barriers between R&D, marketing research, manufacturing, and other siloed functions would have to be eliminated, as well as reducing those between the different business units. There was also a need to improve the linkage between problem identification, external knowledge acquisition, internal knowledge sharing across units, and global exploitation of innovations (in terms of products but also in terms of internal ways of working). The new model that P&G developed was called Connect + Develop (Laffley and Charam, 2008). The goal was to tap into knowledge and ideas outside the company, from small and medium-sized companies, university labs, individual researchers, its business partners and even from its competitors. An additional aim was to improve the sharing of knowledge and ideas within the company. P&G appointed 70 senior technology entrepreneurs to work in six regional Connect + Develop hubs, focusing on finding products and technologies that were specialties within their regions. P&G established 21 global communities of practice networks of experts working in the different business areas (Business Week, 2004). The company also helped to create several firms that operated open networks, typically web-based, connecting scientists, companies, universities and government labs (Huston and Sakkab, 2006).

A number of additional organizational changes were also implemented. The country organizations lost much of their previous independence. New regional organizations were introduced for instance, a new European regional headquarters was established in Geneva, mostly staffed by expatriates from different parts of Europe. While P&G had always used expatriation as a management development tool, the new structure led to increased interaction and knowledge sharing among people with diverse experiences and networks in different parts of the corporation. The co-location of the different business unit management teams also led to stronger connections and relationships across the units. Finally, P&G established regional service centres responsible for a range of functional activities.

The Connect + Develop model has led to significant changes in how P&G approaches its innovation projects. A striking case in point was the development of a new Pringle potato chip printed with words and pictures. Somebody had come up with the idea in a brainstorming session, but it was not clear how it could be done technically. In the past, P&G would have launched an internal R&D project, but for the printed Pringle it developed a technology brief that was communicated throughout the corporation and its external networks (when a new opportunity is spotted, such briefs are developed and circulated throughout the corporation). This led to the identification of a small bakery in Bologna, run by a university professor who had invented a method for printing on food products that could be adapted to fit the purpose. The new product, Pringles Prints, was launched in 2004. In less than a year and at fraction of what it otherwise would have cost, P&G had developed a double-digit growth business. P&Gs innovation success rate (the percentage of new products that return the investments made on them) has more than doubled since 2000. The number of new products originating from outside the firm has risen to 35 per cent, while R&D spending has been reduced from 4.5 per cent of sales in the late 1990s to 2.8 per cent in 2007 (see www.strategy-business.com/press/freearticle/08304).

Case study questions

1. Evaluate P&Gs approach to managing knowledge and innovation.

2. What are the barriers that a multinational organization has to overcome so as to harness the potential of a Connect + Develop model? What are the implications for HR?

3. What are the lessons of P&Gs success in enhancing innovation through global knowledge management, and how does this apply to another organization that you know well perhaps in a different industry?