August 15, 2008
Driving growth through Innovation
by Professors Larry Chonko and Buddy LaForge
In 2000 Procter & Gamble (P&G) was struggling. Profits were down and the company’s stock price had dropped more than 50 percent resulting in a loss of more than $50 billion in market capitalization.
A.G. Lafley took over as CEO in June 2000. His challenge was to turn things around at P&G. He has done a terrific job. As of the end of 2007, P&G has tripled profits; significantly improved sales growth, cash flow and operating margins; and has had average earnings per share growth of 12 percent. The stock price has nearly tripled to increase market capitalization by about $100 billion. Various aspects of the P&G success story have been chronicled by many publications including Fast Company, Harvard Business Review, Business Week, Sales & Marketing Management and Fortune.
Lafley has partnered with Ram Charan to write a book, Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation. It presents a detailed account of how Lafley employed innovation to turn P&G around and propel it to new levels of performance. We think this book is a must-read for direct selling executives. Most of the ideas in the book could be used to increase innovation success in any direct selling company. Even though the focus of the book is P&G, there are also discussions of innovation at other companies such as General Electric, Nokia, Best Buy, DuPont and LEGO.
We cannot address all of the important aspects of the book in this article, so we will provide an overview of the basic innovation model used by P&G to integrate innovation throughout the company. The model is designed to generate customer-centric, game-changing innovation. The model makes innovation the core of its business strategy, integrates innovation throughout all business operations and puts the customer at the center of the innovation process. Then, it presents eight interrelated drivers of innovation success. We will summarize key points in each of these areas.
The Customer is Boss.
P&G considers the customer, not the CEO, to be “the boss.” Many companies profess to be “customer-driven or customer-centric.” Too often, this is little more than lip service. At P&G, the customer is at the center of the innovation process. This perspective has transitioned P&G from a technology-push innovation approach to a customer-pull orientation. Customer co-creation of value, discussed in the July issue of Direct Selling News, is at the heart of P&G’s innovation push. An enormous amount of time is spent watching, listening to and learning about customers. The customer insight gained from these activities provides a foundation for developing innovations that delight customers when they purchase and use P&G products.
Motivating Purpose and Values.
The purpose of P&G is to improve the lives of customers in meaningful ways with products that deliver superior performance, quality and value better than competitors. The company’s core values include integrity, trust, leadership, ownership and a passion for serving and winning with customers. P&G’s purpose and values inspire employees and energize them to the same purpose: directing innovations at improving the lives of final consumers and helping retail customers improve their businesses.
It may sound obvious, but goals are important. But there should be only a few that are critical. The goals should be viewed as achievable if they are going to inspire everyone’s best effort. P&G set sales goals of growing twice as fast as the industry and GDP and a profit goal of 10+ percent of the annual earnings per share growth for a decade. These are challenging, but reachable, goals that require continuous innovation and a focus on customers, gross margin and productivity improvements.
Strategies are basic decisions about how to achieve the stretch goals. Innovation should guide the strategic choices of where to play and where not to play. Many companies create strategies and then try to use innovation to support them. At P&G, innovation is the central foundation and driving force for the business. Innovation is customer-focused, so the process implicitly and explicitly incorporates customer needs, wants and changing preferences into the important strategic choices that must to be made.
Unique Core Strengths.
Decisions about how to win against the competition need to build upon, enhance and use core strengths. P&G invested heavily in making its core strengths stronger. Innovation efforts initially focused on the four product categories (fabric care, hair care, baby care and feminine care) and 10 brands with which P&G was already a global leader. The emphasis was on keeping these core businesses healthy and growing through incremental (new versions, new benefits, new sizes) and disruptive (creating new consumption or transforming current markets) innovations. These efforts increased the number of billion-dollar brands at P&G from 10 to 23, which account for 70 percent of profits.
An organizational structure that supports innovation is required. P&G moved from the typical internally focused, vertically integrated structure to a more open one. Many multifunctional teams, such as Future Works and New Business Development teams, are used to enable innovation. This type of structure promotes more interaction within and across various P&G functions and units and with groups outside the company (our March 2008 article discusses P&G’s Connect and Develop structure). The more connections among diverse groups, the more ideas generated and the more likely successful innovations.
Consistent and Reliable Systems.
Even though the innovation process can seem disjointed, it is important to employ a systematic approach with success criteria defined and progress measured continuously. P&G conducts regular reviews of innovation and business strategy, brand equity and global business units with respect to revenue growth and cost targets, resource allocation, people development and performance appraisal. These progress reviews provide an ongoing basis for the reallocation of resources and for recognizing the innovation success of specific individuals as well as organizational units.
Courageous and Connected Culture.
Developing a culture to support innovation is a long, tedious, but important process. P&G defines its culture as “what people do day in and day out without being told.” The P&G culture supports the interaction of leaders, management and employees with outside partners to produce meaningful innovations. This is a change from a culture emphasizing mergers/acquisitions and cost-cutting.
Leadership is needed throughout the firm to integrate all aspects of the innovation process and to inspire employees. Lafley, as CEO, is also the chief innovation officer. Innovation is part of his day-to-day activities and this is visible to everyone in the company. Being an innovation role model is one of the most important elements of innovation leadership.
The book concludes with a summary of what Lafley learned about innovation through 2007 and his resolutions for 2008 and beyond. Some of his key insights are the power of purpose-driven and people-led innovation, the need to truly consider “the customer as boss” by involving them early and often in the innovation process, the value of making innovation the heart of a business model, and the importance of building an innovation leadership and management team. Resolutions for 2008 are to continue learning about innovation, especially from innovation failures, and to try to better balance creativity and discipline throughout the innovation process as both are required for success.
We hope that this brief summary of the innovation model at P&G encourages direct selling executives to read the book. The importance of innovation in the direct selling industry will certainly increase in the future. The P&G approach provides a successful model with specific examples and details that should be useful to direct selling executives and firms. Each chapter concludes with a section titled “Ask Yourself on Monday Morning.” The section consists of a series of questions that require direct selling executives to reflect on their company’s current approach and are likely to lead to new ideas for improving innovation in their firm.
Raymond (Buddy) LaForge is the Brown-Forman Professor of Marketing at the University of Louisville. Larry Chonko is the Thomas McMahon Professor in Business Ethics at the University of Texas at Arlington. E-mail your questions and comments to firstname.lastname@example.org.