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At Procter & Gamble, the Innovation WellRuns Dry

Abstract

P&G is reported here to befalling behind its competition in introducing new products. Reasons giveninclude:

1. A reduced percentage of salesspent on research and development.

2. Decentralization of R&D tobusiness units. This has caused a concentration on short-term profitability.

3. Unwillingness of customers to payP&G’s premium prices for marginally-enhanced new products.

Admitting its deficiencies, thecompany has recently recentralized some of its R&D.

Formuch of its history, Procter& Gamble (PG) didn’tjust launch new products, it created new product categories, from the firstmass-produced disposable diapers to Crest teeth-whitening kits. That’s onereason P&G has more than 1,000 Ph.D.’s among the 8,000 employees at its 26innovation facilities around the world. “P&G is largely a branded sciencecompany,” says Larry Huston, former innovation officer at P&G who’s nowmanaging director of 4inno, a consulting firm.

Lately, though, there’s been a dearth of pioneering brands emerging from theworld’s largest consumer-products company. Spending on research and developmentin fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percentof sales, the same as the prior year and down from 3 percent of sales in2006. P&G’s most recent homegrown blockbusters—Swiffer cleaning devices,Crest Whitestrips, and Febreze odor fresheners—were all launchedat least a decade ago. Says Peter Golder, a professor at the Tuck School ofBusiness at Dartmouth College: “P&G is built on creating new categories,and innovation is in its DNA, but they need to rediscover it.”

Regaining its new-product mojo is crucial because P&G’s businessstrategy has long been to charge premium prices for cutting-edge products. A150-oz. container of liquid Tide detergent is $18 at Target(TGT), forinstance, 20 percent more than the retailer’s house brand. As risingcommodity prices have increased the cost of most basic household products,cash-strapped customers may still be willing to pay more for true innovationsbut not necessarily for the kind of product extensions and embellishmentsP&G has turned to.

That’s created a challenge for Chief Executive Officer Bob McDonald, who haslowered profit forecasts three times since Jan. 1. He’s trying to cut$10 billion in costs by 2016 and reverse market-share declines in such keycategories as U.S. detergents. McDonald is under pressure from activistinvestor William Ackman, who in July took a $1.8 billion stake in P&Gand may seek management changes. Blockbusters have “dried up a bit,” acknowledgesBruce Brown, P&G’s chief technology officer. “We want to get back to moreof that.”

McDonald earlier this year assembled a team of researchers, marketingmanagers, and senior executives from across the company to chart a bolderinnovation course. The group spent 10 weeks analyzing P&G’snew-product pipeline and selecting the most promising ideas for development.But most won’t be ready for at least another year.

P&G’s 175-year history is filled with such consumer-product innovationsas the first synthetic detergent (Dreft, in 1933), the first fluoridetoothpaste (Crest, in 1955), and the first stackablepotato chip (Pringle’s, which later dropped theapostrophe, in 1968). Researchers typically have leveraged technologies alreadyused in P&G products to come up with entirely new ideas. For CrestWhitestrips, launched in 2002, they adapted bleaching methods from P&G’slaundry business, film technology from the food wrap business, and glue techniquesfrom the paper business.

In recent years, however, the company’s product pipeline has been mainlyfocused on “reformulating, not inventing, products,” says Victoria Collin, ananalyst at Atlantic Equities in London. Among these are new scents of Tide forEastern European markets and Secret deodorant’s Natural Mineral line. As aresult, analysts say P&G has lost customers in the U.S. and other developedcountries, who’ve switched to cheaper products made by such rivals as Unilever,as well as store brands.

When former CEO A.G. Lafley took charge in 2000, he sought to increase therate of product development by collaborating with outside partners who couldhelp with everything from packaging to product design. Working with outsidershas enabled P&G to gain access to some important technologies, such as awrinkle-reducing ingredient made by a French company,Sederma(CRDA), that’sused in its best-selling Olay Regenerist skin cream.

But Lafley also decentralized R&D, making business-unit headsresponsible for developing new items. R&D chief Brown says thatinadvertently slowed innovation by more closely tying research spending toimmediate profit concerns. Between 2003 and 2008, the sales of new launchesshrank by half. By the time McDonald became CEO in 2009, the number of what thecompany considered to be big product breakthroughs had fallen to an average offewer than six per year as unit heads focused on short-term results and smallerinventions, says Brown.

McDonald,who has acknowledged that the company’s R&D has been “inadequate” in someproduct categories and regions, has now centralized 20 percent to30 percent of P&G’s research efforts. He also named Jorge Mesquita,already chief of its pet care and snacks businesses, as head of P&G’s newbusiness creation and innovation unit and given him responsibility forcoordinating product launches.

One area of focus is beauty, where “we lost our way for a couple of years,”says Brown. That business, which includes deodorants, cosmetics, and hair careand made up 24 percent of P&G’s $83.7 billion in sales in fiscal2012, has been lagging competitors such as L’Oréal (OR) inproduct launches. (L’Oréal says it rolls out about 500 a year.)

McDonald has said he hopes cost-cutting will free up more money for productdevelopment. Yet the squeeze has forced P&G to make tough choices even whenit does introduce appealing products. One example: Spending to support apopular new Olay hair removal product last year pulled money from otherproducts, “so the base business lost more than this new thing gained,” Brownsays.

Meanwhile, Unilever says it can roll out 10 new products in 60 countries inthe same time it once took to introduce them in just 10 countries. Recent newproducts include Clear anti-dandruff shampoo and a Rexona deodorant that usesproprietary Motionsense technology to activate the product as the wearer moves.

Kimberly-Clark (KMB), makerof Huggies diapers and Kleenex tissue, has opened research centers in South Koreaand Colombia and increased R&D spending in the first half of this year bydouble-digits from the year before. “Our international business is growing sorapidly that the demand for innovation has increased,” Chief Financial OfficerMark Buthman says.

P&G still brings plenty of new products to market. SymphonyIRI’s NewProduct Pacesetters report, which tracks the top-selling non-food innovations,showed P&G with one-third of the top 25 last year. And the company over theyears has acquired big brands, including the Olay and SK-II skin care lines andGillette. Yet homegrown products remain the challenge. Says 4inno’s Huston:“You’ve got to be constantly creating innovation.”

Thebottom line: P&G, with $84 billion in annual sales, made itsname as a new-product whiz. But its biggest homegrown hits are at least adecade old.

Discussion Questions:

1. What are the basic socio-economicreasons behind the concern over lack of product innovation at Procter &Gamble?

2. How can product and/or processinnovation be good for operations management? Can it be bad for operationsmanagement? If so, how?

3. How can or should U.S. innovationbe encouraged? What is government’s role? How shall this role, if any, be paidfor?

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