The decision to focus on innovation as a core strength throughout the company has had a direct influence on our performance. P&G has delivered, on average, 6 percent organic sales growth since the beginning of the decade, virtually all of it driven by innovation. Over the same period, we’ve reduced R&D spending as a percentage of sales; it was about 4.5 percent in the late 1990s and only 2.8 percent in 2007. In that year, we spent US$2.1 billion on innovation, and received $76.5 billion in revenues. We’re getting more value from every dollar we invest in innovation today.
The focus on innovation has also had a direct effect on our portfolio of businesses. The Game-Changer describes how we sold off most of P&G’s food and beverage businesses so 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 easily devote the resources and attention needed to build a broad-scale innovation culture.
We also focused on creating a practice of open innovation: taking advantage of the skills and interests of people throughout the company and looking for partnerships outside P&G. This was important to us for several 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 improving at the same rate. As the CEO, I could lead and inspire the company as a whole, but I could not substitute my judgment for that of other leaders who knew and understood their specific businesses far better than I could. The decision makers in each business would have to examine their competitive landscape and their own capabilities to figure out what kinds of innovation would work best and win with consumers.
Second, building an open innovation culture was critical for realizing 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 economy, and the ability to realize more aspirations. Along the way, they will become, for the first time, regular consumers of branded products in categories such as personal 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 consumer products companies are rapidly running out of the so-called white space in new regions. P&G, 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 products, processes, and forms of community presence. And to do that, we need to involve people, inside the company and out, who are comfortable and familiar with the values and needs of consumers 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 & Gamble must be realized through teams. The idea 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. If innovation 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.