Accomplishing sustainable, breakthrough innovations within multinational corporations is attainable using “open innovation” and “innovation hubs,” according to Larry Huston, managing director and founder, 4iNNO, and former vice president of innovation, Procter & Gamble, and Tim Munoz, managing director, 4iNNO.
Open innovation, with roots in Procter & Gamble’s well-known “Connect + Develop” strategy, blends a ‘firm’s internal assets with the seemingly limitless knowledge pool outside of the ‘firm. “Open innovation is about combining your assets with the assets of the world . Put them together so that you can drive superior shareholder value for the company and satisfaction for the customer,” Huston said. One important capability for driving open innovation is the establishment of an innovation hub, which Munoz described in detail for attendees at the Mack Institute for Innovation Management at the Wharton School at the University of Pennsylvania.
Two Times the Net Present Value
“Innovations that are connected, or open, have about two times the net present value versus innovations done internally at the company,” Huston said. Open innovation allows companies to connect with companies and innovators who have ”ready-to-go” products, services, or technologies, in order to minimize risk and to circumvent the innate inefficiencies often found in large corporate structures. ”Think of all the time spent doing corporate stuff rather than innovating,” he said. “Even with having to pay licensing fees or royalty payments, or even acquiring a technology, there’s still about a 2x return versus doing it inside.”
When Procter & Gamble (P&G) implemented open innovation, the percentage of innovation s having either a foundational element or the entire ready-to-go innovation sourced externally went from less than 4% to over 60%. “It put 600 innovations in the market, delivered $12 billion in top-line sales, and drove its success rate from 35% to 75%. These results are definitely a basis for disruption , a whole new business model,” Huston said.
Cascading Steps for Open Innovation
Implementing open innovation is a cascading process that incorporates critical steps from strategy through implementation: the innovation vision and mandate, the “where to play” strategy, the “how to win” set of activities and processes, the capabilities needed, and the governance provided by management.
A clear innovation mandate is essential for success . “Leadership must be involved in distilling an innovation vision into a clear innovation mandate,” Huston said. The mandate at P&G was to deliver 7% of organic growth per year. That meant delivering $100 million per week, which P&G did for 5 years running until the recent recession. The very bold and very public goal announced by P&G’s CEO, A. G. Lafley, to increase its “insourced” innovation from 4% to 50%, was nothing less than startling, Huston said.
P&G might not have met its goals without both top down and bottom-up strategies that addressed the culture change. “P&G ramped up very quickly with open innovation and it worked because of the commitment from the top levels of management.” Implementing the vision involved four concepts: using other people’s ready-to -go ideas and assets, changing its culture to “proudly found elsewhere,” building a global innovation network, and recognizing that its intellectual assets were now a combination of “know-how” and “know-who.”
By opening up the company to “externally cooked ideas and businesses” and joint developments, together with its in-house research department, P&G grew its revenues from $52 billion in 2001 to $82 billion in 2012, according to Huston. Open innovation gave P&G the benefit of essentially adding the equivalent of 5,000 full-time people by leveraging ready-to-go ideas from external entrepreneurs.
The usual stage-gate, systematic process of moving new ideas forward at large corporations stifles innovation, Tim Munoz said. While the idea of open innovation is not new, most companies do not employ a truly open model because it is not business-as -usual. “The ability to access talent via networks in a matter of hours, not weeks , is available now,” through the wealth of big data and analytics that can find and manage innovation networks. Innovation hubs start with envisioning all the possible downstream innovations from a new technology.
Hubs are made up of subject-matter experts assembled in standing teams. “Using this structure ensures speed, quality, and buy-in. We go from an idea to a term sheet in six months or less,” Munoz said. With an innovation hub, managing heterogeneous groups of stakeholders and constituents is critical , as the mix of people gathered in any particular innovation hub can be very diverse. “In R&D innovation hubs, the leaders combine technical know-how with commercial sense. They are trained in rapid deal-making around defined science and technology areas,” Munoz said.
The five steps of creating an innovation hub are “want, find, assess, get, and transition.” ”You start with a tight brief , with a defined innovation strategy of the [partnering] company, to be clear about what you want and what your specific requirements are; you find interesting assets externally, you assess them, you ‘get’ them by structuring term sheets, and then you transition them into the company,” Munoz said.
“Half of the hub activity is in the assess stage,” Munoz said. “Assessment starts at a broad screening of potential products and technologies that might meet your brief, continues through strategic assessment, and then focuses in on due diligence. Technical, IP, commercial, financial, legal due diligence-all of these activities happen concurrently in the hub, rather than one after the other, as in a typical business process.” The big potential associated with innovation hubs comes from the focus on monetizing a technology that can drive a portfolio of offerings, not just an individual product.
Integrated Implementation Process
“The usual research and development model isn’t fit for purpose anymore,” Munoz said. Unless you access leverage from outside players, you’re probably not going to succeed. “Almost any innovation is dependent on other people participating, whether to drive the innovation initially or to drive the adoption of it,” he said. But large companies must get comfortable with easing back on the controls. “You’ve got to tap into these open networks. There is a huge first-mover advantage to this.”
Many innovative companies are now staffed with a new role called “the growth entrepreneur.” These people search throughout their assigned domains-defined by business unit, customer segment, technical expertise, and/or market or geography-and collect a smorgasbord of new ideas from every corner of the world. With an innovation hub, the company gains a team of very experienced deal makers and subject-matter experts. Over time, such a team can set the firm apart as the pref erred innovation partner.
P&G focused its open innovation efforts in three key areas: unmet needs of current businesses, building businesses through adjacencies, and finding new growth platforms. The company sent employees across the world to locate disruptive, game-changing technologies-but only if they were proven. “We were interested in finding out who the key people were who were working on these ideas,” Huston said. An essential component was listing the top ten consumer needs for each business.
P&G built extensive external networks. With 9,000 employees and work that demanded a ”huge amount of science,” Huston said, P&G estimated there were approximately 1.8 million people outside of the company working on projects that P&G was interested in for internal growth opportunities. ”When we say we build a network, what we do is we gather the names and dossiers and email addresses of the people in the various areas that might know about new business models.” This process can involve as many as 10,000 names in areas such as absorbing structures. His company creates “invention profiles” for each person with a ready-to-go, new technology. “We essentially get very targeted so that we are able to go to the right person, not carpet bomb the whole universe of inventors in a broad area, and we knock on that one person’s door and tell them what problem we are trying to solve, and that we’d like to talk to them about it. It’s very effective. It’s much more productive than putting 100 people in a lab to chase something that may already exist outside of the company.”
- Vision and mandate: The CEO must lead the transformation to open innovation. The vision should be simple and translated into a specific mandate: What is the specific contribution of innovation to our total growth?
- Where to play: Focus on unmet needs in existing businesses, adjacency opportunities, and creation of new growth platforms.
- How to win: Focus on “ready-to-go” products and services and game-changing technologies that can be extended across the portfolio.
- Develop capabilities: Create innovation networks to leverage the industry ecosystem and innovation hubs to find external solutions and commercialize them quickly.
- Don’t forget to “give it heart”: Promote the tight people; acknowledge that change takes time.
Huston also showed attendees an example of a total consumer experience map; this example was a hypothetical consumer and her concerns about germs. “We want to understand the whole meaning of germs, throughout the consumer’s whole life. We look for her insights, for new product ideas, and totally new concepts.”
Add Heart to the Cultural Transformation
The immediate reaction to the P&G CEO’s announcement about open innovation was that the company was simply outsourcing its research. But the change was more nuanced, according to Huston. “It involved insourcing the ideas and intellectual assets of the world with what we know to better serve the consumer.” To accomplish this shift in strategy P&G had to create a cultural shift within the company. “We changed from a culture of keeping everything inside to a culture of our know-how plus our know-who.”
It was important to “add heart” to this cultural transformation , Huston said. “We didn’t say to our employees , you’re broken and we’re going to fix you with open innovation. We did not believe that. Instead , we said, this organization is like a Porsche and we are going to turbo-charge it and help you drive faster.” Make sure you promote people and recognize the heroes, said Huston, and remember that such a major transformation takes time. “P&G spent about $50 million; it spent time and money on public relations efforts, and it started from the top-down. The CEO cannot just be a figurehead.”
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