P&G's Innovation Culture

P&G's Innovation Culture
A.G. Lafley with Ram Charan
Strategy+Business, Autumn 2008

The heart of a company’s business model should be game-changing innovation.  This is not just the invention of new products and services, but the ability to convert ideas into new offerings that alter the very context of the business.

As they lead to repeat purchases, these offerings reshape the market, so that the company is playing an entirely new game to which others must adapt.

Consider the case of Procter & Gamble.  Since A.G. Lafley became chief executive officer in 2000, the leaders of P&G have worked hard to make innovation part of the daily routine and to establish an innovation culture.

At the time, P&G was introducing new brands and products with a commercial success rate of 15 to 20 percent.  In other words, for every six new product introductions, one would return the company’s investment.  This had been the prevailing ratio in the consumer packaged goods industry for a long time.

Today, P&G’s success rate runs between 50 and 60 percent.  That’s as high as Lafley wants the rate to be, because if the company tried to make it any higher, it would be tempted to play it safe by focusing on innovations with little game-changing potential.

How has Lafley instilled game-changing innovation in his company?  In “P&G’s Innovation Culture,” in the Autumn 2008 Strategy+Business, the authors explain how he designed a social system that sparks new ideas and enables critical decisions.

Lafley is the chairman and CEO of P&G.  Charan is the author or co-author of 14 books, including Execution with Larry Bossidy.  Lafley and Charan are co-authors of the 2008 book The Game-Changer:  How You Can Drive Revenue and Profit Growth with Innovation.

At P&G, the decision to focus on innovation as a core strength has had a direct influence on performance.  P&G has delivered 6 percent organic sales growth since the beginning of the decade, virtually all of it driven by innovation.

Over the same period, it has 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, the company spent $2.1 billion on innovation, and received $76.5 billion in revenues.

One of the earliest changes Lafley made was to revitalize the company’s mission.  In the early 2000s, P&G’s mission was to improve the everyday lives of the customers it served.  But the mission was not fully e...