Assignment
Read the Case 8.1 "Floodgates open up to a sea of ideas" by Simon London below and answer the following questions in a short essay format. The total of marks awarded is 10.
1. What are the new challenges for creative/innovative companies?
2. Can firms maintain their competitive advantage by not taking into consideration these changes? Why or why not?
3. Based on this case, which structure has the greatest practical application?
4. This case undoubtedly stresses the importance of a firm's structure, systems and resources. Which do you think will be the most important in the future?
Instructions to follow:
- Your essay should contain a minimum of 1000 words;
- Your writing should be professional, error free, and conform to appropriate rules of English.
- Referencing should be done in Harvard Referencing Format.
Floodgates open up to a sea of ideas" by Simon London
Procter & Gamble is an unlikely poster child for innovation.
The 170-year-old maker of wet wipes and shampoo is based in Cincinnati, Ohio, far from the technology hotbeds of California or Massachusetts. Since 2000 the group has cut research and development spending as a percentage of sales and focused resources on a handful of big brands.
Yet what looks at first glance like retrenchment is actually far more interesting. The company, once renowned for its inward looking culture, these days gets about one-third of its product ideas from outside. AG Lafley, chairman and chief executive, has set a target of 50 per cent under an initiative dubbed "Connect and Develop".
"P&G is one of the most aggressive adopters of the open innovation model," says Henry Chesbrough, professor of management at the University of California, Berkeley.
The open approach stems from a realisation that corporate labs can no longer be expected to carry the full burden of innovation.
Knowledge is so widely distributed and, thanks to the internet, travels so fast that great ideas can come from rank and file employees, customers, suppliers, competitors, universities or lone inventors.
Yet the pressure on companies to innovate has never been greater. Yesterday's market leaders can easily become tomorrow's has-beens. Just think of Kodak, which failed to move fast enough to embrace the digital photography revolution, or General Motors' tumbling US market share.
"There are all kinds of alternatives to innovation. In the short term you can cut costs, you can make acquisitions, you can buy back your own shares. But in the medium to long term there is no alternative," says Gary Hamel, visiting professor at the London Business School.
Yet P&G's focus on its core brands is a reminder that great ideas from whatever source must be turned into hard cash. The company learned the hard way that internet incubators, corporate venture capital funds and other artifacts of the dotcom era under most circumstances destroy more value than they create. Enlightened pragmatism is now the order of the day.
Thus P&G's Crest brand has been revitalised by the launch of Crest Whitestrips, a tooth whitening product, and the Crest Spinbrush line of inexpensive, battery powered toothbrushes. The former was developed by internal R&D, the latter acquired from the company that pioneered the category. Launching both under the Crest name has transformed the brand from mere toothpaste
into an oral care franchise.
This blend of openness, discipline and focus on the core business captures the innovation zeitgeist. The resurgence of Apple Computer, maker of the iconic iPod digital music player, is built on similar foundations. While Steve Jobs, co-founder and CEO, presents the facade of lone, maverick genius the reality is different. Apple has long been happy to embrace ideas from the outside. Thus the electronic guts of the iPod were engineered by PortalPlayer, a small company headquartered not far from Apple in Silicon Valley.
Similarly, Apple's much praised OS-X operating system, which powers the company's resurgent personal computers, is based on Unix, the operating system that runs many of the world's big corporate data centres.
None of this is to deny Apple's talent for product design, user interface and marketing. But its willingness to embrace ideas from outside has leveraged these talents into a remarkable corporate renewal.
Another lesson from the iPod's success is that innovation is about more than just products. To be sure, the iPod is a neat consumer gadget. But Mr Jobs' real breakthrough was persuading record companies to make their music available at 99 cents per download via iTunes, Apple's online music store. Yes, iTunes without iPod might have succeeded. The iPod without iTunes probably would have sold by the lorry load. But it is the combination of hardware, software and business model that produced a cultural phenomenon.
For innovation junkies this is old news. Business model innovation was one of the hot topics of the 1990s. The most successful US companies of the decade - think of Dell or Southwest Airlines - offered not breakthrough products but breakthrough ways to deliver familiar products. Yet all too often we think of innovation as something practised by engineers rather than the unsung heroes of sales, marketing, finance or administration.
This is a costly mistake according to proponents of "business process" innovation. Here, the emphasis is on finding new ways of working that cut costs or add value for customers. Whereas business model innovations tend to be grand in conception, business process innovations are more often incremental, cumulative and, frankly, mundane to all but industry insiders.
P&G's Connect and Develop programme is an example. The company's business model selling branded consumer products through third party retailers is the same as ever. But the process by which ideas are identified and developed is being transformed. It is innovating in innovation.
The competitive advantage of some companies rests squarely on their ability to improve continually on established ways of working. Wal-Mart, the world's largest retailer, has pioneered a range of process innovations that, taken together, have changed the face of retailing. For example, the Arkansas based company was a pioneer of "cross docking" in which consumer goods companies deliver products direct from the factory to stores.
For the next wave of process innovation, look to China. In The Only Sustainable Edge, published earlier this year, authors John Hagel and John Seely Brown argue that the success of China's low cost manufacturers stems not only from cheap labour but also from the finely honed ability to orchestrate specialist suppliers. Combined with modular product designs, this enables them to deliver a huge variety of products at implausibly low prices.
Write Messrs Hagel and Seely Brown: "These models of innovation spell out a clear message for many companies in the developed world: if you are not participating in the mass market segment of emerging economies, you're not developing the capabilities you will need to compete back home."
Facing low cost competitors is bad enough. But how do you compete against products that are free? This is the dilemma confronting companies such as Microsoft, Oracle and Sun Microsystems as they try to combat software developed by the open source community of programmers.
If you picture the open source movement as a small collection of bearded idealists, think again. Thousands - perhaps tens of thousands - of programmers are collaborating to build operating systems, databases and other software that rival huge civil engineering projects in terms of scale and complexity.
So far, the economic impact is restricted mainly to software. But companies in other knowledge based industries cannot afford to relax. Already reference book publishers find themselves competing against free online products such as Wikipedia, the "open source" encyclopedia. Open source textbooks may be not far behind. Blogs and other forms of "participatory journalism" are challenging the hegemony of traditional media over news and views.
The common thread is that open innovation starts to dissolve the distinction between producers and consumers, between "us" and "them". This challenges companies to change not only innovation processes but also corporate mindsets.
Eric von Hippel, professor at Massachusetts Institute of Technology, argues that demanding consumers have long been customizing mass produced products to fit their exacting needs. In adventure sports technical innovations often originate with elite practitioners.
Similarly, Linux, the open source computer operating system, had its genesis when Linus Torvalds, then a computer science student in his native Finland, was trying to find a way to run Unix on his personal computer. Since no suitable software was then available, he decided to build his own. The lesson, argues Prof von Hippel, is that companies should stay in close touch with their most demanding and sophisticated customers.
One company moving in this direction is Intel, the largest semiconductor company. In a spirit of open innovation, Intel has over the last five years built a network of small "lablets" based on university campuses to supplement its conventional R&D operation. Through the resulting contacts, it hopes to stay in touch with emerging technologies.
The next step: put lablet researchers in direct contact with companies that could benefit from immediate application of far out technologies. The hope is that this combination of lead users and open innovators will yield new insights.
"Researchers are always accused of technology push," says David Tennenhouse, Intel's director of research, "now we are trying to create customer pull."
Another sign of changing times is the emergence of a breed of innovation intermediaries. Innocentive, a spin off from Eli Lilly, the pharmaceuticals company, uses an international network of scientists and engineers to solve problems brought to it by corporate clients. Cash rewards are offered for successful solutions. Innocentive takes a cut. Many of Innocentive's problem solvers are freelance - university professors supplementing their income - or retired industrial researchers. Others are established research labs with spare capacity.
Whether Innocentive's innovative business model is robust remains to be seen. But its very existence underlines that there is a worldwide well of inventiveness and knowledge waiting to be tapped.
To be sure, the open innovation model raises tricky management questions.
• What degree of openness is appropriate for any particular project?
• How will intellectual property rights be protected?
• What skills are required to co-ordinate an extended network of collaborators?
Don't expect old style corporate research labs to disappear in the near future. There will always be value in patented products developed in private. But there is much more to the management of innovation in an educated, networked world.