By the 1990s, the supply-chain management approach flourished through the use of software and data to strengthen the ties that bind suppliers and producers and squeeze out inefficiencies. As the Internet scaled, so, too, did the ability of firms to better manage inventories, reacting to changes in customer demand, to the point where Amazon and Dell would accept customer orders before even assembling the final product. These advancements facilitated, among other things, globalization, with the declining cost of communication creating greater cultural and economic exchange between countries. At the turn of the century, the Internet seized an even greater role in interconnecting a firm’s product development assets—from customers, suppliers, universities, third parties, and individuals—along the innovation process. It even resulted in firms repurposing ideas that couldn’t quite make the cut but might lead to value creation in the hands of another partner.
Procter & Gamble, as much as any entity in the corporate sphere, has embodied the evolution of management practices toward what Chesbrough labels open innovation. The company’s transformation accelerated in the 2000s, catalyzed by A. G. Lafley’s elevation to CEO and his mission to go beyond in-house tinkering through the customary corporate actions: more meetings, organizational shuffling, executive recruiting, or increasing demands on those already employed. Transformational change required knocking down walls, to allow for the contributions of innovators who weren’t part of the payroll. It meant taking note of all the strategic, targeted innovations that raw materials suppliers had brought to P&G as well as recognizing that the company as a whole would be better off if it moved beyond those limited successes and pursued outside contributions even more broadly. It meant admitting, according to company CTO Bruce Brown, that “sometimes the best and brightest may not be employed at your company,” or even in the country, and that products originating in places like Japan could lead to partnerships to produce P&G applications.
All of that ambition meant the need for something else: a culture change. “Getting people to look outside,” Brown said. “Getting people to realize that there might be somebody outside of my walls who has a better idea than I do. And an organization that had traditionally always done things internally, to begin looking externally, and then also saying there might be some people who can do this better or faster than we can. Then we’ll bring our expertise, with the global reach of our brand, to our ability to execute, and other strengths, to make this happen faster and better.”
That meant bold leadership and a clear message that this “open” philosophy would be central to the company’s operating strategy. Lafley established a goal that 50 percent of innovations would include a significant external component within the decade, and created metrics to monitor and accelerate that progress.22 In 2002, Lafley even instituted an official apparatus to drive that innovation, one that has since served as the company’s signature. It was called Connect + Develop, and it assigned 80 members of the R&D staff to take on the new title of “technology scout.” They were charged with exploring externally to create a network of ideas and people that might augment or improve P&G’s portfolio of products and stable of innovators. The aim was to replicate the success of the electric Spinbrush. A small group of entrepreneurs had initially developed that dental hygiene product, sold it to P&G for more than 300 times their initial investment, assisted P&G in the launch under the company’s Crest name, and watched as it catapulted Crest back to the top spot in its market.
The company encouraged innovators of all types and sizes—independent entrepreneurs, government laboratories, contract laboratories, research institutes, suppliers, academicians, communities of practice, subject matter experts—to “connect” with P&G through a chance to collaborate and develop. To be considered, an idea needed to address a major, unmet consumer need; offer a new benefit to an existing P&G category or brand; or feature such elements as proven technology, a demonstrated packaging solution, or evidence of consumer interest.
The results? You might see many of them inside the cabinets or on the countertops of your home. For some of the products, P&G collaborated with companies that are competitors in other spaces. For instance, while Clorox is one of P&G’s biggest competitors in the cleaning products sector, the companies share an interest in Glad, and jointly developed Glad Press’n Seal, with P&G developing plastic film technology and Clorox taking the lead in commercialization. The private sector powerhouses joined together on another initiative that ultimately led to Glad ForceFlex trash bags.
Some of the products came to the P&G family from other countries, such as the Swiffer duster, purchased in a fully formed state from a Japanese competitor; or the antiwrinkle cream Olay Regenerist, which emerged out of a technical conference in Europe, where P&G’s skin-care researchers learned of a new peptide technology developed by a small cosmetics company in France for the healing of battlefield wounds.
A few of the collaborative products have allowed P&G to return to its roots. Originally a soap and candle company, P&G had not sold candles for more than eight decades, before partnering with a candle company to produce Febreze candles. Other collaborations, sometimes involving P&G taking technology and knowledge in and sometimes sending technology and knowledge out, have led to frequent expansion or improvement of existing product lines.
One collaboration stood out, not just because P&G’s partner was the public sector, but because of the unlikely source of the solution. That is the story that I wanted Bruce Brown to share with President Obama when I recommended they meet in June 2011 at Carnegie Mellon University in Pittsburgh, Pennsylvania, on the heels of the President’s new Advanced Manufacturing Partnership aimed at facilitating greater R&D collaboration for creating the jobs of the future and increasing global competitiveness. A few years earlier, P&G had worked with Los Alamos National Laboratory in New Mexico, tapping into the laboratory’s data on nuclear physics to improve the development of diapers. Yes, diapers. Diapers are made at a rate of about 1,000 per minute. Due to that speed, the sand particles that absorb liquid are sprayed all over the place, rather than where a child would typically urinate. “You’d like to have as much of it in the crotch as you could,” Brown said. “The ability to do that—in this violent reaction—that’s basically you are just blowing this stuff around to lie it down in a precise pattern. It’s a great technical challenge. Well, Los Alamos had all this code for how particles behave in a nuclear explosion.”
Together, they applied that code to develop a software tool and then a superior product. P&G then announced that it would provide its high-performance computing models for free to small- and medium-size businesses, sparking a new industry of “on-demand” manufacturing tools.23 Brown estimated savings of more than $1 billion over the years, including the software applications and related professional services, as a result of this Los Alamos collaboration.And the collaboration continues with a Los Alamos scientist now embedded with P&G.
Brown described the U.S. national laboratories as a “treasure trove of expertise.” The Connect + Develop program, as a whole, has proven to be a treasure trove of cash for P&G. Yet even as it has spurred billions of dollars in annual sales growth, according to company disclosures, executives have been careful not to take the innovation culture for granted, with expediency always alluring.24 “I would say it remains a challenge,” Brown said. “You have to avoid greater value being placed on internal development rather than external development. That’s a constant watch-out. You have to make sure you reward people who are doing external work in addition to internal work. Making sure you are clear on what’s important, that you reward it correctly, that it’s strategic and that it’s valued and you invest it and you organize for it and you operationalize it on an ongoing basis. We fooled ourselves for a little while thinking it was Connect + Expand. It really is Connect + Develop. You usually have to do some work to make things work. This isn’t something you just put in place and leave it. The Los Alamos st
ory is a great example. They didn’t have a computing program to make a diaper; we had to take it and adapt it.”
The necessity of never-ending supervision and aspiration, even at one of America’s most pioneering companies, left an indelible mark on Chesbrough. “What I’ve learned from companies like P&G and many others,” he said, “is that before you can really effectively innovate in any open way beyond the boundary of your own firm, you have to become more open internally within your firm.”
The respect for internal talent was embodied in the widely told stories of Jeff Bezos, the founder and CEO of Amazon.com. Bezos didn’t want his employees operating in a culture where they were concerned about getting the approval of superiors for every decision, fearful of stepping out of their boxes, out of line, and into trouble. Rather, he espoused the corporate value of Bias for Action. He encouraged initiative and risk taking with his Just Do It awards, through which he would honor employees for implementing their thoughtful ideas without seeking permission—even if the resulting project didn’t succeed. Their reward? He would read an employee’s accomplishments aloud, invite the employee onstage for a handshake, and then hand that employee a used Nike shoe—a symbolic prize for having just done something well.
That, I would learn, wasn’t all that Amazon did internally.
Bezos was participating in the company’s Customer Connection program, in which executives work with the employees in the customer service department to get a taste of that experience. He took a call from a customer whose table had arrived with its top scratched. The course of action was clear enough: send out a replacement, move on to the next call. Except that, in this case, an employee nearby revealed to Bezos that this same complaint had been lodged by different customers several times before. The consistency of those complaints hadn’t been shared with anyone up the Amazon chain, simply because there was no mechanism to report such issues.
Armed with this information, the managers discovered that the problem wasn’t the product itself, but what it had been wrapped and sent in. Amazon reached out to the vendor, which expeditiously improved the packaging.
That was just one issue, however. What about all the others that might crop up across Amazon’s extensive assortment of available items for purchase? After all, it did not serve the overall health of a service-oriented company for critical information to stay siloed in customer service, hidden from others along the Amazon chain, who, if they knew about it, might take action.
Inspired by that single customer call, Bezos set out to improve Amazon’s feedback loops by empowering all of its customer service reps, modeling efforts after the lean manufacturing principles that Toyota used on its factory floor. The automobile giant had given every assembly line worker the right to pull an andon cord when confronted with a defect, effectively stopping production until the problem was resolved, and allowing for the recording of the episode in a database so it would be reviewed for possible patterns that might be preventable. Now Amazon would give its customer service reps the authority to remove from the online catalog any product causing consistent issues for customers. That decision would prompt the distribution of a report to the manager of that retail category and motivating that manager to move on it, since sales of the product were stopped until the defect was fixed. Additionally, the company would give its customer service reps something almost as important: cover. The reps merely needed to offer their reasoning to demonstrate that they had exercised good judgment. They didn’t necessarily need to be right.
Without question, making this option available to frontline workers, regardless of title, required a great deal of trust. In the process, it engendered good will, with those workers feeling their voices were heard and they had a tool to perform their jobs better. And while the retail managers may not have initially appreciated the removal of items from inventory, the benefits eventually became clear through fewer customer service contacts and fewer returns and replacements.
The message of the andon story is unmistakable. Why should an organization reserve the sourcing of innovative ideas to only a select few deemed worthy of offering such input? Why would an organization cultivate a culture in which those with knowledge to share would feel marginalized?
Amazon is a shining example of open innovation in another sense: it has produced what Chesbrough calls “a force multipler element,” a phrase that has military roots and business applicability. It has done so through its visionary business decision to open its e-commerce platform to external retailers—from used-book dealers to electronic shops to clothing companies to major department stores. It has invited those merchants, some of them competitors, to use that platform to provide an Amazon-like customer experience, in terms of content hosting and order fulfillment, in exchange for a fee.
Other companies have created their own force multipliers, including Apple, which has done so through its iPhone app store, inviting hundreds of thousands of web developers to offer new services that can be monetized at attractive rates. The business prospects for those developers were strong enough to convince venture capital firm Kleiner Perkins to establish a $200 million iFund. “When a professional investor decides it’s a great decision to invest their own money in startups that are going to be building things that are going to be making your platform more valuable for you, it’s the most valuable business model of all, because it harnesses other people’s money, talent, ideas, and so forth,” Chesbrough said. “It’s other people’s money making you and your business more successful.”
These examples aside, I found the concept of a platform providing a force multiplier to be best crystallized over a week in August 2011.
The President’s Council on Jobs and Competitiveness held a town hall–style meeting in Silicon Valley to share an update and invite public feedback.25 The event attracted a bevy of technology’s elite, including Facebook COO Sheryl Sandberg, a former Treasury Department official in the Clinton administration. Sandberg explained how, early in its rise as the world’s most utilized social network, Facebook chose to unleash the power of its platform to the public. It published an application programming interface (API) to extend access to a user’s data to third-party developers, accompanied by the appropriate privacy and security permissions and protections. As with Amazon, this decision would serve as a “force multiplier,” inviting entrepreneurs and innovators to invest their time and resources to enrich the customer experience for Facebook’s customer base, in a way that would generate revenue for their company as well as for Facebook.
Sandberg shared the latest accounting, in aggregate, of the job impact of this new “Facebook economy.” While the company’s official head count was approximately 2,500 employees—most based in Palo Alto, California—she found over 30,000 Facebook Developer openings on a popular job search board. None of the people filling those positions would ever appear on Facebook’s balance sheet or Human Resources list. Rather, they would come from, and remain at, firms like the gaming startup Zynga and its smaller kin, focused on building services through the Facebook API.
This sort of job explosion was unconstrained by geography, meaning that, while the bulk of those jobs were in the United States, the apps economy as a whole is as global as the Internet economy, making it America’s race to win or lose. The tech industry trade association, TechNet, published a study in 2011 estimating the size of the apps economy at almost $20 billion and 466,000 jobs—which just scratches the surface of its potential. The study also included a map of America to demonstrate the dispersed nature of these jobs, with all 50 states represented.26
It didn’t take long for me to find some of them. Four days after Sandberg’s insights at the Silicon Valley event, I was on Main Street in Blacksburg, Virginia, for a stop on the administration’s annual Rural Tour. My colleagues fanned out across the country, participating in state fairs or, in my case as CTO, visiting university towns with a hunger for growing new industries. Blacksburg is
home to Virginia Tech, a world-class research institution with the motto of “Invent the Future” and a welcoming place for entrepreneurs engaged in the Internet economy. That included the dozen firms headquartered in TechPad, a startup incubator on the second floor above a popular Main Street bar.
During my visit to TechPad, I encountered a Virginia Tech sophomore, Nathan Latka, who had already begun hiring in the Facebook economy for Lujure, later to be renamed Heyo, which developed fan pages for small businesses. Latka had started the service in his dorm room and, to that point, had one employee. The following March, after leaving the White House, I would return to TechPad to check in on his progress. It was remarkable. By tapping into a real need, Heyo was on pace to generate $1.7 million in revenue by year’s end, making his company profitable. He was up to 14 employees and, to meet the insatiable customer demand, was in the middle of a funding round to raise another $500,000, for hiring more employees, aligning with strategic partners, and empowering small business owners. One partner was David Clark, an Idaho man who had quit a high-paying job with Yellow Pages to launch Social Media Gurus, which consulted with small businesses on social, mobile, and web strategy. He leveraged the Heyo tool to support well over 200 small businesses in the development of their fan pages, mobile apps, and websites.
By September 2012, just over a year to the day Sandberg shared her insight on the jobs impact of Facebook’s decision to open its social graph API, staff of Heyo would be standing side by side with Virginia Governor Bob McDonnell, announcing a commitment to hire 50 workers in Blacksburg over the next two years, dramatically outgrowing the office space at TechPad.
There’s another promising phase of open innovation, one in which the lines between company and customer blur, as customer engagement along the chain compels the rapid design of service features to meet clear needs. This trend, in Chesbrough’s view, is another element that differentiates open innovation from earlier management innovations, in that “customers, voters, citizens, users are not simply passive recipients.” Rather, they are “prosumers, producer-consumers, or people who are actively engaged in cocreating.” Chesbrough covered this phenomenon in our conversations and in his most recent book, Open Services Innovation, as it related to digital music and the shrinking distance between artist and audience. In the old days, captured in many a movie, traditional record companies would send talent scouts to smoke-filled clubs in search of the next big act and, after uncovering performers with promise, would sign those artists up to long-term deals, create their packaging and marketing, promote them to radio stations, release their albums, and send them on multicity tours.
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