Organize for Innovation: Setup the Externals

This post is the second in a series of two posts examining how an organization can set itself up to be innovative. Yesterday’s post looked at Google and internal attributes of an innovative company, so today’s post will use P&G as an example company and list some external organizational attributes that can make companies innovative

In 2000, Proctor and Gamble’s CEO A.G. Lafley decided that the old way of developing new products wasn’t working (Huston & Sakkab, 2006, p. 60). So, Lafley challenged his organization to work with external companies and other groups to bring new products through P&G’s research division (Huston & Sakkab, 2006, p. 61). Proctor and Gamble developed two sets of networks to aid its research: 1) proprietary networks composed of technology entrepreneurs (potential competitors) and its suppliers, and 2) open networks composed of various companies and individuals (such as retired scientists and individual researchers.) Since P&G has implemented its networking strategy (called Connect and Develop) in 2000, its stock has outperformed the Dow 30 (see Figure 1).

Figure 1 P&G stock performance versus the Dow for the last 10 years (Google, 2009)

As Proctor and Gamble has demonstrated, innovation in today’s world is not an internal affair only. External collaboration for innovation needs to be considered if a manager is going to harness the innovation concept in order to improve their company’s performance (Dooley & O’Sullivan, 2007, p. 398). The external attributes that an innovative company such as P&G have are outsourcing, partnerships, competitor alliances, strategic acquisitions, and  customer involvement.

Outsourcing

The outsourcing and off shoring of innovative activities, such as research and development, in a corporation provides unique challenges versus the outsourcing of services and manufacturing activities (Bardhan, 2006, p. 105). Some companies may choose to outsource R&D when they don’t have the necessary skills for a particular project (Bardhan, 2006, p. 109). They also may choose to outsource product enhancement R&D, but keep new product development in-house in order to keep intellectual property under control (Bardhan, 2006, p. 111).

Partners

In order for organizations to effectively innovate in today’s world, they need to collaborate with external companies (Dooley & O’Sullivan, 2007, p. 398). Just as in outsourcing, companies need to collaborate with other companies in order to gain access to skill sets and other resources that they may not contain internally (Dooley & O’Sullivan, 2007, p. 400). Managers have to focus on how to foster collaborative networks, but also how to manage knowledge transfer and intellectual property generated by collaborative engagements (Dooley & O’Sullivan, 2007, p. 401).

Competitors

Collaboration networks for innovation often extend to include competitors (Dooley & O’Sullivan, 2007, p. 410). One way to collaborate with an organization with differing goals, such as a competitor, is to form a boundary organization. A boundary organization can manage the common goals between the participating organizations while keeping differences known but in check (O’Mahony & Bechky, 2008, p. 431). In order for boundary organizations to be successful, managers have to modify the organizational practices along four domains: governance, membership, ownership, and control over production (O’Mahony & Bechky, 2008, p.432).

Acquisitions

Often companies will acquire other companies in order to expand the acquiring company’s overall capabilities and offerings. Companies should first seek to acquire firms that have just released a product or are close to releasing a product, and not acquire a company deep in research (Puranam, Singh, & Zollo, 2006, p. 276). A firm that is acquired while in the first stages of research benefits from a more hands off approach by the acquiring company (Puranam, Singh, & Zollo, 2006, p. 276). A timetable for integrating a company should be set on the acquired company’s stage within product development and release if the acquiring company wants to maximize its acquisition (Puranam, Singh, & Zollo, 2006, p. 275).

Customers

Customers can play a part in the innovation value chain (Dooley & O’Sullivan, 2007, p. 398). In order to engage customers in a company’s innovation program, managers need a process in place to work with customers. Desouza et al. (2008) recommends three steps for interacting with customers: “1) by identifying, analyzing and communicating with them, 2) incorporating them into their existing innovation process through transformation of their business processes, and 3) encouraging customers to engage in improving existing products and services” (p. 35). A company can involve customers in their innovation programs in three manners: customer-focused innovation, customer-centered innovation, and customer driven innovation (Desouza et al., 2008, p. 42). Customer-driven innovation is the highest form of engagement with the customer, and smart companies willing to take advantage of their customers’ ideas will benefit the most from such innovation (Desouza et al., 2008, p. 44).

Hopefully, these series of posts have described several attributes on how to be innovative, and have demonstrated the validity of those innovative attributes by briefly analyzing Google and Proctor and Gamble. Proctor and Gamble has implemented external networks in order to improve its innovative nature and to bring better products to market. Google has focused internally on being innovative and now challenges other more mature technology firms like Microsoft and IBM. Managers can positively impact the performance of an organization by organizing for innovation. Internally a manager should look at the types of innovation they want to work on, the flexibility they want to give employees, the amount of risk they are willing to shoulder, and the best way to acquire and integrate new innovative companies. Externally, managers need to look at building innovation networks composed of their suppliers, customers, acquisitions, and even competitors in order to gain access to more resources and knowledge.

References

Bardhan, A. (2006). Managing globalization of R&D: Organizing for offshoring innovation. Human Systems Management, 25(2), 103-114. Retrieved October, 27, 2009, from EBSCO Business Source Elite.

Desouza, K., Awazu, Y., Jha, S., Dombrowski, C., Papagari, S., Baloh, P., et al. (2008). Customer-driven innovation. Research Technology Management51(3), 35-44. Retrieved November 13, 2009 from EBSCO Business Source Elite.

Dooley, L., & O’Sullivan, D. (2007). Managing within distributed innovation networks. International Journal of Innovation Management11(3), 397-416. Retrieved November 12, 2009 from EBSCO Business Source Elite.

Google. (2009, November 14). The Proctor & Gamble Company. Retrieved November 14, 2009, from Google Finance: http://www.google.com/finance?q=NYSE:PG

Huston, L., & Sakkab, N. (2006). Connect and Develop. (cover story). Harvard Business Review84(3), 58-66. Retrieved November 14, 2009 from EBSCO Business Source Elite.

O’Mahony, S., & Bechky, B. (2008). Boundary organizations: Enabling collaboration among unexpected allies. Administrative Science Quarterly, 53(3), 422-459. Retrieved October, 31, 2009, from EBSCO Business Source Elite.

Puranam, P., Singh, H., & Zollo, M. (2006). Organizing for innovation: Managing the coordination-autonomy dilemma in technology acquisitions. Academy of Management Journal, 49(2), 263-280. Retrieved October 27, 2009 from EBSCO Business Source Elite.

The Procter & Gamble Company. (1  November). Hoover’s Company Records,11211.  Retrieved November 15, 2009, from Hoover’s Company Records. (Document ID: 168148131).

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About jpthomp137
Techie/student/husband/father interested in new technology, social media, and innovation.

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