A Consumer Giant That's on the Cutting Edge

You might not expect Procter & Gamble (NYSE: PG  ) to be the first large company to really embrace and profit from open innovation and crowdsourcing, but since then-CEO A.G. Lafley made this a priority in 2001, the company has once again become one of the most innovative companies in the world. P&G began this shift right after its stock price collapsed in 2000 along with the rest of the market after the tech bubble burst. It was a difficult time, and spending heavily on research and development became much more difficult to explain to shareholders.

Lafley used this open innovation as a catalyst to change a stodgy and slow-to-change culture at Procter & Gamble. But such a culture is still prevalent among many large multinational companies.

Opening innovation
Lafley and P&G's goal at the time was for 50% of its new innovation to come from work with outside partners through open innovation. Today, that number makes up a staggering 60% of the company's innovation, and the company does not plan on slowing this rate down. The company's crowdsourcing idea generation site Connect + Develop currently finds ideas that add $1 billion a year in revenue. Current CEO Bob McDonald's goal is for that number to triple to $3 billion by 2015, making the initiative the company's leading growth engine, and today he is looking at larger partnerships with established corporations to achieve this.

What's really innovative about P&G is its ability to form a plethora of partnerships not only using its own brands but also using its technology to improve other companies' or even competitors' products. P&G is still an R&D machine, but it has found that sometimes partnerships are necessary to foster its creativity and innovation.

Rivals and partners
For example, P&G made a calcium product called Calsura for products like Sunny Delight orange drink, before it left the beverage business in 2004. P&G spent tons of hours and money developing this more easily absorbable calcium, but it no longer had a beverage product that would benefit from it. Instead of just sitting on the technology or selling the patent and research with the company, it licensed the use of Calsura to companies such as ConAgra (NYSE: CAG  ) and PepsiCo (NYSE: PEP  ) to enhance their products. P&G has also licensed some of its other food technologies to competitors such as General Mills (NYSE: GIS  ) .

P&G even went as far as to form a partnership with perhaps its most bitter rival, Clorox (NYSE: CLX  ) , after it developed proprietary technology for making diapers. However, the company found that this technology would be even better suited to making trash bags and other plastic bags more sturdy and sealable. While P&G didn't make these products, Clorox did, and P&G worked with its archrival to implement this new technology in its Glad branded products, for a nice fee, of course.

P&G has also been active in forming partnerships that lighten the company's footprint on the environment and help the company's bottom line. It recently reached a cooperative agreement with biofuel producer Amyris (Nasdaq: AMRS  ) to develop sustainably produced and renewable building blocks for P&G's detergent products. P&G joins a list of prominent energy-related companies that are working with Amyris to develop this biofuel technology, including French oil producer Total (NYSE: TOT  ) , which took a 17% stake in the company this summer.

A step ahead
P&G doesn't really care how it innovates or who receives the credit as long as it is beneficial for its shareholders. It is a culture that was borne out of difficult economic times, and is one of the reasons why the company was able to navigate through the latest recession so well. While P&G's core brand products will always face stiff competition from similar brands and copycat products, investors can rest easy knowing that P&G is fostering a culture that strives for innovation.

Andrew Bond owns no shares in the companies listed. Procter & Gamble, PepsiCo, and Total are Motley Fool Income Investor recommendations. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Amyris.  You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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