Taking a Gamble: P&G Bets on Silicon Valley

Jonathan Greenblatt is a member of the faculty at the Anderson School of Management at UCLA and an expert on social entrepreneurship and sustainable business. He is the co-founder of Ethos Water and the former CEO of GOOD Worldwide.

Who says size doesn't matter?

As we peer into the next decade, we already are seeing the tectonic shifts among traditional industries. Computer manufacturers like Apple (Nasdaq: AAPL  ) and software businesses like Google (Nasdaq: GOOG  ) are converging in the new battlefield of mobile telephony. Media giants like The New York Times and Comcast (Nasdaq: CMCSA  ) are reinventing their business models. And large market leaders are pushing boundaries and adopting models well outside their traditional comfort zones.

Perhaps no business epitomizes this trend more than Procter & Gamble (NYSE: PG  ) .

Procter & Gamble has an illustrious history as one of the shining stars of corporate America. It is the largest consumer packaged goods (CPG) company in the world, generating almost $80 billion in sales and $13 billion in net income in the last four quarters and driving healthy and growing dividends to its shareholders. Their products literally touch households across the world, filling pantries and shelves in homes near you. The company reports that its vast portfolio of brands already reaches 4 billion consumers every day. That is roughly 60% of the people on the planet.

Despite these accomplishments, P&G leadership is unabashedly aggressive as it looks toward the future. It sees tremendous promise in China and India, where consumers spend a fraction on P&G products, in contrast to their North American counterparts. The company wants to reach an additional 1 billion consumers over the next five years, setting its sights on a customer base more than two-thirds of the world's population.

How will it achieve such monumental growth?
The obvious opportunities lie in geographic expansion as the business penetrates emerging markets and category extension as its brands broaden into adjacent categories. But I think the most interesting developments at P&G are taking place not at the corporate headquarters in Cincinnati, but at its new satellite location -- in the heart of Silicon Valley.

Just in the last month, P&G announced the opening of a Northern California office, a presence that would facilitate its commitment to engaging with entrepreneurs through its Connect + Develop strategy, a plan enabled by a model described as "open innovation." In P&G-speak, this refers to an explicit intent to grow the business through a variety of models -- investments, joint ventures, partnerships, and strategic alliances -- with new start-ups, venture capital firms, and existing high-tech leaders.

For a company with 9,000 personnel in R&D and a massive research budget, it's remarkable to consider this explicit acknowledgement that some of the best ideas can be found beyond the four walls of their own labs and instead in the proverbial garages and offices parks that litter Northern California.

The notion of satellite offices in bustling markets is far from unique, especially in the technology space. Companies like Microsoft (Nasdaq: MSFT  ) and Google often set up shop in hotbeds of innovation like China, India, or Israel to recruit talent and to identify new opportunities. Other large CPG businesses have gotten into the game by making bets in venture capital. Many are familiar with eponymous initiatives like Intel's (Nasdaq: INTC  ) Intel Capital. More recently, Unilever helped fund Physic Ventures, a fast-rising venture firm in San Francisco.

But P&G brings a powerful advantage to the mix: scale.

P&G utilizes its vast reach through a large brand portfolio and extensive operations in almost 100 markets around the world. The company has accumulated a deep reservoir of consumer insights through its fabled market research discipline. It boasts world-class marketing and distribution capabilities honed through a global network of retail partnerships. Despite the downturn, P&G actually is building more manufacturing facilities. The question will be, does the P&G system have the flexibility and nimbleness to thrive in the moment when its message is spoken in a language measured in 140 characters, opportunities that are seized almost instantly in the frenetic Internet time of Silicon Valley?

Analysts reasonably might claim it's too early to tell -- however, the initial results are intriguing.

 Already the business has shown an appetite for crowdsourcing. For example, P&G launched a global competition to design the new bottle for Hugo Boss cologne, offering hundreds of dollars to winners in various rounds of the contest. The company saved millions of dollars by avoiding an expensive, top-down exercise in industrial design. P&G discovered a new model for its Pantene shampoo line by conducting a virtual casting call, encouraging contestants to post homemade videos on YouTube rather than conducting an expensive worldwide talent search. P&G is rumored to have been experimenting with the red-hot start-up GetSatisfaction, whose community-centric customer management model seems to augur a new wave of more cost-effective customer service than manning a conventional call center.

Some will point out that crowdsourcing is far from a new endeavor. Amazon (Nasdaq: AMZN  ) and eBay fill their shelves with inventory sourced from their audience. Nontech companies like American Express have started to try social networks as platforms for participatory (albeit short-term) promotional campaigns. But, when the largest CPG business in the world puts a toe in the same waters, the ripples are like tidal waves that will rock whole industries.

P&G's literal and figurative entry into Silicon Valley is an intriguing move that seems to confirm a broader cultural change. Even the largest companies in the world are embracing open-source models and real-time consumer engagement.

As the company opens house in the epicenter of the Innovation Economy, shareholders might detect the contours of a long-term strategy that could reconfigure the business. Indeed, a veritable mashup of Web-driven entrepreneurship with world-class scale could be a powerful mix that propels P&G into the next century.

Guest contributor Jonathan Greenblatt does not own shares of any companies mentioned in this article, although Jonathan has done work with P&G, and Comcast and Google have been involved with the nonprofit he runs, All for Good. American Express, Intel, and Microsoft are Motley Fool Inside Value recommendations. Google is a Rule Breakers selection. Apple, Amazon.com, and eBay are Stock Advisor picks. Unilever is a Global Gains recommendation. Procter & Gamble and Unilever are Income Investor picks. Motley Fool Options has recommended a bull call spread position on eBay. Motley Fool Options has recommended a buy calls position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Procter & Gamble. The Motley Fool has a disclosure policy.


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