An open innovation discussion with Jeff Weedman of P&G
This year, $276 million was invested across the entire country of Canada in the first quarter, and in 2009 the number was $279 million invested. This is 50 per cent lower than 2008 numbers. Both periods represent the lowest level of first-quarter deal flow since 1996 and the bad news is the trend is still heading south. Pun intended.
With VC activity this low it is very difficult for companies to get the kinds of investment and guidance they need to foster growth. As we have mentioned in many of our previous Clean 15 Series articles, the Canadian government has tried to soften the blow through great support systems like the SDTC and OCETA. However, companies will still need to find alternative means to get the guidance and support needed for market entry and more importantly, market volume.
Many smart companies are turning to licensing deals and leveraging corporate venture where they can to get their world class clean technologies into the market and better their position with investors. If the VC activity continues to fall and many think that trend will continue, there will be an increased move to open innovation, where larger companies lean on smaller, more agile firms for R&D partnerships and cutting edge new innovations. These relationships will need to be mutually beneficial to both the incumbent and the smaller company. Open innovation may also help VCs to make smarter choices about the cleantech companies they invest in. Following potential deals could help to mitigate the risk and differentiate between a really cool science project and a clean technology that has value beyond the wow factor.
The poster child for open innovation is Procter&Gamble. I caught up with the VP of External Business at P&G Jeff Weedman to discuss the effects that open innovation has had on their company. P&G has targeted a whopping 50 per cent of its technology to come from outside the company. The focus seems to be paying off handsomely. Weedman is at the forefront of this drive. Here are some of his insights into this paradigm shift:
Dwayne Matthews: P&G used to be a very closed up ship. P&G’s “not invented here syndrome” was the former philosophy of the company. What changed?
Jeff Weedman: There is a variety of things that led to that. I talk about internal and external factors. Internally, we were not being as successful and as good ten years ago as we had been historically. P&G prides itself on innovation, its our life blood, but of our new initiatives only about one in three were meeting their financial objectives. While a 333 batting average would get you to the all-star team in baseball it is not financially viable.
Our current system was not producing the kinds of hits that we historically got. The second thing is the cost of innovation being done exclusively was beginning to get a lot more expensive. The third piece that was impacting us is that once information became more readily available, the followers that decided to follow us could follow faster.
The fact that follower could follow faster, meant that the amount of time that we had to recoup our investment by bringing new initiatives to the market got shorter and shorter. In addition to smart competition and more cost to innovate, there is another thing to change dynamics. It’s hard to remember but if you go back 10 years ago the internet connectivity was not nearly as sound as it is today.
DM: What does connectivity have to do with it?
JW: P&G is over 170 years old, so for many years the fact that we had 7000 to 9000 scientists that was a competitive advantage because we had more than any other consumer goods company. But if you step back and look at the people around the globe that have the same training and the same fields of expertise, for our 9000 scientists, there is an estimated 2 million out there, and so why would we think that our 9000 could outperform the output of 2 million? [But] the 2 million were not reachable and so it was kind of an interesting time because there was no accessibility, and I think the [sudden] interconnectedness with all the new communication systems meant that we had a much broader sourcing and we could reach all the people that had capabilities.
Therefore, it kind of started with: what we were doing didn’t work and continuing to do that was not affordable, and then, the realization that interconnectedness was not likely to change. So our version of open innovation became a logic alternative. Our CEO and CTO at the time strongly believed this, and they made the announcement to the world that we were going to get 50 per cent of our innovation from sourced external innovation. People ask “where were you at that time?” And we suspected that we were under 10 per cent sourced external innovation. [We knew] it would require cultural changes internally and changes externally if we were to achieve [more]. And so that is really why we decided to break from a closed model.
One of the questions that I often get is “Does this mean that you don’t do R&D internally?” And that is absolutely not true. In fact, our total spending in R&D has gone up every single year since we declared that we were embracing open innovation. The big idea here is that open innovation is big and closed innovation, and this is an opportunity for us to do both.
DM: Maybe you can tell me how open innovation has given P&G a competitive advantage?
Jw: That is a good question, and I think it falls into two key buckets. One: its given us access to new ideas, new products, new innovation faster, and allows us to get to market faster than if we tried to do things on our own. I see this across a whole spectrum of different projects. One of the more widely known examples I like to use: are you familiar with the Swiffer mop?
DM: Probably too familiar. I have a one year old, so I am very familiar.
JW: Well, we wanted a dusting companion with it called the Swiffer Duster and we started to work on it internally, and smart people in our company said “you know we’re doing ok developing an alternative, but this one that Unicharm sells is better” Unicharm, by the way, is a competitor in Asia that sells mostly in Japan. So instead of trying to do our own we talked with Unicharm and got the rights to Swiffer Duster global, outside of Japan, and exclusively outside of Asia. Not only did we get the rights to their product, they manufactured it for us. They packaged it for us.
And even though P&G is the world’s largest advertiser for consumer products, we used Unicharm’s introductory advertising to introduce Swiffer Duster in the U.S. There is a bit of a French Canadian twist to this—because once the volume built up big enough that we really needed to have a source of supply on this side of the Pacific, we actually decided to put the plant in Canada. Unit Charm sent their engineers to actually help us get the plant up and running.
DM: I know that a lot of innovation happens in smaller firms, but many of the firms are cash constraint, so how does this work with a small company?
JW: There tend to be some pretty normal fears with small companies, such as [they wonder] what it’s like to work with a big company. They feel like they are going to get lost in a big company, but here is the reality: P&G has to become proficient in working with small companies because it is going to embrace open innovation.
I think we are in the top 20 or so market cap companies in sales globally and so by definition most companies are smaller, but I suspect that your question was really geared toward the smaller entrepreneur—and again, that is something we had to build expertise on and we have good examples of how that works.
One of my favorite examples is some very, very interesting technology that we sourced from an individual entrepreneur. Becuase P&G has a joint venture with the Clorox Company on Glad, and Glad has trash bags, storage bags and things like that, it turned out that as we got to know that this individual’s technology has enabled some of the most dramatic breakthroughs in improvements in trash bags for Glad.
We see this a lot in small companies. In small companies, they have a lot of brilliant breakthrough ideas, but don’t have the money or the time or the experience to protect those ideas globally. Even if it is terrific technology, they don’t have the financial wherewithal to take it global in any kind of reasonable time. Being able to partner with P&G means that they have the opportunity to tap into P&G’s global footprint.
We are on the ground in approximately 220 different countries. For companies like Unit Charm, the ability to tap into P&G gets the product out there faster. P&G is 300 brands—so it is a bunch of small companies in a lot of ways.
DM: Do intermediaries and technology scouts play a role in helping you find technologies that strategically fit P&G?
JW: One of our longest partners in this space happens to be Yet2.com. I will never forget the day that these guys showed up in my office pitching an online marketplace for intellectual property, and we have been supporters of theirs from the get-go because of their connectedness.
What is interesting is that we tend to be very directed in terms of what we are looking for and therefore we don’t hire lots of agents to go out and do that work. But it’s important that we have trusted agents. Networking is what it’s all about.
DM: Has P&G engaged in corporate venture funding?
JW: We have done that a bit, we are not as deeply involved in it as many companies before the dot com run up and knock down back about 10 years ago. Here is kind of our philosophical approach: quite often when companies get involved in corporate venture it gets kind of fuzzy whether they are making a financial investment or a strategic investment. And at P&G, the sweet spot is for us is when we are a strategic partner with other companies.
It’s not just about making a return on the investment, it’s about whether their company and technology capability can actually be used in P&G products and services to help improve those things—so we are best when we are strategically aligned.
We don’t have a fund to say “go out and find ten companies”, conversely if we find a company that is of strategic interest to us, we have no hesitation and there is no limitation on how we choose to participate. [It could be a question of what] can P&G bring to the party that will help enable the partner company get to their next milestone? And what is P&G’s role in helping them do that? Sometimes it is investing, sometimes it’s being a BETA customer, and sometimes it’s being part of their advisory board. Everyone is an individual consideration.
We have learned that every company is different, every company is unique, and so we have to figure out how we interact with the companies. What can we do that will help enable them to get to their targets?
So do we do venture funding? Not in the classic type of way, but we do it in a variety of different business models.
DM: That makes a lot of sense. In my experience, many Global 1000 companies are turning to corporate venture of strategic interests. I would assume this is to help power their open innovation drives.
There is solid evidence that many Canadian cleantech firms have world-class technology, however they have a very difficult time commercializing their technology, so partnering with P&G could potentially bring mutual benefit. What are some of the things that small companies would need to do to be considered an attractive partner?
JW: The first thing that you need to figure out as a smaller company is “How can I help P&G solve problems or have products that will meet their needs?” It is much better to talk to us where we declare that we have needs. We are very interested in cleantech.
I think the second thing that small companies can do is understand that big companies have to have work processes. It’s not just finding somebody at P&G you send your technology overview. We have had to develop internal capability to get it to the right person inside of P&G.
The most brilliant idea in the world shopped in the wrong window or the wrong door has virtually no value because the odds of getting it to the right place in a big company are still pretty small. So again, we view part of our mission as getting ideas to the right place.
I think the third thing is that we really like companies that either currently have strong IP or the potential to have strong IP. Sometimes there is an amazing lack of understanding and companies are scared of talking to P&G and they assume that they are at risk. Our reputation to connect and develop goes away pretty quickly if we are not fair when it has to do with IP. And the reality is we favor and really like strong IP, because it allows us to make investments with a more sure chance of getting a really strong return versus trying to develop something that anybody can copy. If small companies have strong IP, we like them.
The last point is that small companies have got to be patient when they are selling big companies—and mine is no exception. However, one of the things that we monitor internally is that we want to be seen as the partner of choice, but the speed at which a big company can operate is a lot slower than small entrepreneurs, so if people don’t have patience its unlikely that we will get things done.
DM: You are hitting a lot of the points that small [cleantech] companies need to hear.
JW: Well, we are always looking for an improvement of our environmental footprint in all of our products, in our packaging and in our operations.
We have a cold water laundry detergent that is just doing astoundingly well, because it turns out that the biggest energy consumption in the laundry process is heating the water. By providing a detergent that works effectively in cold water, all of a sudden consumers can significantly reduce their environmental footprint by using cold water.
What can cleantech companies in packaging do to either help us reduce our environmental footprint or reduce the environmental footprint for consumers? [And] how do we improve the lives of consumers? We are going to do it one product at a time—and if just by changing the way we do laundry we can change 3 per cent of global energy use—well that is not chump change.
By Dwayne Matthews
Dwayne Matthews is the Managing Director of the Clean 15. For more information visit www.clean15.com