Open innovation is considered to be an idea which companies can follow to bring together both internal and external ideas and generate ways of bringing new and better changes in the organizations by accessing internal and external path while enhancing their existing technologies. The main concept following open innovation is that in this era of largely distributed knowledge, firms cannot take the risk of depending solely on the research of the single individual, thus in such cases it buy inventions such as patents and license processes from other companies. In the recent times, organizations have realized the significant of open innovation. They have become aware of the fact that all acknowledeged ideas can not be implemented within every company, these ideas are implemented upon the basis of the production and management of the company. Consequently, services as well as product manufacturing companies have now shifted their efforts to open innovation. This report is a detailed comparison of open innovation efforts carried out in the leading organizations of the product manufacturing companies i.e. P&G and Unilever, and also provides information based upon the opportunities and challenges of open innovation countenance by the two companies. The research approach applied in this research study is qualitative. The findings of this study provides recommendations for other companies in the product manufacturing industry regarding implementation of open innovation.
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Background to Context
In today’s fast moving world, the competition is fierce. In the wild market economy of the present times, it is trickier and hard for an organization to differentiate itself. To tackle with these issues, experts suggest that there is only one way out, which is to do something that the customers have not seen before, in short “innovate”. Most organizations fail to look in a new direction for the reason that they keep all their attention centered in one direction in which their business is focused. Such firms remain stuck in their typical method of operation. They make every effort to make the existing model operate in an improved way but donor pay attention to discover a better way of doing things. Many organizations are built for unremitting enhancement, rather than for discontinuous innovation (Chesbrough 2003).
Change is a process of moving from one condition or state to another. Nevertheless, change is not necessarily innovation. An organization which discovers a primarily a new way to approach and serve its buyers has in short attained innovation.
Innovation is the accomplishment of the new processes or products. Innovation suggests the course of thinking of imaginative ideas and turning them into real form, thus eventually executing and employing them. Innovation does not only includes generating new products, but it also includes employing new business procedures, new techniques of performing tasks, major coalitions, implementing new strategies and expanding towards new markets (Chesbrough 2003).
Unreserved resourcefulness devoid of any discipline or course of innovation is at best distracting and at worst detrimental to the company. Innovation implies taking the most capable ideas and trying them for actual. Not all will happen as expected; several will be unsuccessful. Regardless of certain failures, majority of the population within an organization is truly always in search of innovative and entrepreneurial ways of fulfilling their goals (Ebersberger 2010).
Essentially innovation has two types –closed innovation and open innovation. The Closed Innovation functions as a catalyst for innovation process, taking into account that most of the greatest inventions, either in the product or services space had its initial stages in the vertically integrated model of closed Innovation (Chesbrough 2003).
However, numerous factors have resulted in the wearing a way of closed innovation. Firstly, the mobility and availability of well-educated individuals has become greater than before over the years. Consequently, great amount of knowledge is present outside the research departments of huge organizations. Knowledge and expertise are taken out of the firm when the staff members switch their jobs which lead to among organizations. In the present era, fine and capable ideas as well as technologies are getting a chance to be more enhanced outside the companies’ territories due to the rise in venture capital, for example in the form entrepreneurial companies. Companies through establishing new departments or acquiring services through licensing agreements can actually create opportunities in their setup to generate ideas and technologies which are not possible in their routine. Lastly, other organizations in the supply chain, for example suppliers, take part in the innovation process (Chesbrough 2003).
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Therefore, businesses have started to seek out additional means to add to the competence and efficacy of their innovation procedures. For example, it helps to search for new ideas and processes that exist outside the firm. Another advantage through innovation is that excels the collaboration with parties involved in the value chain, which helps in creating value for the customers. Moreover, it could also allow companies to sell their knowledge and technology which is found to be unfit for their own strategy (Open Innovation.eu 2006).
Hence, the comprehensive definition of open innovation can be given as: to enhance the development of new technologies by the integration of internal and external ideas and on the other hand exploiting in-house and external networks within the business markets (Chesbrough 2003). This implies that in every organization a change is necessary, as it helps to improve people’s perceptions and company’s environment. It also involves other entities when producing new products and implementing new technologies.
Keeping in mind its ever-increasing importance and use, open innovation is being applied by a large number of companies and helping them gain competitive advantage in the market. Companies irrespective of whether they are service or product oriented need to innovate their products as well as processes to sustain themselves in the market.
Company Profile of Procter & Gamble
Procter & Gamble (P&G) was established in 1837 and is an American multinational corporation based in Ohio Cincinnati which has its main business lines in the consumer products. It manufactures a wide variety of consumer goods. Procter and Gamble Hygiene and Health Care Ltd. was formed in the year 1985 under the name Procter and Gamble.The organization is one of the best providers of health care and hygiene goods in the world market which is operating in more than 80 countries and employs more than 140,000 individuals throughout its global chain. Procter & Gamble spends a high amount of money in their innovation processes particularly on their Research and Development department of the business and puts the 4 percent of the global sales in R&D, which has allowed the company to acquire almost 24,000 patents worldwide, and every year it received on average 3,800 patents of new designs and products.
Innovation has facilitated the company to boost its growth; in the year1999 P&G initiated an innovative strategy known as Organization (Dodgson et al. 2006). The Company’s Organization Strategy is a building block of the Connect and Develop (C&D) plan that P&G established (Chesbrough 2003, Christensen 1997). The rationale of this program was encouraging innovation by creating P&G’s internal communication processes more focused and interlinked with the external processes (Bons and Daams 2010). As an integral part of this strategy the company adopted an approach which allowed it to bring in external ideas and knowledge within the organization through generating internal seed funds and acquiring innovation entrepreneurial firms and generating (Dodgson et al. 2006). With this approach the company is able to boost innovation within its organization by forming close ties with external partners and working closely with them to improve and develop patents which surely gave the company a competitive advantage (Dodgson et al. 2006). Before the introduction of this program, less than 10% of the innovation Procter& Gamble had were employed in its products (Sakkab 2002).
Company Profile of Unilever
Unilever is a product manufacturing company, which has lately, came forward out as an organization, which is at all the times ready to embrace new ways of reaching out solutions unprejudiced of the fact from where these solutions are being originated. It is imperative to note here that most of the solutions to the firm’s problems are offered by Unilever’s those suppliers, where the company is managing strong innovation relationships and supplier collaborations. Creating and sustaining good relations with suppliers founded on the basis of trust require time and effort; however this is something that Unilever takes critically. Its alliance with the University of Liverpool Centre for Materials Discovery is an illustration of the fact that Unilever also managed to establish various academic research partnerships other than the collaborations with suppliers; it also shares mutual facilities, which are a vital element of the open innovation strategy of the Unilever. The Unilever and Liverpool together form a suitable team; Liverpool has a safe lasting strategic investment and the company has now attained a molecular design capability, which will allow it to develop innovative functional molecules and a provide it with a facility to screen more ingredients and find out the most suitable plan in a shorter time frame (Innovation Europe 2010).
The capability of Unilever to influence IP into and out of Unilever is a big potency, and realizing this, both open innovation and patents are two of Unilever R&D’s critical efficient skills (Innovation Europe 2010).
In managing Unilever capabilities in the region of joint innovation, it is vital to be skilled at making the suitable connections. The company has started by utilizing the compilation of internal talents and skills that cover an exceptional range of product categories plus by defining which collaboration innovation tools work best for them (Graul et al. 2006).
Unilever is the market leader in almost each and every one of the core-product activities. The aim of Unilever is to become the market leader with the help of acquiring national organizations, by expending and investing in a green field areas of every region, or by bringing in from external resources, which is attainable, advantageous and cost effective (Unilever 2011).
In the recent times the Company has acquired approximately 2000 distinctive brands internationally. This is the up-front outcome of the company’s history of preeminent strategies. Over the last few decades the company has acquired many local as well as national companies, each one having its own national brands. These acquisitions continued for a long period of time. In the late 1990’s, Unilever came up with an innovative strategy to increase the speed of the company growth; it’s known as Path to Growth. The most preeminent feature of this strategy involves additionally refocusing on its major brands. This strategy helped to minimize its number of brands from approximately 1600 down to 400 major brands (Unilever 2011).
The core objective of the research is to compare and analyze two organizations in the product manufacturing industry i.e. Unilever and Procter & Gamble (P&G) with regard to open innovation, demonstrate the results, and with the help of the findings evaluate the tools they used and the challenges faced by them.
The research aim is to compare open innovation process at Unilever and Procter & Gamble, their efforts to achieve competitive advantage in the service market by the use of open innovation and the benefits gained by them from the process. The research illustrates the findings from both companies, assesses the challenges confronted in implementing open innovation and the tools used for the purpose. The epoch has now changed the world into a place of widely distributed knowledge and technology. In such a situation companies are not in the favor of taking the risk of depending upon the company’s own knowledge, technology and research. In order to uphold themselves and stay novel in the market they should rather purchase or license procedures or inventions such as government grants and copyrights from other organizations. The research is a comprehensive study on open innovation at the leading companies in the product manufacturing industry.
The research questions laid out for this research study are to highlight the research aim and objectives emphasized for this particular study, and these research questions will assist in identifying different constituents of open innovation selected for this study:
- In what ways open innovation contribute to innovation and business performance?
- What tools are being used to implement open innovation at Unilever and P&G?
- What were the challenges faced by the two companies in implementing open innovation efforts?
The scope of the research is specific as it analyses open innovation in the leading product manufacturing companies. It evaluates both the companies’ effort to implement open innovation and achieve renewal, sustainability and competitive advantage against its rivals in the market and rise ahead, the tools used and the challenges encountered by them. The research provides a detailed theoretical and conceptual framework for such study. However; it also set out that the interpretation of the findings presented in this report is dependent upon the researcher’s own understanding of the research topic and its presentation in such a way that the objective of the study is achieved in the best possible manner.
Significance of Research
The study carried out in this report contrasts two companies that use open innovation but in different approaches. The research provides in depth assessment of the impact of innovation on product manufacturing companies. This research is of great value to the product manufacturing organizations, which can help in identifying the tools and strategies used by the leading companies with regard to open innovation, and helps other companies in the same industry in directing their strategies consequently to exploit the elements of open innovation. On the other side, the study carried out in this report helps the researcher to learn about important theories that provide reasons and ways for implementing open innovation also allows him to develop and practice research skills that would surely help him in future throughout his professional career.
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In the recent era, open innovation has turned out to be the most imperative factors for continuous expansion and economic progress that initiates at a solitary organization level, and goes up to the regional and then to the national level, posing an influence upon the country competitiveness in worldwide economy (Fredberg et al. 2008). The importance of open innovation has become increasingly known and realized in the duration of the last two decades by the companies of all the sectors of the economy. Pure Research & Development is any longer believe to be ample for economic expansion of any organization, as new ideas only enhances earnings and employment, but on the other hand, new ideas when commercialized into practice –which is called innovation – also enables social and economic influence, and for this major fact innovation is considered highly imperative. Open innovation that is a prevailing model for maximizing economy and expansion has changed the approach to innovation in leading organizations.
There has been a significant increase in product and service organizations shifting towards innovation to gain sustainability, renewal and achieve competitive advantage in the market. With the times continuously changing the idea of closed innovation gradually eroded away. At the same time as some businesses that were unable to adapt were faced by significant losses, some have been innovative in the sense they innovate and have shifted to Open Innovation. Therefore, knowledge and know-how that were once carefully guarded within the boundaries of the department of R&D, was now becoming more and more accessible to other firms (Leonard-Barton 1995, Gassmann 2006). Consequently, it became progressively easier for an organization to take advantage from the skills of another by poaching in specific key staff members of the challenger. Increasing number of high quality suppliers that bigger organizations now rely on is also a factor contributing in the erosion of closed innovation. As a result, organizations had to adapt. It was important for them to become skilled tapping outside technologies and also learn how to capture the worth of technologies that were leaving. This marked the start of Open Innovation (Fredberg et al. 2008).
A substantial quantity of coverage has been given to the latest phenomenon of ‘open innovation’ within the academic literature and outside. (Trott and Hartmann 2009). In order to develop a better understand of shift to open innovation and its need for organizations, various theories have been suggested. These theories provide a deeper knowledge of open innovation in product and service organizations. Some of the theories pertinent to this research study are explained below:
Chesbrough Open Innovation Model
Henry Chesbrough introduced an “Open Innovation” model in 2003 which was much commended and set a model for innovation management and the joint enterprise. At that time, it was an intrepid and far-reaching notion and it challenged the traditional approach on innovation.
Open innovation is an idea based on the supposition that companies possess the ability and hence should employ external ideas along with the firm’s internal ideas, and exploit in-house and external roads to the business markets, at the same time when these organizations are seeking to enhance their technology. The development consists of internal and external estimations into architectures and systems, for which the needs are characterized by business model. The business model uses equally the external as well as internal initiatives to create significance, while explaining internal operational procedures to sustain some portion of that significance (Chesbrough, The Era of Open Innovation 2003, West 2006 and Simcoe 2006, ).
On the basis of his research on companies practicing open innovation, Chesbrough deduced that industrial R&D was experiencing a “paradigm shift” from the closed to the open model.
Open innovation can be considered as a collection of practices for which will earn the company profits from improvement and also a cognitive model for the conception, acceptance and exploration on these activities. For instance, for the period of more than 50 years ago government funding agencies and non-profit foundations have financed scientific research, playing the part, which Chesbrough (2003) named the “innovation benefactor”. “If exercising innovation is changing for the reason that new forms of innovation are economically feasible then this offers opportunities for researching and describing these new practices. The open innovation paradigm offer propositions for how such innovation should work” (Chesbrough, The Era of Open Innovation 2003 and Davis 2006).
The main messages of this model are:
- Shift the organization even further away from the linear process, which has subjugated much of the 20th century firms’ approach.
- Utilize the ‘open’ iterative process, become more multi-dimensional in collaboration, and assimilate the customer more centrally into the ‘web’ of collaborators.
- Invention from the R&D bench resulted in market ‘push’ and an effort to rationalize corporate thinking by forcing it on the market and onto the customers.
- Concentrate on consumers unfulfilled, unspoken or necessary needs by making customers the centre in the web of co-creators and co-creation activities (Chesbrough 2003).
Henry Chesbrough introduced a novel phenomenon of open innovation, which is much different from the conventional closed innovation model. Chesbrough described that this closed model started to alter in the 1990s when companies such as Cisco systems vied very vigorously with the research- endowed businesses like Lucent Technologies (Chesbrough, The Era of Open Innovation 2003).
Trott and Hartmann (2009) in their research suggested how Chesbrough has given a counterfeit dichotomy by giving an argument that open innovation is the only inimitable existing alternative to a closed innovation model. Instead of being held intimately inside the firm, following the idea of open innovation research results are able to cross the company’s boundaries. Other businesses which are capable of making use of a technology can license it is generating a win –win condition. Likewise an organization can license the technologies manufactured by other companies.
Von Hippel Democratized Innovation
Von Hippel (2005) has observed that lead users at most times create and modify products for themselves and frequently liberally disclose what they have done. He also observed that most users may be interested in taking on to the solutions that lead users have developed. Altogether, these findings enable the basis for user-centered innovation models that may entirely change manufacturer-based innovation models in specific scenarios and counterpart them in other situations. User centered innovation is gradually growing its worth as computing and communication technologies expands. In his theory, Hippel discussed the ongoing democratization of innovation and patterns of user-centered innovation that are rising.
Innovation is swiftly moving towards democratization. Consumers, fully utilizing enhancements in computer and communications technology, increasingly can create their own new products and services. These innovating consumers—which can be an individual as well as firms—sometimes freely reveal their innovations to others, generating user-innovation communities and a highly rational commons. Much discussion is made on user-centered innovation paradigm in “Democratizing Innovation “ by Eric von Hippel. He clarifies why and when consumers deem it gainful to create new products and services for themselves, and why it frequently pays consumers to share their innovations generously for the use of everyone (Hippel 2005 and Kirschbaum 2005).
The software and information items—most remarkably in the free of charge and open-source software movement- as well as in bodily items are an example of the shift to democratized innovation. (Hippel 2005).
Von Hippel (2005) further suggests that in order to attain sustainability, organizations must now revamp their innovation processes and that they must methodically look for innovations made by the consumers. Businesses were specifically discussed by Hippel—the custom semiconductor industry is one similar instance—which has learned to help user-innovators by supplying them with means to create novel and innovative products. The objective of a democratized user-centered innovation system, according to von Hippel, is well worth struggling for (Hippel 2005).
Open innovation Model and the Role of Knowledge Brokers
Milton Correia de Sousa (2008) was the first one who gave the idea of knowledge brokers as a source of making way for innovation in the companies. Sousa observed in the report that the movement from internal R&D to external join and develop unlocks the door for organizations –whether they are large or small –to go ahead of their core competencies to stay competitive in an increasingly multifaceted, unpredictable and changing environment. Milton has explained the phenomenon and the process and concluded that open innovation is necessary for firms to attain comparative advantage. Open innovation enhances adaptability, and at the same provides various direct benefits to the organization (Sousa 2008).
It is understandable that successful innovation under intricacy, implausibility and variation can only be attained with the help of collaborative approaches that incorporate knowledge inside and exterior the company. Across the globe, firms are now utilizing this model of innovation gradually, and at the same time when this model has become a necessity for small enterprises, which usually are deficient in knowledge of some sort to entirely complete the innovation process, bigger firms are also shifting from their long-established R&D strategy to a joint connect and develop (C&D) process (Sousa 2008).
However, open innovation is never free from risk. It is necessary for the organizations to understand the skills, potentialities, and knowledge that are different in the market. So that they could evidently recognize what is need to be outsourced using processes to bring new ideas (Penin, Caroline and Burger-Helmchen 2011).
It is also imperative to minimize knowledge leak risks by devising suitable protection strategies.
Knowledge brokers have a significant part in open innovation processes. They are aware of the part that individuals can play in brining close the solution seekers and provides which effectively promotes collaborative efforts (Maula, et al. 2006). The appearance of knowledge broker as SPI, in a small country, comparatively far away from the main global decision centers makes obvious the fact that knowledge is invasive. Two outcomes from this are:
- Successful innovation speedily becomes outmoded and therefore, need a constant and sustainable flow of innovation to remain competitive.
- Knowledge can be accessed from anywhere, but if and only you have the correct connections and links to knowledge sources, and the right technical, technological as well as organizational tools. As a result, knowledge brokers can emerge wherever (Sousa 2008).
Keeping these corollary in mind, Sousa says that one can safely establish that knowledge brokers are here to stay and will have, at all the times, an ever-increasing vital part in accelerating innovation through global and interconnected networks of individuals and knowledge. Brokering knowledge for innovation has turned out as the main factor for innovation activity, which could work with itself.
Most of the previous researches and studies regarding open innovation are focused primarily on the firm level of big corporations. However with the changing times, the scope of innovation has been altered enormously. Now, enterprises cannot afford to carry out their innovation processes on their own, owing to the labor mobility, copious venture capitalists and broadly dispersed knowledge across several public and private firms. With growing disintegration, outsourcing, modularization these days the management of open innovation in small organization is becoming equally important. This study fills the gap in the literature of open innovation by giving a comparative evaluation of open innovation processes carried out by two companies in manufacturing industry.
Elements of Open Innovation
For an organization to become capable of implementing open innovation practices, they need to focus on their processes management.
The significance of partnership capabilities has become vivid in open innovation literature. In addition, the formation of an atmosphere for innovation and visionary leadership is deemed to be criteria for the execution of innovative processes. At last, the presence of the right systems, tools and processes seems to be a vital facilitator of open innovation initiatives.
Relational elements are essential in association management studies. Cullen et al and Kauser and Shaw explain the necessity of loyalty and trust among cooperating partners (Kauser and Shaw 2004). Furthermore the institutionalization and repute of working partners as explained by Mora-Valentin et al. and Ireland et al. have an impact on the implementation of cooperation. Organizations, which have the name of being a fine partner, may see themselves in a good situation while seeking new partners. Nevertheless, knowledge management studies also attend to partnership concerns. Absorptive capacity is more centered on the company itself than on the partnership; however it assists a company in making the best of partnerships. This encompasses the integration of the knowledge of the partner but is led by the choice of the partner who has the accurate knowledge. Moreover choosing the right partner, it is also essential for firms to choose the correct form of cooperation for each initiative. This selection should rely on the strategy and abilities of the companies and the objectives of the particular initiative. Firms therefore require some partnership capabilities that will augment their innovative performance (Kauser and Shaw 2004).
One more aspect essential for the success of open innovation is the creation of the surroundings for innovation. This kind of atmosphere can motivate employees to work hard for better performance and encourage them to be innovative and entrepreneurial. In open innovation activities the concentration is not merely on being innovative internally but also when exploiting external paths to market (Chesbrough 2003). The staff should be capable of spotting external knowledge paths for their ideas, which require a definite entrepreneurial spirit. Hence, the formation of an environment for innovation must also include the establishment of an entrepreneurial culture.
Other than partnership capabilities and an atmosphere for innovation, the open innovation activity must be facilitated. This assistance encompasses internal processes, structures, systems and tools set up to make the implementation of open innovation activities possible. Quality and process management researches provide deeper details of various elements, which aid in enhancing the quality and effectiveness of processes. Building up the accurate procedures can have an influence upon the performance of open innovation endeavours.
Types of innovation
Innovation is divided into numerous types depending upon the chosen criteria. According to well-known researcher named Schumpeter, innovation can be categorized into five different kinds including, innovation of new products, introducing new ways of production, adopting latest supply sources, the exploitation of new markets and last but not the least introducing new methods of systemizing the business. Furthermore, Innovation is categorized under two main types known as product innovation and second is process innovation. In product innovation, the alterations are made in the product or service to offer an innovative new thing (Fagerberg and Nelson 2005). Tidd et al. (2005) describes that process innovations are given as “changes in the methods with which such new products/services are manufactured and supplied” (Savitskaya 2009). Even though this division is extensively accepted it is not supposed to guide us to disregard other central factors of innovation. For instance, in the last few decades majority of the prominent innovations have been taken place in organizational ways such as, the reformation of production and supply, or as explained by Schumpeter that these organizational innovations are comprised of arrangements within the companies and eventually assist in restructuring of the entire industry (Fagerberg and Nelson 2005).
Two other forms of innovation include incremental innovation and radical innovation. Both of them facilitate the company to bring continuous improvement. According to Tidd.et.al,
“The basis for this categorization “the degree of novelty”. Bigger fraction of financial profits is reached with the help of incremental innovations and enhancements, since the costs of such innovations are noticeably lower” (Banks 2007).
In addition, process innovation helps the organization in reformation, cost reduction and optimization. Bower and Christensen introduced an entirely new term of innovation known as disruptive innovation, which contradicts sustaining innovation that means a firm making a reaction to the progress alterations in their business industry (Hockerts and Morsing 2008).
Christensen also signified that the most imperative factor to sustain progression within the organization is to manage and bring innovative modifications within their markets. Such innovative modifications are referred as disruptive innovation or in other words disruptive technology. Disruptive technology is described as a technological innovation that creates an entirely innovative market with the introduction of a latest kind of product or service that will make all the previous technology based products or services out of date (Savitskaya 2009).
Whether a company is taking into account incremental or radical innovations, it is vital to closely assess the critical need for the product and its prospective return on innovation. Innovating more than requires can at times be damaging in that it increases cost and time to market, with little desired output. It has been defined as neutralization, where a product can be just sufficiently good to make it into the marketplace and grab market share from the rivals.
IP, Patenting and Appropriation
All companies making use of open innovation must tackle with the requirement to protect company’s cerebral capital (Fredberg et al. 2008).
One of the presumptions of open innovation is that there should be a massive quantity of ideas gathered from outside of the company and the firm should be an efficient purchaser as well as the seller of IP. Von Hippel and von Krogh (2003) have stated, “free revealing can regularly be the best naturalistic way for innovators to increase the profits using their innovation and that free revealing must be used beyond software” (Hippel and Krogh 2003). The following are the workable causes why innovators wish to without restraint disclose information rather than holding it secret or licensing. First is when others find out your company’s innovative secret. Second is when the revenues gained by patenting are minor. And third is when the influence of complimentary information is beneficial.
The trend behind free revealing is that it is private-collective model of innovation. According to Von Hippel and Von Krogh the society is provided with the best of whole of this idea, which hints that public goods are gathered by using private funds (Hippel and Krogh 2003).
Joachim, Henkel (2006) demonstrates in his theory that company’s qualitative and quantitative research produces entrenched innovations. He states that organizations are accustomed with this dilemma and it utilizes various techniques to secure their knowledge and information. They disclose 50 percent of the regulations they form, depending upon how essential the external help will be during operation developments, as more assistances discloses more regulations. Small-scale companies with a small amount of internal sources therefore reveal more. The writer also states that companies implement selective revealing to minimize rivalry loss. It remains constant with the implementation of growth maximization behavior (Fredberg et al. 2008). “Jauhiainen (2005) declare that the issue on whether to be defensive or to outwardly use innovative knowledge is two folded” (Fredberg et al. 2008).
Jauhiainen (2005) has used the term “appropriability regime to explain about exploitation of information assets and sustain competitive edge”. The strengths and weaknesses of any firm in the defending manner might turn into both encouraging or harmful, relying upon the circumstances of the organization.
Limitations of Open Innovation
Until now, open innovation has appeared to be an attention-grabbing phenomenon. Although various writers refer to the extensive history of combined development of innovations, just a small number of companies have really used it in the shape that we are talking about it in this era. One more problem faced is that even if the company is able to do that, a major issue is to manage within to utilize the innovative ideas and knowledge.
To a growing amount, companies use outside sources in their innovational activities, but still there is a requirement for comprehending the evaluation process in an enhanced manner. Only a minute number of analysts believe that to continue with the local evaluation bias more research is needed. One more central question is to find out how the procedures for open innovation models and customer development can be interlinked with the already existing systems within the company’s R&D structures. The NIH syndrome also known as Not Invented Here Syndrome, is described as a susceptibility of recognized project groups to deliberate that they know all the required information in this field of interest, therefore they are rejecting to accept ideas from the groups, which can create hurdles for the companies that are willing implement open innovation practices.
Open Innovation Performance
Open innovation poses a positive impact on the innovation performance of an organization as Fey and Birkinshaw (2005) stated that openness to innovative ideas is the sole most vital forecaster of R&D performance (Rosing 2011). Laursen and Salter (2006) in a prior evaluation of corporate search strategies, discovered that knowledge sources such as company’s individual R&D, suppliers and customers are the most frequently used by manufacturing firms. The unswerving exploitation of universities as resources of ideas remain restricted to a minute proportion of businesses, found either in a limited number of sectors and amongst those who utilize other information resources most expansively, and along with those who have well-built own R&D capacities. Laursen and Salter (2004) discovered that innovation performance increases equally with the breadth and depth of external search; i.e. with the assortment of external knowledge sources employed, and their extent of usage.
The impact of open innovation on innovation performance is further thought to be relying on the strength of technological inputs and opportunities obtainable in the surroundings, and the easiness with which these sources can be utilized into. As such the level of complexity in industrial knowledge bases, exploration costs and the likelihood of over-searching influence the relationship between search and performance.
Granstrand et al. and Fey and Birkinshaw explained that sourcing implies the acquisition of information or solutions on a marketplace basis. The sourcing company is first and foremost concerned with the yield of the contract, not the learning processes taking place in the course of the development work (Ahuja 2001).
The contract partner, sequentially, whether it is a research organization or a seller, is liberated in making use of the experiences achieved if not also the IPRs developed to work for other client firms. This may have an impact of boosting the innovativeness of a bigger population of firms.
The growing popularity of open search and sourcing strategies in companies in general and the reduction of IPR regimes join to open ways for external technology commercialization (Grandson and Gassman 2006). It can be in the form of licensing, development of new enterprises. Through licensing, the originating firm remains in control of the technology in question, but can utilize the already available complementary capabilities of other firms. Licensing therefore combines organizational resources at their margins. By establishing new enterprises as vehicles for commercialization the company may utilize external sources of funding to reduce its own risk, while remaining in possession of an option for later full re-internalization.
Not much investigation has been done on external technology commercialization phenomenon, even though anecdotal case evidence as well as larger sample case evidence point to the fact that it is becoming a broader trend and has an impact on open innovation performance.
Collaboration is the expansion of knowledge by relationships with particular partner organizations, and includes mutual trade of knowledge. Industrial organizations can work together with universities or research establishments or with suppliers and customers or form associations or joint projects with other industrial companies having complementary knowledge.
For the reason that collaboration encompasses intense communication and coverage of own knowledge, it also needs trust. Helper et al. (2000) explained that characteristically, there is a requirement for mechanisms to control opportunism and the development of mutual understandings regarding what is to be accomplished (Fagerberg and Nelson 2005). Much of this can be realized as relation specific, irrevocable investments. It will, depending on the level of intensity and accomplishment in the communication, produce joint learning and adaptation processes. On the other hand, it also involves the possibility of each partner attaining less from the inflows of knowledge as compared to what is shared outwards. Also, it will frequently need the allocation of considerable resources in the shape of personnel. Hence, collaboration is most probably a more selective aspect of open innovation as compared to search, and can be prone to lock-in (Fagerberg and Nelson 2005).
Benefits and Opportunities offered by Open Innovation
The organization of developed R&D has experienced significant transformation since the mid of 1980, principally in the United States. However, instead of establishing a completely new process, this reforming has revitalized essential elements of the industrial research processes. In particular, most of the features of Open Innovation Approach to Research and Development management are noticeable in this earlier period (Mowery 2009). The early levels of open innovation by now take place in many organizations. In fact, almost any firm can point to instances of innovation activities that are different from the closed model in ways that would be termed as open innovation. However, the level varies from an insignificant few percent of the overall innovation effort inwardly focused companies to the remarkable stage of almost 50 percent that P&G has reached. Regardless of where the organization is now on this spectrum, the main thing to understand is that open innovation is the prospect, so it’s vital to start making some kind of open innovation part of the overall strategy (Lindegaard and Kawasaki 2010). The commonly accepted primary advantages of open innovation are to:
- Speed the growth of new products and services and consequently augment revenues and market share.
- Cut down time to market for new products and services and speed up profits.
- Decrease direct expenditure on R&D.
- Enhance the accomplishment rate of new products and services.
Challenges faced by companies, which are at early stages of open innovation:
Of course open innovation also presents challenges, particularly for seeking and existing managers and leaders who are habituated to work in a closed setting (Lindegaard and Kawasaki 2010). These following three primary matters must be answered prior to shifting to open innovation strategy:
How will open innovation influence the firm’s business model?
In an open innovation environment, the organization may end up in working with anyone-even its rivals. How will this affect the business model and change your competitive landscape?
How the organizational chart will be altered to adjust to open innovation?
What sort of associations does the company want to engage in? What general vision and mission will the company share with its associates? Systems, processes, values and culture throughout the organization will have to be changed. Individuals who have spent their careers remaining internally focused now need to focus externally also.
How does this influence the role of manager as a leader of the organization?
Most of the companies have not mastered the skill to innovate across diverse business sectors internally, let alone doing so with exterior partners. Consequently, most managers and leaders do not comprehend open innovation at a beginning stage. They must understand the effect of this movement-its opportunities and risks-and become skilled to adapt to leadership style which optimizes trust, inspiration and performance (Lindegaard and Kawasaki 2010).
Innovation Marketplaces: A major source for open innovation
Now, as open innovation is becoming prevalent, the call for innovation market places that can act as intermediaries to which organizations can quickly connect increases. A few of these intermediaries will act as niche markets, while others will be more all-purpose. Several will established by firms to meet their particular requirements, and some will be set up by third parties to position their companies as an interface between organizations looking out for solutions and the smart people-or firms with solutions (Lindegaard and Kawasaki 2010).
InnoCentive is a third party innovation marketplace which functions with a prize-based open innovation model. InnoCentive unites various companies, educational organizations, the public sector, and non-profit association with a wide-reaching set of connections of approximately more than 16,000 specialists and experts and problem-solvers in 175 nations across the globe. A pharmaceutical giant Eli Lilly as an in-house innovation incubator initially established InnoCentive. An autonomous company since 2005, InnoCentive at first had success within the pharmaceutical market place; however it is currently active in various other sectors, including consumer packaged goods, where organizations like P&G have had success by making use of InnoCentive.
InnoCentive model functions like this: A company (a seeker) offers a challenge to solvers across the globe who can win cash prizes for providing solution to the problem. Approximately, more than a third of the solvers have doctorates. Issues have been provided in engineering, computer sciences math, chemistry and business sector etc. InnoCentive takes a posting fee and a finder’s fee if the solution is provided and has solved the problem (Lindegaard and Kawasaki 2010).
HI: Open Innovation practices increase innovation performance
Various studies have shown results according to which open innovation practices pose a strong impact on innovation performance of an organization. These results suggest that broad-based approaches give in the strongest effects, and that the collective of open innovation strategies seem to be more essential than individual practices. The manufacturing industry is going into a new age of “open innovation”; an age of focused corporate strategies with the help of which investments in intramural R&D are enhanced or even replaced by extensive utilization of exterior knowledge sourcing and external paths to commercialization. Moreover, organizations whose innovation process has been professed as tightly closed are gradually opening up their innovation processes to enhance their performance. Regardless of the extensive consideration that has been given to open innovation, there is little methodical proof on open innovation practices or on the influence on company’s performance. A wide-ranging, holistic approach to open innovation is expected to give greater returns than a profound attention on a particular aspect. Combining the results together, what seem to be most essential are the overall strategies rather than the particularized dimensions of open innovation.
If external individuals and firms look at a company, they may have novel trends to bring changes within the organization. They will apply procedures and ideas that might not have been implemented by the people working within the company, because of the reason that they are only emphasizing upon the business vision. Companies adapting Open Innovation practices should be able to support both innovation approaches based on the objective of the company.
H2: The high cultural long-standing orientation of the company’s causes intense “Not Invented Here” syndrome and in turn reduces the tendency to consume outbound open innovation
The studies and researches have proved the fact that “Not Invented Here” syndrome is supposed to be the most important obstruction to outbound open innovation. According to the hypothesis cultural peculiarities impose a obstacle towards outbound open innovation in companies creating protective attitudes towards the external utilization of knowledge (expressed through Not Invented Here syndrome).
H3: Open Innovation helps to minimize the time period for innovation activity
Open innovation develops the company’s business system to outline its research investments. “This cuts down the time period to sell for more radical innovation thus making the pursuit of radical innovations more sustainable. This reduces the overall time spent on a portfolio of innovation” (Chesborough 2003).
The literature review presented in this section of the paper provides the source for the conceptual framework for the analysis of the findings of the nearby study. In this chapter various relevant theories and factors are discussed related to the open innovation elements, limitations and effects and manufacturing companies, and consequently, the advantages accomplished due to the open innovation models. These theories form basis for greater understanding of the open innovation processes. Three hypotheses have been proposed to be tested in order to evaluate different factors determining open innovation systems with respect to the performance of the companies.
Research methodology is a manner adopted to solve problems. It is more highlighted as an art of figuring out ways to conduct research scientifically. However, it is necessary that the researcher is aware of the techniques. Every problem needs to be solved through a different technique and methodology; this requires the researcher to have proper knowledge about the dimensions and research methods. This section of the study highlights the methods and techniques used to evaluate the data accumulated for the research. The purpose of research is to find out the unveiled truth or make a new discovery through theoretical and hypothesis support. The approach selected for analyzing the data in the current study is qualitative and secondary in nature, in order to attain reasonable conclusions described by its logical limitations. The chapter also provides an analysis of the tools used for the collection of secondary data.
Purpose of Research and Areas to be investigated
The rationale of the present study is to compare open innovation in two companies of the industrial sector with respect to tools applied and challenges encountered. The results of this report should be explained in such a manner that the theories covered in the literature review are focused adequately to establish views on the research hypotheses prompting various aspects that adds up to the success of open innovation in industrial sector.
The open innovation system has been targeted in the current study, which has already been discussed in the theoretical background in the literature review chapter. As a result, the study has its concentration upon providing an inclusive view on the elements of specific open innovation techniques applied and its effects in the performance of the companies.
Adopted Research Methodology
Qualitative research is employed to explore and comprehend people’s beliefs, experiences, attitudes, behavior and interactions (Key 1997). This type of research produces non-numerical data. Various techniques such as focus groups and in-depth interviews are usually applied for qualitative research fieldwork to record a variety of experiences, or in researches regarding how a company is functioning, revealing views and experiences of test respondents.
Qualitative research results are not stated as percentages, are not subjected to statistical analysis and the findings cannot be applied to general population.
For the purpose of the present study, the case study approach as qualitative research methodology has been adopted and implemented. Case study research may involve only one cases or several cases often two to four. The investigator carrying out a case study makes an effort to evaluate the variables with respect to the topic under study (Tellis 1997).
The reason behind the selection of the given methodology is that with that qualitative research helps explore topics in more profundity and detail as compared to quantitative research. Also, qualitative research has been proven to be economical than quantitative research, since there is no need of recruiting a large number of respondents or apply extensive techniques. It provides flexibility in locations and timing as well. Case study is used here because the field of the study is a single case and not a case of large population. This case study addresses a bounded system, which is featured in a natural condition, in order to realize the system’s own habit (McNabb 2008).
The case study approach of qualitative research methodology is chosen because it is estimated to offer a distinct picture of findings, and a single person can perform it, either longitudinally or in a more restricted time span.
Inductive and deductive researches are the two methods of developing logic which are applied to make a conclusion on the basis of data which is supposed to be accurate. It comprised of attempts to give general principles starting with various particular examples. Rather than starting with laws and principles and giving conclusions, most researches gather related experience and try to create general rules from it. Where the subject of the research is too diversified in nature then inductive method is brought into use. After the identification of the problem, research audience is targeted and observed through several means. On the basis of observation and analysis patterns of behaviour are pointed out and conclusion is derived. Many of the researches begin with inductive method. Identification of the problem is a rather difficult step in inductive research process. The identification leads to series of detailed studies known as programmatic research. The hypothesis created out of inductive research is just theory based and is not supported in numerical terminology (Saunders and Lewis 2003)
For the present study, inductive approach to the study is adopted, which is most suited for quantitative research. In the specific inductive mode of research, the case study approach will examine the minutiae and meanings of knowledge and would not require a prior hypothesis. Rather, attempts have been made to find significant patterns and themes in the data. To create clear connections among the research aims and the conclusions gathered from the raw data and to ascertain that these connections are both visible as well as defensible, inductive research is applied (Thomas 2003). Keeping in mind the nature of the research it is useful as the scope of the sample selected is restricted and the results that are obtained from the sources can be easily categorized from the performance of both the companies’ i.e P&G and Unilever.
Information for the current study is gathered from numerous secondary sources, which are deliberated in this sector of the research study.
This study is making an extensive use of secondary data. The purpose of using secondary data is to cut the research cost and use the data, which is already available. For the current research the secondary information is collected from journals, documents and any other form of unstructured data. The secondary data collection strategy is applied which involves unofficial documents, official documents, objects, etc. from various websites, studies on open innovation and documents from the company websites which provide insight of the usage extent of open innovation in the selected companies.
According to Steppingstones (2004), “The data acquired from secondary sources is useful for carrying out a comparison of the data collected in the study. The secondary data assists in making data collection more specific because with the help of secondary data, it is easier to recognize the gaps and deficiencies and what further information should to be collected.” Moreover it has been confirmed to be economical as no interview and questionnaires have been carried out and save time and efforts as compared to the primary data collection. The secondary research process is accomplished quickly mostly within two to three weeks. The best aspect of secondary data is that it lets the researcher to start with the research without setting the base from scratch.
As the present study is a qualitative research, an appropriate sample size should be chosen to adequately answer the research questions. Since, the present study is targeted at comparing open innovation at two organizations in the same industry, Unilever and P&G have been selected. Moreover, as qualitative research methodology has been adopted for this study it was important to take a smaller sample size. The selection of the companies is made on the basis of their position in the industrial sector. On one side of the story is the P&G which is leader of the consumer goods industry and has all its focus concentrated on open innovation, sharing information, advanced efficacies, first mover and cost reduction benefit that implies fast in gaining novel ideas from outset to the shelf. On the other hand, Unilever is primarily concentrated upon strong brand identification, expansion of its product lines through innovation department, and development of coalitions and therefore making extensive use of the concept of open innovation. Both the companies are benefited from worldwide expansion in the forthcoming markets and from cost reductions.
Basis for Analysis
For the present study, qualitative case study research methodology is adopted and in the analysis of case studies, traditional statistical analyses cannot be applied (Kohn 1997). Hence, descriptive analysis is used to systematize and methodically evaluate large amounts of information. Descriptive analysis will be used to present findings from the secondary research. The findings from the secondary data accessed are supposed to be entirely suitable and completely adequate to be able to give conclusions and provide answers the research questions and address the research problem. The findings from the selected companies i.e. P&G and Unilever will then be evaluated on the basis of the open innovation framework presented in Chapter Two of the research. The research has remained open to new opportunities and insights, while assessing and analyzing the data.
The triangulation of data to make the findings and research results more powerful is permitted by the case study method. Furthermore, in descriptive analysis, data triangulation strategy would be used. “The data triangulation involves the use of different sources of data/information” (Guion 2002). The technique is used in order to enhance the end results and perceptions of formation of users of this study. Triangulation here will be used to involve several studies and information from other secondary sources of the information at different time periods (Guion 2002). In an associated manner, this qualitative research will be employing investigator triangulation and regarding the concepts and descriptions generated by other researches and studies on the given subject as well as the findings from the company databases as well. The findings from both the companies i.e. Unilever and Procter & Gamble regarding open innovation would be compared to produce general principles that could be applied in the companies of industrial sector.
Research Methodology Limitations
The research methodology implemented for the particular research study is considered to be the most appropriate one based on the researcher’s own understanding of the research topic; however, there are certain limitations that are also realized and highlighted in the following for better understanding of the users of this report.
- There is a chance that the information collected is not timely. Outdated information offers insignificant worth little value chiefly for companies challenging each other in this rapid changing markets. For this care has been taken when depending upon secondary data that might have been investigated well in the earlier period and the reliability of the sources used is examined prior to using the information for the findings.
- The secondary data relevant to the research topic is only available in insufficient quantities. As such all possible efforts have been made to fill the gap with the help of including literature and theories from easily accessible and current secondary information and study of findings is then explained to relate them to existing data.
- The results cannot be generalized to the specific audience or the general public at large. Here the researcher’s aptitude to provide a convincing and appealing outline of the case, with suitable examples and relations to broader concerns, is used to work under this limitation.
- Limited funds are available for the research; therefore, all possible attempts were made to keep the costs of research to minimum.
- It is harder to determine the validity and dependability of linguistic data.The richness of the data depends on the quantity of detail and contextualization. As such minute number of crucial issues are scrutinized in this research study.
Findings and Analysis
This chapter critically examines and evaluates the data gathered through findings that are acquired from the research study in order to evaluate the connection between a manufacturing organization’s open innovation and the benefits gained by them as well as the challenges encountered in implementing the open innovation efforts that is taken from the current study.
The chapter further lays down, an evaluation between the literature review and the research study that will be assisted by assessing the results of the findings, for the purpose of understanding the open innovation in product manufacturing companies and its dynamics.
Open Innovation at Procter & Gamble
P&G is an organization that mainly focuses on consumer enterprise. P&G is working in almost 80 nations and has over 140,000 employees. Procter & Gamble focuses the most on innovation process by spending its major time on the research and development (R&D) department. The company invests its 4 percent of total (global) sales in R&D. P&G has 24,000 patents globally and obtains 3,800 exclusive rights on average every year.
To boost growth with the help of innovation, in 1999 P&G introduced a new strategy known as Organization (Dodgson et al. 2006). This scheme is a building block of the Connect and Develop model that P&G develops (Chesbrough 2003). The rationale of this plan was motivating the process of innovation by focusing on internal strengths and disjointed communications more externally focused and interconnected (Bons and Daams 2010). The scheme was built with an aim of finding out fresh complementary technologies from outside of the company and to concentrate on the licensing to increase the return on invest of the company (Dodgson et al. 2006).
At a trading technologies expo “Innovation 2000” P&G brought all its open innovation ideas together. The company invited all the external suppliers. The technologies expo was a great success because it was able to generate approximately 2,200 innovative concepts for novel and most up-to-date products (Dodgson et al. 2006).
Considering other techniques from the above-mentioned techniques, Procter & Gamble also exchange the entrepreneurial firms and tried to make domestic seed resources (Dodgson et al. 2006).
The C&D project help with the making, transfer and exploitation of knowledge across organizational territories. These applications utilizes data searching, simulation, mining, rapid prototyping, and modeling. In a way, as if there is an innovative idea then it must be utilized (Dodgson et al. 2006).
Data searching and mining
Procter & Gamble’s Connects and Development strategy is used to connect the internal and external sources which employees the technologies (Dodgson et al. 2006).
Workers of P&G can get in touch with each other across the globe by the supposed “InnovationNet” (this is an internal website). This function, InnovationNet performs with the records of the person’s requirements. This entails that users with similar beliefs are connected to one another (Dodgson et al. 2006). Besides exchanging information between nations, the basic focus of P&G is to enable the communication facilities available to everyone within and among communities involved (Brown and Duguid 2000).
A system needs to be developed by the researchers that must be based on the Internet to share the statistics and information for the company’s internal and external resources. For instance, there must be communication with the external sources or by providing link to the external database (Sakkab 2002). In addition, P&G set up the Technology Entrepreneurs network, which is a team of 70 individuals who help in linking Procter & Gamble to exterior innovation prospective (Dodgson et al. 2006).
Simulation and modeling
“Ultimate Supply System” was introduced by Procter & Gamble in 1995. It was setup in order to create link between the suppliers and by augmenting the magnitude of the supply chain. It was achieved by the sequence of information, products and goods, and economic activities among two or more industrial firms. The aim is “to considerably enhance sales, decrease costs, increase cash flow and, eventually, to supply the right goods at the appropriate time at the right price to the customers” (Wegryn and Siprelle, undated; as cited in Dodgson et al. 2006).
Moreover, P&G has a domestic operations research group, which is responsible for inventing the supply chain arrangement by optimization and recreation techniques. This research group is recognized as Global Analytics. This group is responsible for the scheduling cycles and the schedules of the manufacturing process. It also provides results for capacity utilization, which works in close collaboration with supply chain (Dodgson et al. 2006).
Virtual and rapid prototyping
Computer system is implemented in P&G to analyze the archetypes of goods within the implicit circumstances, which is suggested with single building equipment, the effect of the production line adjustments. These commodities are removed for earlier period needs and virtual prototyping gives the chance to expect and go successfully to give a response to the what-if question. P&G also has a group with the name of CreatelInnovate, which makes innovative packages to establish brand identity. On the other hand, with the computer aided design the company is able to see the prototypes for testing purposes. For CreatelInnovate, brainstorming is a primary task. If some useful ideas invoke a good feeling in the minds, the model should be constructed in a couple of days. This model is then considered for the whole of the process. Groups across the globe observe the virtual model and can provide constructive and/or off-putting comments. Later, at times a small video will be arranged of the company’s product and mail it to a specific number of consumers. Majority of the trial products fail, but few of the ideas work exceptionally. The complete process may take only days and not months. Later on, a wide-ranging market evaluation should always be carried out (Dodgson et al. 2006).
To earn additional profit P&G licenses its technologies and access to corresponding technologies. Procter & Gamble gets licenses for all of their technological products in the beginning and it gets patent agreement for five consecutive years. Governmental grants and various other patents are also engaged within the company’s operations.
Open innovation at Unilever
Unilever is a product manufacturing company, which has lately, came forward as an organization that is at all the times ready to embrace new ways of reaching out resolutions logical of the fact from where these resolutions are being derived. It is imperative to note here that most of the solutions to the firm’s problems are offered by Unilever’s those suppliers, where the company is managing strong innovation relationships and supplier collaborations. Creating and sustaining good relations with suppliers founded on the basis of trust require time and effort; however this is something that Unilever takes critically. Its alliance with the University of Liverpool Centre for Materials Discovery is an illustration of the fact that Unilever also managed to establish various academic research partnerships other than the collaborations with suppliers; it also shares mutual facilities, which are a vital element of the open innovation strategy of the Unilever. The Unilever and Liverpool together form a suitable team; Liverpool has a safe lasting strategic investment and the company has now attained a molecular design capability, which will allow it to develop innovative functional molecules and a provide it with a facility to screen more ingredients and find out the most suitable plan in a shorter time frame (Innovation Europe 2010).
The capability of Unilever to influence IP into and out of Unilever is a big potency, and realizing this, both open innovation and patents are two of Unilever R&D’s critical efficient skills.
Unilever has changed from corporate business enterprise into a vital open innovation tool and means with the creation of Unilever Corporate Ventures in the year 2001. Externally it has been noticed that various Unilever brands are running as competitors against each other advertising ideas (Innovation Europe 2010).
In managing Unilever capabilities in the region of joint innovation, it is vital to be skilled at making the suitable connections. The company has started by utilizing the compilation of internal talents and skills that cover an exceptional range of product categories plus by defining which collaboration innovation tools work best for them. Given below are the top 10 open innovation tools and techniques utilized by Unilever.
Open Innovation portfolio management and metrics
Open innovation associated with the internal alignment appears apprehensible. Nonetheless, open innovation patterns must remain unaltered and they must concentrate on the company’s corporate strategy, and it must influence on an urgent action to affect the Open innovation with the assistance of robust metrics. Most organizations companies set metrics against the figure or proportion of projects made possible through open innovation. Without any delay, Unilever became conscious of the need to create ways to make this numeral 100%, and looked forward to set metrics on the basis of value (Innovation Europe 2010).
Unilever scouting community
The Company also spends in the area of scouring and has established a scouting community. Their foremost responsibility is to make sure they don’t have the solution within the Unilever territory; before they pursue the idea of approaching a small number of chosen scouting partners which they feel can envelop the greater part of their needs and challenges. The Company’s scouts possess affluence and extensiveness of experience complemented by a healthy scouting toolkit which Unilever has made over the years.
Academic Research Partnerships
Other than the relationships and associations with suppliers, the company also has a large number of academic research partnerships as well. “The Company’s alliance with the University of Liverpool Centre for Materials Discovery is an illustration of the fact that Unilever also managed to establish various academic research partnerships other than the collaborations with suppliers; it also shares mutual facilities, which are a vital element of the open innovation strategy of the Unilever” (Unilever 2011). They both constitute a perfect team. Liverpool has a safe lasting strategic investment and the company has now attained a molecular design capability, which will allow it to develop innovative functional molecules and provide it with a facility to screen more ingredients and find out the most suitable plan in a shorter time frame (Innovation Europe 2010).
The alliance with Liverpool helps in bringing to light one more central feature of the Unilever toolkit for open innovation, which is intellectual property. One outcome of the Liverpool partnership is that the Company has a really profound knowledge of the chemistry, and so is at a much better position to make stronger the value of the IP. The capacity of Unilever to influence IP into and out of Unilever is a strong point, and realizing this, both open innovation and patents are two of Unilever R&D’s important efficient abilities (Unilever 2011).
Unilever Corporate Ventures
The creation of Unilever Corporate Ventures transformed corporate venturing into a vital open innovation tool and means of the company in the year 2001. Prior unsatisfactory collaborative venturing proved to be lessons for Unilever in nurturing new businesses. They taught them that the abilities they had in expanding billion euro brands, of which the Company at present has 13, are poles apart from what is considered necessary to bring into being and incubate new businesses (Graul et al. 2006).
Ever since its establishment, which took place in 2007,Salon Spa International is generating strong financial profits. In particular, firm connection exists between the spa business and the Unilever’s Skin Category, facilitating both the organizations with a chance to conduct research and testing services with new skincare technologies, moreover, to build and create worthful customers’ insight (Unilever 2008).
A good example of Unilever’s collaborative venturing is Pepsi Lipton Tea Partnership (PLTP), which was developed in 1991. This has helped the Unilever brand with the best opportunity to enclose itself to introduce itself with ready-to-drink tea industry. It has also helped to provide business channels with Pepsi. The Lipton Tea was able to introduce itself in the United States industry, which increased its growth and there was a rapid development in 2003 and 2008. (Unilever 2011).
On the outside, consumers must have lately witnessed several Unilever brands competing against each other for advertising ideas. The founder of Unilever, William Hesketh Lever, is considered to be the one who put forward the concept of crowd-sourcing method during his hunt for new talent in the village of Port Sunlight (Graul et al. 2006).
Lever, the founder of the Unilever Company was an entrepreneur in its true sense and the entrepreneurial way of thinking is a critical component in the open innovation toolkit. Moreover, to promoting this internally, the Company approaches various other entrepreneurs with whom it carry out live projects. The Axe Bullet Body spray is merely one case of where Unilever aligned with an entrepreneur, the outcome being an unusual approach that saw the product launched in half the time it would usually have used to get into to market (Innovation Europe 2010).
Benefits of Open Innovation
Benefits of Open Innovation offered to Procter & Gamble
Open innovation, when in its true sense, was applied at Procter & Gamble generated noticeable benefits for the Company. Approximately 35% of the firm’s new products consist of components that are taken from the sources outside of P&G, which are about 15% in the year 2000. The inventiveness in the commodity was discovered 45% which were came upon from outside. With the help of connect and develop—in conjunction with the enhancements in other aspects of innovation concerned with the product cost, design, and marketing—the company’s Research & Development productivity has augmented by almost 60 percent (Graul et al. 2006). The success rate of Procter & Gamble’s open innovation practices has been doubled, at the same time as the cost of innovation has reduced.
Investment funds on the Research and Development sales have greatly reduced which were down to 3.4% in 2005 from a spending of 4.8% in 2000. The last two years, the company introduced 100 new items, for which the implementation occurs from the outside sources of the company. Over a period of 5 years from 2000 to 2005 the company’s stock after hitting their lows nearly double and the values of the brans that the company has crossed US$22bn (Graul et al. 2006), due to the introduction of the Connect and Develop model the company is able to maximize its innovations. This was possible by grouping with the external allies by making better use the patents that P&G already have (Dodgson et al. 2006). Before this model was introduced, very small amount even lower than 10% of technologies was utilized for the products (Sakkab 2002).
The stress on open innovation at P&G did not only provide the advantage of 50 percent decrease in concept-to-launch time with partial cost of innovative plans for the project, nevertheless it has attained above 35 percent of innovations and has achieved with huge amount of revenues
(Huston and Sakkab 2006). Networks and collaborations generate an environment of the firm, which produce value that no solitary firm can construct on its own.
The C&D was successful to achieve the targeted growth in the innovation levels expected by the organization in the year 2005, which was possible through external alliances. In order to further develop take C&D and gain superior value by C&D teamwork, P&G in the last quarter of 2010 set two new targets to be achieved: First to increase the Connect and Develop program in Procter &Gamble’s innovation practices to three times more with offering 3 billion dollars for the Company’s yearly sales revenues with the help of open innovation. P&G earned $56.7 billion revenue in the year 2005 and the company’s assets totaled to $20.3billion. However, on the other hand according to Procter and Gamble’s annual report of year 2011, “Research and development expenditure was $1.9 billion in the same year and the company employed about 7500 R&D individuals” (P&G 2011). Second is to become known as the Collaborator of Choice for innovation partnerships by persistently attaining effective relationships.
Projects enabled through Connect &Develop constantly served with better effectiveness, promptness, significance and market influence. The annual report shows that “Less than 50% of P&G innovation at present sourced externally. 70% greater than average NPV from Connect & Develop enabled projects in 2009. (Out of 112 initiates representing 77% of NOS). Forty percent of Connect & Develop partners have several deals with the Company. Approximately $3 billion in annual sales at collaborator firms driven by P&G-shared innovation” (P&G 2011).
Connect & Develop alliances have provided innovation practices in almost all departments of the organization, including excellent product innovations. Some of P&G’s well-known product innovations include Oil of Olay skin cream and Oil of Olay Eye Roller that has become highly eminent eye product within a few months (P&G 2011).
The number of patents P&G issued on yearly basis has decreased during 1996-2005 (Figure 3). Yet, on the other hand, the company’s revenue has appeared to be augmented during the decade and the company is still acquiring nearly 4500 government grants yearly. The effect of its outside innovation set of connections and the company’s policy of licensing in and gaining latest goods and selling those products as a P&G brands is provided in numbers; even if the amount of grants that are issued declines, profits rise, particularly those following strategic. For Procter & Gamble licensing is an element of their innovation association and is a provider in market for purchasing and selling technologies.
The figure above shows the patent analyses for P&G which is not very flattering considering the fact that the number of issued patents has decreased in the years; however observation of the all intangible assets shows that P&G is working keeping in mind the future of the company. In the year 2005, Procter & Gamble carried the highest amount of intangible assets as compared to its competitors, and out of 49 assets almost 40 percent of them were intangible. Keeping in mind that the goodwill is acquired by maintaining the proportion above 80 percent (P&G 2005). The Connect & Develop model of P&G has facilitated the company to manage attain licenses and attain the competitive edge for many products from other companies that specifies its high amount of intangible assets (Viskari 2007).
At present, the company holds approximately 20 billion dollar different brands, and has consumed almost 2.2 billion dollars upon innovation in the year 2010. The financial annual report of year 2010 demonstrates that currently the external partners have carried out fifty percent of the P&G’s innovation, whereas it was 15 percent since the last six years. In 2008, Procter and Gamble has made earnings of $83.5 billion. At the same time, the company’s Research and Development budget raised to 2.32 billion dollars, as compared to 1.92 billion dollars in the last year. In spite of this, most importantly the relative amount of revenues of R&D lessened to 3.4% from 4.8 percent (P&G 2011).
Benefits of Open innovation offered to Unilever
Benefits of Open innovation at Unilever can be clearly seen in its products. Some of which are following:
- The company was able to manufacture an upside-down roll-on deodorant, which makes use of 18% less plastic in each pack, which in turn has reduced the cost.
- Pureit, a home water purification device that is operated from a battery which gives households the ability to obtain pure and hygienic drinking water at an affordable price.
- Minor and powerful laundry detergents which, for the reason that of their size is so small and concentrated, decreases transportation cost, carbon dioxide and water utilization.
- Comfort Easy Rinse Fabric Conditioner that lessens the capacity of water, needed to wash garments.
- ProActiv margarines that has organic sterols which are medically approved to minimize the amount of cholesterol from the body (Unilever 2011).
Such innovations constitute a significant fraction of the Company’s Long-lasting Living Plan aim is to divide the ecological effect of the manufacturing and application of its products.
The Company has six strategic Research and Development laboratories across the globe. Company’s Research and Development labs are located in various regions such as in United States, India, United Kingdom, China and the Netherlands (Unilever 2011).
Unilever provides exceptional customer care, and is able to attract consumers from leading worldwide companies such as Wal-Mart, Carrefour, Target, Tesco and some wholesale stores like Metro. The company is also attracting customers from mom an pop retailers that are present in more than 170 countries all over the world. The ten leading retail suppliers are uplifting the sales of Unilever to almost 20 percent. Unilever is selling its products to more than 10 million national markets both in developing and prevailing markets (Unilever 2011). Unilever also achieved the Tesco’s Global Supplier of the Year Award in 2010 (Unilever 2011).
Discussing the manufacturing side, Unilever has 264 manufacturing sites across the globe. From the year 1995, its performance, per tonne of production, owing to open innovation, has improved steadily:
- The release of Carbon dioxide CO2 from energy has reduced by 44 percent
- The usage of water has decreased significantly by 66 percent (Unilever 2011).
- The total waste has fallen by 73 percent
- Unilever’s total recorded rate for accident frequency is taken as per million hours. which is used to gauge the safety level –was recorded at 1.61 in the year 2010.It implies a fall of 15.7 percent as compared to the previous year (Unilever 2011).
Challenges of Open Innovation
Challenges of Open Innovation at Procter & Gamble
Given below are precisely explained some of the most serious issues identified, which in case are not handled accurately might put in risk P&G’s long term accomplishment.
The risks of “outsourcing” innovation
Having the ability to gain access to knowledge exterior to the firm and leveraging in this manner, open innovation appears to be a very rational strategy. However, main risks are positioned behind it; first of all “Lean innovation” may turn out to be breakable innovation and show the tactic to a progressive stoppage of internal competencies to create its personal innovations. This might influence them in the future particularly their most imperative competitive edge, their aptitude to innovate.
Managing the intellectual property and its negotiations in an open environment
The Connect and development (C&D) of P&G will transform into a leading innovation model of the era; this notion is explicitly given by the Company (Huston and Sakkab 2006), however the negative aspect is noticeably regarding the issue of how to make safe the company’s intellectual property. Case is converted to be much more complex following the application of the open innovation model. Some time ago, majority of the innovations were carried out in reserve within the organization, and Procter & Gamble was only required to make a choice whether to grant for the patent for the specific innovative products or not. Hence, in the Connect and Develop program, there is a number licensing facility both in and out for innovation and latest technologies that transfers the protection of the cerebral property into a massive dilemma. The firm must think about the most suitable way to guard their new inventions and hence, patents should be looked at closely (Panduwawala et al. 2009).
One more issue emerging from this matter is regarding the management of more than hundreds of collaborations with small technology suppliers, which have no long-term regular partnership with Procter & Gamble and do not carve up the similar incentives. Enormous expenses of transactions are frequently incurred in the attempt to innovate methodically in an open environment; these are the costs, which may not have taken place if the innovation occurs in a closed setting. (Panduwawala et al. 2009).
Matters regarding selecting and sorting the required innovative ideas
In order to embark upon the complications that are discovered in the C&D concept, the organization finds a way to prefer technologies as accepted and verified (Huston, Sakkab 2006). The strategy while decreasing the opportunities to modify and generate radical innovations is also considered to be helpful for the reason that it is thought to help in decreasing the execution and technological threats since P&G’s Research and Development department arbitrates right in the concluding stage. This filter without doubt constrains the capability of the open innovation approach, forming a restriction on it, and also creates an issue as internal R&D capabilities are less practiced.
Evaluating the “Serial Innovators”
The Pareto Principle affirms, “We should suppose that most of the priceless innovations derive from a much-condensed set of bright individuals. This is for the reason that of the high number of persons involved and the reality that they are not within the organization. For P&G identifying and promoting this important group will become a major problem and an out of the ordinary potential competitive advantage” (Panduwawala et al. 2009).
Connect & Develop financial results
It is not still clarified whether this approach has enabled P&G a significant advantage to its predictable approach of innovation before the year 2000 or not, despite of the fact that sales and profits augmented in an unexpected less time after the execution of C&D. The company’ stock has experienced similar growth in its value which is comparable to the trends observed in the industry stocks. Consequently, the factual effect of C&D is difficult to determine in financial requisites (P&G 2011).
The complicated system and its interactions
The running of this system is transformed into a hard task by itself by Procter & Gamble’s Connect and Develop feature and also various innovational activities, owing to the creation of a complex set of arrangements and connections. P&G has two serious titles; The “Technology Entrepreneurs” and the “Research Fellows” at the center of these connections and the administration of innovation. The Technology Entrepreneurs are those who seek out innovations taking place in the external environment and bringing them within their organization. The next are responsible for the conceptual growth and unremitting enhancement of Connect & Develop, functioning as the fortitude of this complicated structure (Panduwawala et al. 2009).
Challenges of Open Innovation offered to Unilever
The performance of open innovation at Unilever is challenged in the following areas:
Unilever is confronted by the biggest challenge of improving efficiency in reducing costs, particularly in its usage of people, and the time to deliver the product to the market (Graul et al. 2006). The company’s expenses and employees’ costs are much higher than Procter & Gamble’s cost. Since P&G takes a hands-on move in e-business and innovation, the company’s position is a reactive one.
Even though Unilever appears to have gained expansion worldwide with some achievements, it gives an impression of being lacking an overall worldwide strategy. The strongest point of P&G is to gaining knowledge and giving out information on a global basis whereas it is one of the weakest factors for Unilever.
Strong entry barriers and substantial rivalry
While mergers and acquisitions keep on occurring , the product manufacturing industry is likely turn into more consolidated one, which, alongside with tough entry barriers and large competition between present rivals, will support sustainability for incumbents. Expenditure and accessibility of raw materials can carry on create a danger to smaller companies which are deficient of adequate capital reserves required balance for additional costs.
Expansion into global markets
Expansion into international markets is vital for the future growth of the company. Expansion into the worldwide industry is not novel to the product manufacturing industry. “Low consumption of household products in emerging markets – such as China and India – represents an opportunity for companies to expand their revenues and escape from the stale performance of their home markets” (Graul et al. 2006).
The fastest upcoming markets are the Eastern Europe, the Pacific Region and Latin America. On the other hand, the Asia-Pacific region is foremost as an essential emerging market for the industry, although there are some hurdles in this region, and the most prominent one is the low income.
In the light of the above findings, it can be suggested that both companies Procter & Gamble and Unilever are the market leaders and both of the companies have acquired higher profit margins by applying effective open innovation techniques. The research study highlights that Procter & Gamble is industriously involving in various activities that assure a better future of development and expansion. Procter & Gamble has made considerable investments in open innovation, and made use of acquisitions, joint ventures, and alliances for the expansion of their market understanding and approach. On the other hand, Unilever with its renewed efforts for strong line expansion and partnerships with good corporate partners like Pepsi are applying open innovation to progress their business. The Company has aligned its reserves and supplies and is fully dedicated to open innovation processes. It is generating a significant amount of funding for its Research and Development Department, and today Unilever is holding a better position in the market thus improving its present standings.
Open Innovation Methods has augmented market share of Procter & Gamble on base business and at the same time has helped the firm to focus on each business as well as investing in the emerging markets. P&G’s global strategy is also based upon innovation techniques. The company’s open innovation strategy provides innovative R&D techniques to reduce costs and at the same time increase quality and improving go-to-market capabilities. Procter & Gamble has been keenly encouraging partnerships and open innovation in nearly each and every phase of product and process development as well as the launch, which ranges from basic chemistry to packaging. P&G’s open innovation practices are positively affecting the open innovation performances. It is also highlighted in the above research study that P&G has acquired ample sufficient market awareness, embraces innovative database technologies comprising of more than 100 million customers and also exploits a combination of worldwide resource facilities and associations and alliances for promoting local acceptance and an atmosphere, which enables knowledge, transfer. Company’s R&D has enabled continuous initiations of new products, and has made expansions and reformations within their existing lines to accomplish consumer needs.
As stated in the study that NIH syndrome can have negative effects on the open innovation performance. Therefore, Procter & Gamble has uncompromisingly tackled with the NIH (not-invented-here) syndrome; the company has reproduced its prospective sources of insight and solutions. This has made selected resources accessible to the community, but also listens carefully for signals of emerging customer need. P&G is further dealing with this issue successfully and therefore progressing drastically.
In contrast, Unilever is a little behind as compared to Procter & Gamble in applying open innovation techniques. Unilever can increase its open innovation performance by transferring its in-house researchers into outdoor technology investigators; subsequently Unilever’s external technological exploration will be carried out by most of the same researchers who are currently within the company’s R&D labs. This is one way, which can help Unilever in tackling the “NIH syndrome”. The required thing is to develop a culture internally, which is appreciative of external capabilities. Historically research labs were reviewed and assessed on the basis of the number of patents they delivered, which is very internally focused. However, for open innovation, it is best to judge a research lab on the basis of number of patents it finds and manages to get access to.
The chapter has presented a comprehensive analysis of open innovation in the leaders of the product manufacturing industry i.e. P&G and Unilever. The findings of this study have therefore proved the hypothesis set out in the Conceptual framework. The conclusions and recommendations of the findings are explained in the next chapter.
Conclusions and Recommendations
The objective of the study has been addressed by carrying out a comprehensive study that is descriptive in nature. The purpose of the study has been to investigate open innovation in P&G and Unilever and then suggests which one is better. The results from the present study are summarized in the following.
This analysis has investigated open innovation practices of the leaders of the product manufacturing companies i.e. P&G and Unilever. The descriptive results reveal a number of insights. This section summarizes the main results of the descriptive analysis and ties them into the theoretical discussion mentioned above.
Open innovation has a positive effect
Open innovation practices pose a sound impact both on the capacity for fresh innovation and on the company’s innovation performance. In most cases it is the breadth of these activities – that is the range of interfaces with the environment exterior to the firm – which produces the constructive impacts.
An international, holistic approach to open innovation can generate greater profits as compared to a profound focus on a particular aspect
Combining the findings together, what seems to be most vital are the general strategies as compared to individual dimensions of open innovation.
A robust internal ability is still significant
Two findings indicate in this regard. First, the findings point out that R&D strength is an important factor determining innovation performance. The next finding is related to sourcing. There exists some varied evidence, which suggests that sourcing has constructive effects.
Global vertical collaboration is a critical factor determining high innovation performance
Innovation collaboration alongside the value chain – i.e. vertical collaboration – is much positively connected with greater innovation performance of companies.
In the light of the analysis and conclusion, the following tools can be recommended for the product manufacturing companies, which can assist them in successfully implementing open innovation in their organization.
This involves both dependence on exterior sources for the development of finishing products and processes and purchases of outside knowledge for internal improvement activities. Contribution of external sources is considered as high if product innovations or process innovations are completely developed by exterior sources.
Open innovation strategies and practices related to employment causes a firm to become more absorbent for ideas from outside and taking advantage from allies. Search is the positive constituent of this practice. It is keenly looking for novel information or screening of a firm’s setting for innovative ideas.
The coupled method is an arrangement of the inside out and the outside-in procedure as business boundaries are open in both directions. Collaboration is termed to be a way to gain access corresponding assets and to internalize information spillovers. The collaboration dimension within the open innovation practices captures the variety of different kinds of collaboration partner like consumers, suppliers, rivals in the market, etc.
For organizations considering the idea of adopting an open innovation strategy, protection IP is a critical activity in attaining positive financial benefits from the inside-out course of action. Protection can be termed as the closed dimension of open innovation since the stringent protection of IP can be regarded as a closed innovation strategy. Nevertheless, registration of IP can also be exploited as a means to commodity proprietary knowledge, in turn allowing more interaction.
Recommendations for Future Study
From the present study, it is clear that open innovation performance of P&G is better than Unilever due to a number of factors and therefore is leading the product manufacturing industry. The present study has kept its focus on the benefits of open innovation to both the companies and tools applied by them in implementing open innovation efforts. A future study can target open innovation in the leading companies of the service industry and the techniques applied by them. This will allow to extend the scope of such study and to discuss comparison of trends of open innovation in service and product industry.
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Appendix A: Financial Highlights (P&G)
|Amounts in millions, except per share amounts||2010||2009||2008||2007||2006|
|Net Earnings Margin from Continuing Operations||13.9%||13.9%||14.2%||13.3%||12.7%|
|Diluted Net Earnings per Common Share from Continuing Operations||$ 3.53||$ 3.39||$ 3.40||$ 2.84||$ 2.49|
|Diluted Net Earnings Per Common Share||4.11||4.26||3.64||3.04||2.64|
|Dividends Per Common Share||1.80||1.64||1.45||1.28||1.15|
Source: (P&G 2010).
Appendix B: Consolidated Earnings (P&G)
Source: (P&G, 2010).
|Amounts in millions except per share amounts; Years ended June 30||2010||2009||2008|
|See accompanying Notes to Consolidated Financial Statements.|
|Cost of products sold||37,919||38,690||39,261|
|Selling, general and administrative expense||24,998||22,630||24,017|
|Other non-operating income/(expense), net||(28)||397||373|
|EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES||15,047||14,413||14,885|
|Income taxes on continuing operations||4,101||3,733||3,594|
|NET EARNINGS FROM CONTINUING OPERATIONS||10,946||10,680||11,291|
|NET EARNINGS FROM DISCONTINUED OPERATIONS||1,790||2,756||784|
|BASIC NET EARNINGS PER COMMON SHARE:|
|Earnings from continuing operations||$ 3.70||$ 3.55||$ 3.61|
|Earnings from discontinued operations||0.62||0.94||0.25|
|BASIC NET EARNINGS PER COMMON SHARE||4.32||4.49||3.86|
|DILUTED NET EARNINGS PER COMMON SHARE:|
|Earnings from continuing operations||3.53||3.39||3.40|
|Earnings from discontinued operations||0.58||0.87||0.24|
|DILUTED NET EARNINGS PER COMMON SHARE||4.11||4.26||3.64|
|DIVIDENDS PER COMMON SHARE||$ 1.80||$ 1.64||$ 1.45|