Procter & Gamble (P&G) was founded in 1837, but it wasn’t until 2001 that it really threw open its doors.
At that time, less than 10% of the company’s new products involved external innovation partners. Concerned that it might miss out on products that could disrupt its markets, the company set a goal to increase the percentage of products delivered through collaborative innovation to more than 50%. By 2008, it had exceeded that goal, and its external partnering strategy – dubbed Connect and Develop – had become a fundamental part of its business.
Part of the reason the strategy worked so well was that P&G was open to any kind of partnership. For example, it worked with individual inventors to launch the Crest Spinbrush, with chemical suppliers to develop Olay Regenerist creams, with university spinouts on a line of probiotic supplements, and even with competitors such as The Clorox Company on the Glad Press’n Seal plastic wrap. Today, P&G aims to deliver US$3 billion toward the company’s annual sales growth by working in conjunction with its network of outside collaborators.1
It was an open-source strategy that few companies were comfortable with at the time. But P&G credits its expanded innovation network with enabling it to bring to market products that had traditionally been beyond the company’s areas of expertise, thereby broadening its sources of revenue. The network also reduced risk. New products began hitting the market faster, quality improved, and potential competitors became partners instead.
With advances in networking, cloud computing, social media, and mobile technologies, more companies have the opportunity to connect, communicate, and collaborate with important external elements of their value chains. Building on the early days of electronic trading networks, richer collaboration networks will enable companies to engage more deeply with customers, suppliers, banks, and other trading partners. Those that partner effectively and securely can bring innovative products to market more quickly, boost efficiency, improve visibility, increase agility, and reduce risk.
A McKinsey & Company study of more than 3,000 company executives found that networked enterprises – companies that use collaborative technology to connect internal processes to customers, suppliers, and partners – outpace their peers in nearly every category of business performance, from market leadership to increased sales and profitability.2
The Costs of Not Acting
External collaboration has traditionally been viewed as a quirky anomaly – or worse, an act of desperation by companies losing their grip of their markets or their bottom lines. But the days of experimentation and desperation are over. Competitive advantage is ever-more fleeting, says Rita Gunther McGrath, an associate professor of management at the Columbia Business School and author of The End of Competitive Advantage.
Customers are fickle, product lifecycles are shrinking, and companies won’t keep up if they go it alone. Richer business networks will be the platform on which successful companies innovate, collaborate, grow, and continually evolve – in terms of both speed and scale.
The Don’t-Do-It-Yourself Movement
“Ants aren’t smart, but ant colonies are,” says Quentin Fisher, lead partner in big data and analytics at CCS.
The real value of the interactions between companies occurs at nodes throughout the network.
It has taken companies a long time to come to that realization. For example, one of P&G’s first forays into supply chain collaboration beyond its own walls was a pilot to test an automated continuous product replenishment program with Kmart. By creating a shared information system of inventory and demand, P&G surmised, supplier and retailer could improve supply chain efficiency, cutting costs for both. But Kmart didn’t see it that way. When the pilot was finished, Kmart bowed out. So P&G approached Kmart’s then-smaller competitor, Walmart.
Walmart’s Not Smaller than Kmart Anymore
Just as individuals have moved past one-to-one e-mails to social networks to stay connected and informed, linear supply chains are transforming into collaborative supply networks, enabling companies to operate and collaborate efficiently. Thanks to the emergence of new technologies such as cloud computing, social media, analytics, and mobile systems, there is an opportunity to create enhanced networks that enable greater levels of engagement, transparency, collaboration, and trust in the business world. “People can be connected at a much lower level in organizations,” says Fisher. “Companies can be much more agile and adaptive. They can make faster and better decisions.”
The Great Flattener
Open, collaborative business networks can flatten the organization, adds Fisher, putting small to midsize enterprises on the same footing as much larger companies. Open innovation, for example, is being employed by companies of all sizes to tap the knowledge of individuals outside their organizations to solve business problems or come up with product innovations (see The Best Idea Wins).
The Best Idea Wins
Companies aren’t looking just to their major suppliers to solve big, hairy business problems or come up with the next big thing. They’re connecting with smaller groups and individuals whose ideas might otherwise have to come through their front doors. Such companies as Coca-Cola, Netflix, Apple, and Anheuser-Busch have incorporated virtual strangers into their businesses through open innovation networks, including InnoCentive in the private sector and Philoptima Consulting for nonprofits, and idea competitions such as hackathons.3
General Mills launched its Worldwide Innovation Network back in 2007 and says it contributed to the development of several products in its first year, including low-sodium soups and fizzy yogurt.4 The New York Times recently profiled an amateur inventor-for-hire who cracked the code measuring the texture of granola bars, for which General Mills is now seeking a patent.5
Sometimes processes and products are delivered fully formed; in other cases, inventors offer pieces of the solution that companies then assemble to achieve breakthroughs.
As tools for collaboration, communication, and joint design become more powerful and less costly, open innovation processes become easier to integrate into the business network. “We’re seeing [open innovation] in the business environment that wasn’t possible at scale before in the enterprise,” says Fisher. “That’s transformational.”
In many cases, employees are already building their own ad hoc external collaboration networks to do their jobs more effectively, leaving companies open to data loss, intellectual-property exposure, and regulatory risks. Approximately 60% of employees are using consumer tools for collaboration, according to a 2013 survey by Hurwitz & Associates.6 Not surprisingly, while 76% of companies have visibility and control over data shared inside their organization, just 30% felt the same about information shared outside their firewalls, according to survey results.
Going Outside Used to Hurt
Yet businesses remain largely disconnected, in part because doing everything yourself used to be the best way to do business. In 1937, Nobel Prize–winning economist Ronald H. Coase introduced the concept of transaction costs – the costs incurred from buying or selling things – and showed that companies could reduce those costs by performing functions in-house rather than dealing in the marketplace, where roads were still mostly dirt and robots were things you read about in pulp fiction.
Since then, of course, transaction costs have dropped steadily, thanks mostly to better transportation networks and greatly increased automation in the supply chain. And they plummeted with the introduction of PCs and distributed networking. Yet companies still haven’t become comfortable doing business outside their four walls for a few good reasons (see Why We Don’t Collaborate).
Why We Don’t Collaborate
There are a number of barriers to increased openness outside corporate boundaries. But as the value of collaborative business networks grows, these hurdles are likely to be overcome.
Security. When the business network extends beyond a company’s four walls, the potential security risks multiply. Forget the firewall; how do you lock down a borderless network? The so-called “zero trust” model is one data-centric approach to security that would still enable an ecosystem of partners, contractors, suppliers, and customers to connect.
Lack of standardization. Highly customized legacy systems and a variety of technology providers have always made standard data sharing difficult. But just as companies have recently shown a willingness to forgo customization and control in exchange for the convenience of software as a service and cloud technologies, they’ll be willing to embrace the standardized offerings that will enable increased data and intelligence sharing through business networks.
Government regulations. Concerns about data security and ownership persist, particularly outside the United States. Ultimately, many countries are leaning toward supporting the level of openness required to participate in the global economy and, as with the technology itself, standards are likely to emerge.
Cultural resistance. Often, people hesitate to share information and resources beyond the corporate boundaries for classic human reasons, such as a fear of loss of status and control. But that opposition is likely to dissipate as the demands of the marketplace require increased collaboration to compete.
The Advent of Knowledge-Based Sourcing
For years, the focus of most procurement organizations was to wring costs from the company’s base of suppliers. From that perspective, says Bill He, vice president of global strategic sourcing for Kimberly-Clark, “the low-hanging fruit is gone. You can only reduce procurement costs by 10% a year for so long.”
But it isn’t just that procurement is generally about as collaborative as a game of chicken; the process also prevents companies and suppliers from knowing much about each other. A company sends out a request for proposal (RFP), gets proposals, picks a winner, and negotiates a deal. But, says He, that process only reveals a small fraction of what the purchasing company really needs and about the same amount of what the supplier could actually provide. “It’s just the tip of the iceberg,” He explains.
However, an emerging strategy known as knowledge-based sourcing allows suppliers and customers to share much more information up front to jointly identify opportunities that will deliver benefits for both parties, whether it’s three months from today or five years from now. “Knowledge-based sourcing is the future of the business network,” says He (see Kimberly-Clark: How Sharing Creates Market Advantage).
From Supply Chains to Business Networks
Companies are beginning to define the supply chain as a much broader business network, starting with their supplier’s supplier and ending with their customer’s customers, says Lamar Chesney, an independent business consultant and former supply chain and finance executive.
Business networks must allow companies to transact quickly, collaborate in real time, and access information from their network of partners when and where they need it. But difficult as all that is to pull off, it’s just table stakes. The trading networks of the 1990s and early 2000s offered these features and they all failed.
That’s because the trading networks were little more than passive pipes connecting companies together. Companies got out of them only what they put into them. And they already had ways of communicating and collaborating in this way, whether by phone, e-mail, fax machines, or (gasp!) meeting in person.