By Azra Brankovic, IESE Research Associate

The Game-Changer: How You Can Drive Revenue and Profit Growth with Innovation, co-authored by Procter & Gamble Chairman and CEO A. G. Lafley and consultant Ram Charan, is a tedious read, but it turns out to be a rather hot book on innovation. Two main parts of the book cover two of the most relevant topics in innovation today: the first concerns a change in thinking, which is mainly presented in terms of a switch to “design thinking,” while the second is about implementing innovation. The third part of the book talks about what makes for an innovation culture.

The message of the book is that innovation can be a successful business strategy that can be integrated into everyday business practices. Lafley took the post of CEO in 2000, in a difficult time for the company. Led in part by the history of P&G’s business being based on breakthrough innovations—such as Tide and Pampers—he decided upon innovation as the organizing principle of the company, the fuel of its organic growth. P&G has had good results with this strategy.

Game-changing innovation
The authors define innovation as the conversion of new ideas into revenues and profits. They differentiate it from invention, which they describe as an idea that is often turned into a product or system but doesn’t necessarily make a difference in “financial results.” The example they give is the invention of MP3 players by the Japanese in the early 1990s, which they call an invention, not an innovation, whereas with the iPod “the category exploded.” “Real innovation can change the context—the market space, the customer space, the competitive space, the societal space—in which a business operates,” they say. Hence the title of the book: “Changing the game, then, means not being hamstrung by the deep-rooted conventional wisdom of your business and industry, but rather seizing the initiative to imagine a new game or a new space and, thus, shaping and controlling your destiny.”

Paradigm shift
It’s a bit ironic that Japan’s MP3 player didn’t take off, as Lafley credits the roots of his being a “design believer” to when he lived (and worked for P&G) in Japan. From the attention given to design in Japan he realized that “Good design is a catalyst for creating total experiences that transcend functional benefits alone and delight consumers. It is a catalyst for moving a business from being technology-centered or product-myopic to one that is more consumer-experience-oriented.” This widening of his vision, and P&G’s subsequent move from a technology-push to a consumer-pull system with a concomitant pouring of funds into immersion research, reflect a paradigm shift that many corporations appear to be going through recently (for examples of a number of CEOs talking about their experience with it, see CNBC’s recent five-part series, The Business of Innovation; for more on design thinking at P&G, see recent BusinessWeek article).

The previous model where innovation focused on R&D coming up with new products and then “throwing them over a wall” to the rest of the organization has changed to one of people from other departments being involved in the innovation process, including business leaders who take ownership of a project from start to finish. In this manner, Lafley explains, innovation became a repeatable process that goes beyond just new products, and whose risk is managed. As a result, he points out, P&G’s R&D productivity is up 85% whereas R&D spending is up only modestly from 2000.

The reframing has enabled the company “to see strategic choices in a different light,” according to Lafley. “Businesses and brands previously considered ‘mature’ could then be looked upon as growth opportunities.” P&G looked at its core brands deeply and drew a lot more money out of them.

Operationalizing innovation
The second part of the book might be the more relevant to many readers, as much of the difficulty people cite regarding innovation concerns its implementation. Innovation at P&G is integrated into everything by putting it into business plans, budgets, and reward structures; as the authors put it, “the business goals and strategies ground and integrate the innovation program into the business.” More specifically, they say, “All the rhetoric of innovation, of grand strategies, and big visions, culminates in reality in the budget.”

At P&G, each business unit has to identify all the innovation programs of a certain size in the context of the budget and the business plan. If Business A is forecasting $1 billion in sales, it has to identify seven to ten innovations that are the primary building blocks. The business is also required to track where each innovation is in the process—going to market, in development, or being qualified. This is tracked over a period of three to five years.

Budgeting for innovation “should not be difficult,” the authors say. “Almost all innovation projects are costed; the teams know how much they have to work with, and what the expectations are. Embedding this in the budget should be simple. But the effects of doing so are profound, building an innovation-related architecture that lets managers know what they have to do.”

The book also suggests it can be easier to spot the value of and manage innovation initiatives when they are treated separately rather than lumped into an R&D budget which, when cost cuts need to be made, is cut without regard to whether potentially promising initiatives are being jettisoned. They suggest a better approach is to separate out the innovation projects, linking the cost for each with forecast revenues and gross margin improvement. (A recent McKinsey Quarterly article, which talks about how a division structure can mask big differences in the performance of smaller units, similarly discusses how “a finer-grained approach can better show where value comes from.”)

More granularity can also be achieved by grouping innovation projects for measurement—as disruptive high risk / high reward (long term) and low risk / low reward (short term). “Such groupings demonstrate that managing disruptive projects is different from managing those that are short term.” You don’t want to be overly granular in managing innovation, though. “Think about measuring innovation as you would an investment portfolio, where you are concerned with the total return rather than individual stocks, bonds, or mutual funds. The key is not to measure each project individually and then declare victory or defeat, but to measure total investment over a period of time compared to total output. This pools high- and low-risk projects and encourages people to take canny chances.”

Monday morning
The Game-Changer elaborates on many other elements of P&G’s innovation architecture (as well as providing examples from GE, Honeywell, and DuPont), such as funding structures; innovation project teams and centers; working with suppliers and retailers; innovation reviews; metrics used; and so on. An innovation culture is defined as one of “openness, curiosity, networking with suppliers and customers, and the ability to say, ‘I have a problem I can’t solve. Can someone help?’” The authors address fears about going into innovation at all because of its high rates of failure, fears of not being imaginative enough and sounding stupid in front of others, and the need to be courageous and inspiring as a leader of innovation. To help such leaders start putting practices into action, each section concludes with “Ask yourself on Monday morning” questions, which guide you as to what you should be thinking about and what actions to undertake.

If you want a glimpse of the dominant paradigm of innovation now, you will find it in The Game-Changer, and if you want to act come Monday morning, it can help you out.

August 2008. All rights reserved.

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