Chapter 11 New Economy Innovations from an Old Economy Giant

1. Chapter 11New Economy Innovationsfrom an Old EconomyGiant By Shu-Chen Chen

2. Procter & Gamble (P&G) • A world leader of package goods industry. • Nearly $40 billion in global sales in fiscal year 2001 and more than 250 brands marketed in 130 countries • Had traditionally been a closed society, extremely protective and secretive about its technology • The depth and breadth of P&G’s technology is almost universally underestimated. • Employs more than 8,900 R&D professionals, including more than 1,200 MDs and PhDs, at its 18 R&D facilities in eight countries on four continents. • Spent $2 billion in FY2001 in R&D investment - 4.5% of its sales, a ratio similar to those of such “technology leaders” as General Electric, DuPont, 3M, Dow, and Canon. • Holds more than 27,000 active patents worldwide and is granted more than 3,000 new domestic and international patents per year.

3. Old Patent Policy • The technological treasure trove of P&G traditionally had been kept under wraps, just as it has at most other manufacturers. • P&G’s secretive and protective culture controlled the company’s patent policy, which focused on internal utilization rather than maximizing value externally. • The result of this insular corporate culture was a limited value extraction of P&G’s intellectual property.

4. 4 key factors Driving P&G toward licensing and external commercialization • More than 90 percent of P&G’s 27,000 patents are not commercialized. • The cost of technology is going up.

5. 4 key factors Driving P&G toward licensing and external commercialization • Today’s reality has created a need to acquire technology. • Due to the increased costs and shorter product life cycles. • There’s a growing opportunity to reapply P&G technology. • Other companies can benefit from P&G’ s technologies.

6. The Licensing Sweet Spot • P&G’s External Business Development & Global Licensing (EBD&GL) organization is responsible for looking for licensing and external commercialization opportunities. • First step: looked for licensing opportunities where the licensee, the retail customer, and the consumer could all benefit – known as the licensing sweet spot. • Notable among those early successes - the licensing of P&G’s calcium citrate malate(CCM) technology.

7. Four Key Principles for New Approach to Licensing • Profits from licensing agreements would now flow back to the business unit that had developed the technology. • Provides unit managers with motivation to seek external commercialization opportunities. • All technologies became candidates for externalization, which serves as a strategic rationale for: • Increasing the pace of innovation. • Increasing its speed to market. • Increasing return on investment.

8. Four Key Principles for New Approach to Licensing • The company established a new, more broadly based licensing organization. • It broadened its scope beyond patent licensing. • EBD&GL now includes licensing P&G trademarks and know-how.

9. Redefining Competitive Advantage at P&G • Since implementing the new approach, P&G has increased the number of deals it closes fourfold, it’s generating more than a sevenfold increase in annual income. • Old Enconomy Definition: • I’ve got it . . . you don’t • New Economy Definitions: • I’ve got it . . . you’ve got it . . . I’ve got it cheaper. • I’ve got it . . . you’ve got it . . . I’ve got it with no (or less) capital. • I’ve got it . . . you’ve got it . . . I’ve got it with 18 months’ lead time. • I’ve got it . . . you’ve got it . . . now you follow my technology. • I’ve got it . . . you’ve got it . . . and I got to market two years faster than I could have alone. • I’ve got it . . . you’ve got it . . . I make money when I sell it, and I make money when you sell it.

10. Real-World Success and Opportunities - Licensing Patents and Technologies • Tide • A discount merchandiser was selling P&G’s Liquid Tide detergent in proprietary, 300-ounce, self-dispensing bottles, which exaggerated Tide’s per-ounce price premium. • Solution: Licensing the 300-ounce bottle to the competitors. • Result: The playing field was leveled for Tide, which could then compete successfully, based on its superior formula and brand equity, despite the premium price. The business has grown markedly as a result.

11. Real-World Success and Opportunities - Licensing Patents and Technologies • Nodax • A biodegradable plastics technology for a biodegradable disposable diaper. • P&G’s potential use of the technology in diapers is extremely limited. However, it can be potentially used in a wide range of fields: compostable trash bags; agricultural films; fertilizer; disposable, safely biodegradable biomedical devices; disposable plates, cups, and utensils. • It’s a good candidate to license to other companies.

12. Real-World Success and Opportunities - Licensing Trademarks • Pampers – a famous brand name in baby diapers • A new licensing agreement with Dana Undies places the Pampers brand name on a line of high-quality infant and toddler underwear. • The Pampers brand name assures consumers of the clothing’s quality. • Dana gets not only the brand, but also access to additional retailers through P&G’s sales network. • Retailers place the products near the Pampers diapers in the store, where parents can easily make the brand connection and purchase decision. • P&G gets the brand-equity interest of meeting consumers’ needs.

13. Real-World Success and Opportunities - Licensing Trademarks • Noxzema: cleaning creams & Old Spice: deodorant and fragrances • P&G’s focus had created orphan products in the brand families. • Licensed to the shave-product specialist Universal Group, which is able to give these products the development, distribution, and marketing attention they need to succeed. • A win-win-win: • Consumers get traditional and new Noxzema and Old Spice products they can depend on • Universal Group gets brands with built-in equity • P&G gets royalties, plus the equity interest that comes with retaining loyal consumers and reinforcing the brand positionings

14. Real-World Success and Opportunities - Licensing Know-How • Reliability Engineering, P&G’s proprietary technology for improving manufacturing efficiency • Reliability Engineering: a set of ‘tools’ that could be applied to systems in any product category anywhere in the world. • Using computer models to predict the reliability of specialized manufacturing systems. • P&G is exploring licensing the Reliability Engineering technology to manufacturing companies.

15. Real-World Success and Opportunities - Licensing Know-How • P&G’s global marketing leadership and expertise • Partnered with Emmperative to provide other companies with best-practice marketing know-how, including strategy development and deployment, concept development and testing, pricing strategy, package design, etc. • Initial Emmperative customers include the Coca-Cola Company, BBBO Worldwide, and Philips Domestic Appliance and Personal Care division.

16. Real-World Success and Opportunities - Technology Donation • A new program designed to extract value from, and realize the further development of, promising technologies the company has elected not to pursue. • Strategic objectives achieved by technology donation: • Tax benefit • Fostering development work that can deliver whole new revenue streams for universities and research institutions. • Resulting in further development of important new technologies that otherwise may not have been commercialized. • Giving the next generation of scientists real-world experience, and it connects them to P&G’s culture of scientific innovation.

17. Marketing P&G’s Intellectual Properties • EBD&GL has adopted the philosophy that IP marketing is best accomplished by making one-to-one connections with potential customers and partners. • The process of “connecting” incorporates both proactive and reactive elements shown in the following picture.

18. Conclusions • In New Economy, because of increased costs and shorter product cycle, even an innovative company like P&G cannot afford to go it alone in developing the new technologies it needs. • A company’s intellectual properties include the technologies it develops, the brand names, the marketing skills, manufacturing know-hows, etc. All of those are candidates of externalization to create the maximum value of the company. • P&G is a good example of a company that was secretive and protective about its technologies but now is able to maximize the value of its intellectual properties. This transition brings it a large income increase.