One key assumption underlying the open innovation model is that combining the best of
internal and external R&D will more likely lead to a competitive advantage. This requires
that the company must continuously upgrade its internal R&D capabilities to enhance its
absorptive capacity —its ability to understand external technology developments, evaluate
them, and integrate them into current products or create new ones. 75 Exhibit 7.14
compares and contrasts open-innovation and closed-innovation principles.
An example of open innovation is Procter & Gamble’s “Connect 1 Develop,” or C 1 D
(a play on research and development, or R&D). 76 Because of the maturing of its products
and markets, P&G’s CEO A. G. Lafley decided it was time to look outside for new
ideas. P&G is an $85-billion company whose investors expect it to grow at least 4–6
percent a year, which implies generating between $3 and $5 billion in incremental revenue
annually. P&G was no longer able to generate this amount of growth through closed
innovation. By 2000, P&G’s closed innovation machine had stalled, and the company
lost half its market value. It needed a change in innovation strategy to drive organic
growth.
P&G’s Connect 1 Develop is a web-based interface that connects the company’s
internal-innovation capability with the distributed knowledge in the global community.
From that external community, researchers, entrepreneurs, and consumers can submit
ideas that might solve some of P&G’s toughest innovation challenges. The C 1 D model
is based on the realization that innovation was increasingly coming from small entrepreneurial
ventures and even from individuals. Universities also became much more proactive
in commercializing their inventions. The Internet now enables access to widely distributed
knowledge from around the globe.
External collaborations fostered through the worldwide Connect 1 Develop network
now play a role in roughly 50 percent of P&G’s new products, up from about 15 percent
in 2000. Successful product innovations that resulted from P&G’s open innovation model
include “Pringles meets Print” (sold for $1.5 billion in 2011