Saturday, January 20, 2007

The Value of Co-Creation

I have been reading Wikinomics by Don Tapscott and Anthony Williams. Overall, it is a good book. One of the arguments the authors make is that corporations need highly permeable boundaries to foster innovation in their organizations and be successful. In the software industry, we have seen how IBM and others have leveraged the open source movement to co-create and drive innovation in the industry. IBM for instance estimates that it saves in R&D around $1 billion a year by investing in the Linux community. And in its hardware business alone, IBM sold $2 billion worth of Linux based hardware in 2006. Those make strong arguments for the value of co-creation, right? Well, wait to hear how P&G leverages co-creation. In the late 1990's, P&G realized that out of a $1.5 billion R&D budget, generating a lot of patents, less than 10% of the produced patents resulted in products. So P&G's CEO, A. G. Lafley, set out a pretty aggressive goal: that 50% of P&G new products and service ideas come from outside the company by 2010. We aren't talking about outsourcing here, but true co-creation. Identify most promising ideas out there that help P&G innovate and incorporate them into P&G R&D.

The result is big time dividend as mentioned in P&G's New Innovation Model in March 2006, by Larry Huston and Nabil Sakkab on HBS Working Knowledge.

More than 35 percent of our new products in market have elements that originated from outside P&G, up from about 15 percent in 2000. And 45 percent of the initiatives in our product development portfolio have key elements that were discovered externally. Through connect and develop—along with improvements in other aspects of innovation related to product cost, design, and marketing—our R&D productivity has increased by nearly 60 percent. Our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a percentage of sales is down from 4.8 percent in 2000 to 3.4 percent today. And, in the last two years, we've launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company's stock collapse in 2000, we have doubled our share price and have a portfolio of twenty-two billion-dollar brands.

That's pretty amazing and should be a call for action for any executive out there. Co-creation works in a big way!

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