James Mawson: It now gives me great pleasure to introduce this first keynote of the afternoon. David Lawson is probably one of the more visionary practitioners of open innovation; he works for one of the world’s largest consumer goods companies – Procter & Gamble, whose products you no doubt use hundreds of times a day; you see their advertising indirectly or directly even more times – so it gives me great pleasure that David has come all the way from Silicon Valley to join us here and share some of the insights that he has been developing within the venture capital market over there in Silicon Valley, for Procter & Gamble.
David Lawson, open innovation manager at Procter and Gamble [Presentation with slides]: Thank you very much and thank you for the invitation. Despite the Scottish accent, I am in Silicon Valley now and working for Procter & Gamble in open innovation. We have heard today about a lot of different tools that we use in corporate venturing and I just wanted to give a slightly different flavour as to what Procter & Ga
mble is doing today. That is not necessarily to say that this is working better than some of the tools that you are using but a slightly different venture, based on some of the successes that we have had in the past. We did have a corporate venturing arm about ten years at Procter & Ga mble is doing today. That is not necessarily to say that this is working better than some of the tools that you are using but a slightly different venture, based on some of the successes that we have had in the past. We did have a corporate venturing arm about ten years at Procter & Gamble. We discontinued that for various reasons and we are still strategic partners in a couple of funds in one of the Burrill Life Science Funds and in Cleanntech in Silicon Valley with Vantage Point Capital Partners all driven by different business decisions that we had at different times. I wanted to show the slightly different approach that we are taking and see whether it can stimulate some discussion here about ways that we might be able to collaborate.
I am part of our Global Business Development group, which is a corporate function within P&G which helps all the business units and then some of our capability organisations in Think, very overtly about open innovation. We have talked a little bit about that today.
I want to start with a bit about P&G. Most of us will know us as a company – we are very big in the UK as well – and 175 years ago today, it started in Cincinnati, where all the pigs used to come to be slaughtered and Mr Gamble and Mr Procter worked in the salt business, making candles first of all. Of course, the esterification of fat leads to other factors, and you can imagine candles led to all our different detergents and brands today. We have over 300 brands; we pride ourselves in having brands that are above a billion dollars – a somewhat arbitrary number that we have set – with 24 brands today that make $400 billion each. Some, like Pampers, are about $11 billion; Tide and Ariel is about $9 billion; so these are the ones that are really in P&G’s hands. We can get the scale, globally expand these to our retail partners and for us, it is about the consumers. Often, we look at touching the consumers’ lives and measure that on a day-to-day basis. We can’t pull a string out and measure that but we go to people’s houses. We ask them to open their cupboards, ask how many Procter and Gamble products they have and we discover that they will be shaving with products, they will be cleaning their teeth with Crest, they will be using Bounty or Charmin, so the number of times we touch the world’s consumers. Of course, we look at expanding our company today. With a billion new consumers; we are looking to get into the developing world, which is a challenge for us as we move forward.
The key thing for us, then, is that it is all about innovation. We have clearly recognised over the years that we cannot cost save ourselves into prosperity and only by having a very active, innovative culture, can we really move forward. You can get that from the history of P&G, as we have done our innovation programmes for each of the individual brands but it becomes more and more important today when I look at our organic growth rates of two to three per cent on an $80 billion company and we are looking to add the size of our total Latin American business every year.
So although we invest significantly more than most of our competitors, we are still on the exponential part of the curve. About ten years ago – it is interesting that I have not had a chance to say hello to Ben DuPont, but he is sitting at the back there – Ben was a key enabler with his company, yet2.com in the early days, in 1999-2000, when we started Connect and Develop, which is our app for open innovation. It is just the concept that there are more clever people outside of Procter & Gamble than there are internally. So it was both the process externally – who we want to partner with, what are we looking for – the most important I heard a couple of times today around what is the culture. How do you create a culture where you are rewarded for embracing ideas from outside? I have been with P&G now for twenty years – started with them in Germany – but for those people who know P&G from the old days, it was called the Old Kremlin (everything within and nothing came out) and the first people you met on Day 1 was your lawyer, your attorney, who told you, ‘You shall not talk to anyone outside’! It has been a ten year process but we now have a very active reward system in the company for embracing external innovation. We empower our scientists to be very active at conferences in the context of looking for open innovation, which is one of the tools that we use when we go forward.
When I think of who we partner with, it is basically everyone! If I look at our universities, we have a very active global university programme, collaborations globally, but the areas that I focus on specifically are the VC Community Angels and a little bit of private equity sold. The concept that we are exploring is: what happens if we take a few people from P&G, who really know what our needs are, and put them in hotbeds of innovation around the world? Of course, Silicon Valley is one of these hotbeds. I am there with a couple of other people in the R&D function, people from marketing organisations, people from our social media component, which is huge in our brand interaction today, then also a lot with our retailers – retailer without orders, so when is the inflexion point going to come that we are not lining up our products in Tesco, Wal-Mart, or Carrefour, but maybe going directly to consumer. That is a hugely interesting for P&G; 96 per cent of our products today still physically go into a store, are displayed and taken out and I think our retailers are worrying with us about when that inflexion point is going to come.
Silicon Valley, therefore but not just Silicon Valley; we have a couple of people now set up in Boston, New York and hopefully today with the UK or the European Union we are looking to get more activities to understand other venture capitalists here, who you are working with, the SMEs that you work with. Then we also have a couple of collaborations with people in Tel Aviv to manage the Israeli system as well.
Types of partnerships: I put one up. This is our corporate sign. I say we are agnostic to the kind of partners that we have and the deals. It is always about a win-win situation. If you are partnering with Procter & Gamble today you will not get our standard, ‘Here’s our Letter of Intent and our Memorandum of Understanding’. It is very much that we set out with a blank piece of paper and later on I will show you some of the deals that we have done and the reverse of that is to highlight that. Again, as I mentioned, numerous kinds of deals: some of these – one of my favourites is out in Silicon Valley where we have a joint venture with Chlorox; for those of you in America Chlorox is a key competitor for P&G. We are in court with each other it seems almost every second week but under ‘Glad Bag’ press and sealed business, the deal structure for both companies was most amenable that they spun off their Glad business into standalone equity. P&G took a 50 per cent equity stake in that; we contributed 26 more scientists who were using a technology from our Pampers and Always business – one of the thin-filled plastic sheets – and we are able to put into that business. So Glad today – and five years ago we created that joint venture, $500 million – is almost a billion dollars in sales today. That just shows how we are looking at value without being paralysed about the kind of relationship we have today.
Ten years ago, we had an aspirational goal to get to 30 per cent. We are looking at 50 per cent and now we are targeting to be even larger than that. So we are looking, in 2015, to have 75 per cent of the innovation that you see at Procter & Gamble. That would be in the technology, in the products, how we go to market, in potentially a new innovative business model, coming from outside partnerships and companies like yourselves. We have a P&G organisation and with 9000 experts we spend almost two billion dollars on R&D internally. That is not anything to be particularly proud of as a metric today. But we have many other different assets and we can help some of the SMEs that we work with to understand where there may be value that they themselves could not articulate.
I will give a couple of examples of that. The consumer research that we do today gives some fairly unique insights and that allows us to help some of the companies as they develop, maybe to get access to things such as, ‘I need to understand what consumers are interested in but my SME doesn’t focus on that today’. You might get an opportunity to partner with P&G to access that.
There are several slides here and I don’t want to take up too much time up because we can get lost in a lot of it. This is all available, non confidential information which I am happy to share with anyone afterwards. We discovered that the greatest opportunity of P&G income was scale. With scale, we started to look back and identify, in businesses that we did over the years, where we had the most significant impact. Those of you who remember the very early days in our paper business – we were vertically integrated. We had three farms in North Carolina; we shipped that up to Canada; we had pulp mills where we extracted pulp and that was the core of the Always products, or of Pampers. So we went back and once we got into acrylic acid, polyacrylates and started working with super absorbent materials, our partnerships with BASF, we were able significantly to change the infrastructure, the speed of the lines and the technology itself, to be superior. That is one example, looking back at how we changed the whole playing field there to our advantage.
The second was chemicals – you need chemicals in detergents to clean – and it was P&G in the early days, with Genentech and others, who said, ‘Maybe we can use biotechnology to create enzymes.’ The enzymes are in stable in some of the factors that we use, so with BASF and doing some co development, we were able to work on the right polymers, which release at the right temperatures and we could really change that industry, today to get out of the commodity chemical industry.
Both of these were ten year programmes so we went back a couple of years ago and looked at all the products that we sell today and asked where we would get the most scale. We have come up with nine transformative platform technologies that are all linked to things where, once you can see them, you can imagine: cleaning – so factors in cleaning. We clean hair, Pantene, Herbal Essence; we clean teeth with Crest; we clean floors with Mister Clean – all these different products, so you can imagine being a world expert in cleaning is a huge area for us. Microbio or systems biology, understanding all the bacteria and micro organisms that live on you, in you; so, irritable bowel syndrome for our healthcare business; it could our pet care business with high levels of cortisone – dogs and cats, when they get kennel stress – they are all due to micro organism changes. malassezia glabosa, which is the causative agent for dandruff, is big for our Head and Shoulders business – $2.3 billion – so we want to be understanding fundamentally these things.
For each of these platforms, we have gone through – I can share this – what is the fundamental benefit we are looking at as we go through here? The one I wanted to highlight, as an example of where P&G, as you start looking at how we can add value if I don’t come with a large wallet. So one of the concepts that we have here is around sustainable materials. I mentioned before that P&G have got into a Cleantech fund with vantage point. That was about six years ago when they were creating one of their funds and the reality was that we had no expertise in that area and one of the experiments was that we thought if we got into a venture company, who was going to be focusing an idea and doing investment, we would see more of the deal flow that would help us as we go forward. Those who are in this world understand how complicated it is but it was our slightly different focus that changed it for a few of the major players today around the molecular biological platform.
In the early days, everyone was focusing on biofuels and when we looked at that, it may be important for some of the managers running our plants but it was not too important for our petrochemical derived products today. If I look at the over 4000 raw materials that we buy in today at P&G, that are petroleum derived, these four – factors, resins and adhesives – make up about 85% of our spending pool. So I went back and said, ‘If I can’t affect these, then maybe we shouldn’t’, so we sat down with a lot of our chemists and said, ‘Companies like Amyris, LS9, Genomatic, – head of all these companies – all are making intermediates’. I could see a way to convert them to low volume but very high margin speciality chemicals but the companies themselves had no idea of what the effect would have to look like to be able to work well in a Tide product in cold water and hot water.
So our work with a company like LS9, which we publicly talked about, was helping them to understand that not only could they do a biofuels programme but that their technology platform lent itself very well to the speciality chemicals that we worked well for P&G and that we would help with our chemists, with our analytical methods and with our product formulation to validate that that was indeed the case. Because these are drop-in raw materials for us, we have a very good understanding of course of what their performance criteria have to be and their costs and that was very helpful to companies like Amyris, and LS9 when they are looking at their shoot cost analysis for their end materials, to understand how far they could go. If you were to talk to the people at LS9, they would probably say that that was additive to their business model. It was something that we had talked about, of course, but being a smaller SME starting up in the early days they did not want to diversify themselves too much. So we came along and did some heavy lifting on that side, while they focused on bio fuels and that seemed to be an interesting area.
Taking that as a model of what we can do with the transformative platform technologies for multiple business units and also for your potential portfolio companies that you are working with. Sometimes, it is just that a CPG company is perhaps not as glamorous as others and people forget that we are interested in things. I was talking today to a couple of the ladies who work with access to the European Space Agency’s technologies. There may not seem to be any relevance there but actually P&G had, four year ago, a licence from NASA for some of their very advanced modelling systems around space suits and the fit of space suits for astronauts. Those are some of the modelling programmes that we use for designing new Pampers in different parts of the world! Always think: there are applications where it is not obvious! We made a breakthrough business which we just divested to Kellogg’s, we always thought that taking potatoes and dehydrating them and then reconstituting them with water meant a lot of water being shipped around and the idea was to dehydrate them very quickly. Unfortunately, we have two mega plants which they use about 19 to 20 rail trucks of potato flakes per shift. So to dehydrate that amount would be impossible so we gave up the idea of using microwave as a technology, which was one of the options that came up, until we met Boeing in Seattle, who told us that that is the way they dry several of the layers of paint on the new planes – they put them into huge microwave ovens. So 19 rail trucks would easily fit in there; in fact, 55 rail trucks would fit in; so that is something we were looking at just before we divested the business. So often, at the interfaces of industries and technologies, we find very interesting opportunities for us.
Smart products is a hugely interesting area for us. I would say that almost every product that P&G sells today is a physical product, so unfortunately we are not in service. We do a little bit of medical service and a little bit of franchising but 98 per cent of our business is something you buy, take home, use and within one or two months it is gone. So making that product more interactive for consumers engaging is a very interesting area and this whole concept around mobile, social local mobile, solomo in Silicon Valley is very big for us and we get that interactive with the products that we have.
If I take our household care, with a couple of examples of things that you would never see as a corporate interface, this was – I don’t know if anyone has ever used magic erasers? It is a basic product, you go round and you rub it on your walls and clothes and things disappear. It is actually a soundproofing foam that BASF sells to Boeing. Then we were able to show there is a slightly different thing. It is actually incredibly cheap to make because it is used in large volumes. But we were able to come up with a completely different way of using that, just by understanding consumers’ needs and technologies. Swiffer duster is a very interesting one, Unicharm is a huge competitor for P&G in Japan and they have come up with this wonderful Swiffer technology that they have no clue how to get out in Japan. They have no aspirations to move their business out of Japan but we were very interested in this and subsequently had an agreement with them to take Swiffer and the innovation that Unicharm was still doing for the future of Swiffer in Japan. All future innovation would come from P&G. We share revenue in that and today, the Swiffer business with all the different SKUs that we have is at $1 billion.
That is looking at a competitor and not seeing them as a competitor but as a true partner for open innovation ideas. To show how small I can get, Sederma was a very small French company, working on a penta peptide for skin. There is heavy lifting for them to create that into a brand that will then go on but we came along with the Olay brand. We found a win-win relationship for them and that has now been the pillar of one of our most successful Olay launches. The Olay business today – if I look at Olay and their proforma and then some of the SK2 variants we have is about $4.5 million worth of sales.
The Swiss Precision Diagnostic company we were desperate to get into the diagnostic field. We had very little experience in that area so this was one where we went along with our friends at Alere, so previously that was in medical innovation. They had the Clearblue line of pregnancy, fertility and ovulation products, which is actually manufactured in Bedford, just near here. We created a joint venture, so that is out there. It is highly successful. We have the opportunity to increase our equity stake or not, as the deal goes on. Our mutually agreeable with the right Board conditions, and that has now allowed us to get into the health monitoring space, albeit in fertility, pregnancy and ovulation first of all, but to understand how that business works, the FDA clearance, the global expansion and the consumers, most importantly and to make that a very successful business going forward.
I want to touch briefly on our venture capital and why we think that is a particularly interesting area. As I said, we’re agnostic about at where the ideas come from. We have a group that looks at academic relationships around the world. We have collaborations with CSIR in India, with the Chinese Academy of Science, with AStar in Singapore, with Durham University, with everything. But we always felt that, between academia and innovators and becoming a larger company that P&G can work with, there is a very rich world, a little bit with SBIR but then particularly with the venture capital community globally, it serves a huge value in taking some of these small companies and taking them to the next level. My role, being as I said in Silicon Valley and now expanding that into other regions of the world, is to try to identify VCs that are strategically investing in spaces that are relevant for P&G.
These are a couple of the partners that we have very good relationships with today, just with Silicon Valley or maybe Falgship Ventures up in Boston. Sitting down with them and clearly talking about what opportunities they see, where they see themselves investing in the future, what the needs are of a large consumer goods company – that is part of the work we do. A bit of new business models: we heard a lot about incubators and accelerators and how they are getting a little more specific. There are a lot of them in Silicon Valley of course. A new one started up a couple of months ago called GreenStart, which is focused exclusively on green-tech and of course, we have never thought of a consumer goods company and how some of the technology platforms could be reapplicable to that. So we are giving a bit of help there on what our needs are and how they might fit in some of the portfolio companies they are looking to mentor and grow.
I would like to open for questions there and discussions but this is 100 per cent my job, to go out and meet partnerships, people like you, talk about some of our needs. I am more than happy to talk about how we can innovate together, where you might see value from P&G with problems that you have not seen in the past and help you develop some of the businesses that you are managing. Thank you very much for your time. [Applause]
James Mawson: We have five minutes or so for questions if there are any from the floor, please?
David Lebowe (Highlighter): There is an emerging area of technology referred to as ‘idea management’. The US government has made pretty good use of some of these products and I am just wondering if you have brought technology into this innovation ecology that you are developing, to facilitate bringing ideas to the surface.
David Lawson: Yes. First of all we have an enterprise solution that we have developed inno360, which is specifically to capture the knowledge that we have in the company with 130,000 employees. Did we ever invent that before? Was it ever documented? We have a huge process today to digitalise our whole R&D process all the way from fronting innovation through our go-to-market capabilities, to understand that better. But yes, there is a lot of knowledge that resides within the company which has not been captured and managing that knowledge is huge.
Also real data management is an enormous problem for many companies but for P&G in particular. If I launch Crest toothpaste in Warsaw, it takes me three months for AC Nielsen or Euromonitor to tell me how well I did. I know what I shift; I know from the loyalty cards who bought it; I know which coupons they cashed – the store has it on a scanner; so the data will exist, it is just that I don’t know about it. So yes, knowledge management is huge.
Jamie Falkirk (Carbon Trust): Thanks for the talk. You seem to be right at the forefront of bringing things in from outside the funnel. I wondered if you have any experience of the other way, which seems to me to be much harder – taking the cool stuff out – and what experience you have had of that.
David Lawson: That is an interesting point. I mentioned that we have 24 brands, making over a billion dollars each. Then there are a further 23 brands that make between $500 million dollars. So there are 47 of these which make up over 85% of P&G net outside sales. But we have over 300 brands. Back to your question then: what do we do with the brands that are very innovative but which just don’t make the cut in some of our resource allocation planning or some of the profitability issues that we have. We have done that in fact. There is a company in Cincinnati, Nehemiahr Manufacturing, and we have taken some of our small brands out of P&G – products like Fit or Dryell our at home – dry cleaning solutions – and in a $9 billion P&G type business, it makes $52 million. So we ground it. We have actually created an outside company to take some of these ideas, to grow them themselves and then P&G retains the right potentially to buy them back if they hit certain milestones. But it is more of a challenge. Everybody wants to do it, then as soon as you start lining up the things that are going to go, the general managers worry about all their profit disappearing and what is going to fill the gaps.
Neil Foster (Baker Botts): What other conflicts of interest and other conflicting issues are there when, as you say the largest growing area for R&D in your business is with SMEs. But you are a vast organisation and they are very small; what conflicts are there and how are those dealt with? Are you sensitive to them? Or is it your way? Is there one template or is there sensitivity?
David Lawson: I may not be the best person to answer this; you may need to ask the SMEs themselves. We poll every year. We have an independent company to do this and they poll who we are partnering with our open innovation programme and we get fairly candid feedback. It is not surprising that we are way too slow. We are far too bureaucratic and we do not have a sufficiently flat decision process that I can say yes or no. So in the last few years, we have completely flattened. I have one person. I talk to the CTO of Procter and Gamble. The answer you might get is no but you will get that within four to six weeks. Without that being in place, I have no time to write recommendations and align it with the whole line management just to say that we are interested in doing something in partnership. That has been one of our biggest challenges, as many people say, ‘I have had previous negative interactions with large corporations and I don’t want to work with P&G’. We are hoping to get better in that. We aspire to be a partner of choice at the end of the day but it is definitely a challenge.
James Mawson: That is perfect. Please join me in thanking David Lawson [Applause] I feel deeply honoured and flattered that so many Americans from the US, from Silicon Valley and Boston, have come over for this event. We have got people from continental Europe and from Asia. So it is humbling and we are delighted that you have been able to join us; thank you very much.