Monday, September 10, 2012

Did Decentralizing R&D Hurt P&G?

Coleman Lochner at Bloomberg Business Week writes today about the struggles at P&G.  Specifically, Lochner examines the slowdown in product innovation at a firm famous for its breakthroughs in the past.  Lochner displays a chart, posted below, which shows the slowdown in the company's R&D spending over the past few years.

At Procter & Gamble, the Innovation Well Runs Dry

Why the decrease at a firm so well known for innovation?  After all, Lafley made a major push to increase the rate of innovation.  He invested heavily in ethnographic marketing research and the introduction of design thinking methods.   He also embraced open innovation and collaboration with external partners.  Many observers credited these moves with accelerating the pace of innovation at P&G during his tenure.

Lochner offers an interesting explanation for the decrease in R&D spending, given that Lafley did emphasize new product development so much.  He writes,

 "Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown."

 I found this observation very powerful.  Often, we advocate decentralization in organizations, because we want to empower those closer to the customer.   However, this example demonstrates a key downside of decentralization.   If you couple decentralization with an incentive scheme that may put a bit too much focus on short term profits, then you could get decisions that are harmful in the long run.   The business units may simply feel too much pressure to "make the numbers" and not invest enough for the long run.   Leadership development programs that rotate executives often into new roles also can result in excessive focus on short term results.

One caveat though... Much research shows that R&D spending is not strongly correlated with successful new product development.  It's not just how much you spend; it's how you spend it.  Therefore, before we can jump to conclusions about the chart above, we would need to know more about how P&G is engaging in R&D.  Perhaps the challenges lie in the methods and processes, not just the spending levels. 

No comments: