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By: Jeb Gleason-Allured
Posted: September 4, 2009, from the September 2009 issue of GCI Magazine.

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P&G sources its fragrances and flavors internally, from its tiered list of suppliers or in creative collaboration with these suppliers. As a result, the company purchases everything from individual aroma chemicals to bases to specialties to finished fragrances and flavors. In addition to its in-house creative staff, P&G maintains four perfume oil manufacturing plants around the world. The only aspect of the business the company does not participate in is the manufacture of new aroma chemicals. “It is a close partnership,” Hicks says of P&G’s fragrance and flavor suppliers, “particularly given our size. The magnitude that this business represents to our top-tier partners is very significant—nine-figure significance.”

Of the creative collaborations, Hicks says, “We believe that to be a major competitive advantage. If I look at it from a creation standpoint, a lot of what we do is collaboration. We get what we call perfumer-to-perfumer collaborations between a P&G perfumer and a [fragrance] house perfumer. Those collaborative partnerships often generate the best perfumes I get. You’ll find that the two artists will create together a perfume that is different from what each of them individually would have been able to do because they all create in the context of their own history [and background]. If you get a healthy relationship between two perfumers, they will create wonderful things together that they may not have been able to do individually.”

“Would we ever go to a world where I don’t need fragrance companies and I only [formulate] internally?” asks Hicks. “No, I’d lose a lot. We’ve also looked at it the other way. Would I ever abandon internal perfumer capabilities and go completely to outsourcing from fragrance houses? No. I get some enormous advantages because of that capability we have inside.”

Connect + Develop

P&G’s close relationship with fragrance houses mirrors its overall strategy of open innovation, highlighted on its Connect + Develop innovation portal (www.pgconnectdevelop.com). As noted by P&G’s chairman and former CEO A.G. Lafley, “External collaboration plays a key role in nearly 50% of P&G’s products.” Hicks explains that the company has developed relationships with academic institutions, suppliers, entrepreneurs, venture capital startup firms and even competitors in its focus on both internal and external R&D opportunities. In addition to acquiring so-called “cooked,” or near-complete, innovations such as Swiffer and the Mr. Clean Magic Eraser, P&G products such as Pantene, Downy and Tide contain components derived from Connect + Develop relationships. “It has made our R&D far more productive,” says Hicks. “We don’t feel like we have to do everything. It’s brought us better ideas. It has changed the culture of R&D within P&G.”

Formulation Innovations in Sustainability

The classic model of innovation has sought to deliver new technologies to brands in order to offer new benefits to consumers. Today, Hicks notes, innovation has broadened its scope to include cost reductions, optimized business processes and sustainability—without a loss of performance or quality for the consumer. “We own iconic brands that have lasted for decades,” he says. “Our outlook is that brands can live forever, if you manage them right. We’re going to be here 172 years from now, still trying to improve the lives of consumers worldwide. To do that, we have to have a sustainable world, and we have to contribute to that sustainability.” While P&G directs some sustainability efforts toward the control of energy consumption and water usage in its own operations, it also views sustainability as it relates to its brands. “We don’t want consumers to face major trade–offs between product performance and brand experience and sustainability,” says Hicks. Meanwhile, he says that sustainability must be meaningful, and thus carefully measured. Here Hicks cites the example of compacted laundry detergents in North America. “The sustainability impact of that is huge: the reduction in petrochemical use, the reduction in shipping water around in this country, the value we could pass on to consumers was [significant].” In another instance, P&G performed cradle to grave energy consumption analyses of its brands, following the trail from suppliers to consumers. Hicks says the company was surprised by the findings. “The largest energy consumption associated with our entire business is the energy that consumers use to heat up the water in their washing machines,” he says. “Nothing else even comes close. The innovation we did was Tide Coldwater.” Here again, the key lay in providing the benefit without sacrificing performance. “I think where we’ve seen things not work is when you force consumers to have to make that trade–off: this is more green or sustainable, but your clothes won’t be as clean. We don’t think that’s necessarily smart business.”