Procter & Gamble: Mastering the Art of the Innovation Tournament
Procter & Gamble (NYS: PG) CEO Bob McDonald is a man with a plan. Last year, he and his company declared a bold vision -- one that includes making all products and packaging with recycled or renewable materials and ensuring that no waste from P&G products touches a landfill. Prominent in the vision, too, is powering all plants with renewable energy. Because all of this will take decades to achieve, P&G also declared a series of shorter-term, 10-year goals to guarantee that the company is making progress. The 2020 renewable-energy goal is to power 30% of P&G's energy needs for 180 plants worldwide with renewable sources.
It's a tall order. How do corporate strategists and engineers -- expertly tuned to the production of some of the world's leading consumer brands, such as Bounty, Pampers, and Clairol -- achieve an ambitious goal in an entirely different discipline, and achieve it fast? As more companies recognize the need to transition to non-fossil fuels, corporate managers in many industries will face this same question.
P&G knew the company needed an innovative approach to reach its goal. To do this, it wanted to partner with the best experts in the field to uncover new solutions to this complex sustainability challenge. From July 26 to July 28, 20 P&G managers and engineers gathered at a company facility in Cincinnati. Their secret weapon: an innovation tournament. With the help of George Favaloro, managing partner at Viridis Strategy Group in Waltham, Mass., and Karl Ulrich, Wharton vice dean of innovation and author of a book on innovation tournaments, P&G held a two-day innovation tournament with external experts to brainstorm and develop plans for plants in Cape Girardeau, Mo.; Mariscala, Mexico; and Kuantan, Malaysia.
While P&G has been able to reduce energy intensity by 52% over the past nine years, these three facilities represent the company's highest energy-consuming businesses in different regions of the world. "We can use our scale to apply the learning from those sites to most, if not all, the other sites and also across different regions," says Willie Johnson, P&G's product supply sustainability leader. One of the company's largest power users, the U.S. plant makes paper products, including Bounty, Charmin, and Pampers. The Mexican site produces beauty products, such as Pantene, Head & Shoulders, and Clairol through processes requiring heating and cooling. The Malaysian facility makes raw materials for detergents, such as Tide and Dawn.
Inviting a broader circle of participants
In the search for green energy to power these sites, P&G's use of an innovation tournament itself may not represent a new phenomenon. But its successful management of the process is an art that many organizations are seeking to master. Done well, an innovation tournament can escalate an organization's ability to find innovative solutions by opening up the process to a broader circle of participants, notes Ulrich. Just as the TV show American Idol auditions a quarter million aspiring pop stars, filtering down to one winner, and the X-Prize Foundation awards prizes for the best proposals solicited worldwide to solve global challenges, innovation tournaments solicit a large number of ideas and filter them down to the most exceptional.
Instead of a far-flung event like X-Prize, P&G chose a more controlled process, inviting seven external experts to propose and brainstorm solutions with a team of 20 internal experts. Common among corporations that need to protect proprietary information, this format also made sense in P&G's case "because a lot of it was about process innovation," says Favaloro. "We wanted to engage people in an ongoing process that involves interaction between internal and external teams. They needed to be steeped in the process itself, instead of the next big widget."
In many ways, the tournament's success turned on P&G's mindset. Since 2007, through its Connect+Develop program, P&G encourages employees to create ongoing relationships with outside experts, recognizing that internal resources alone may not provide all the answers. At the Cincinnati tournament, "the P&G experts who live and breathe these problems as their jobs were very open minded," notes Ulrich. "There was no territorial pushback, which you often see."
Moreover, significant spadework at the outset resulted in a fast-paced, productive final round in late July. To start, P&G's internal teams delivered in-depth briefs via webinar to bring the external experts up to speed on the plants so they could frame more workable, tailored recommendations. Then the outside experts submitted 150 ideas, which the internal and external teams together winnowed to 45 via online voting. By the time the groups met in person, "it was a supercharged environment," says Favaloro. "Everyone was up on the problem and had already worked on it independently." Adds Stefano Zenezini, P&G's family-care product supply vice president: "One hour into the discussion, [and] you're already discovering new things."
One of the first "eureka" moments came when external expert Ian Bowles, managing director of Rhumb Line Energy LLC in Boston, informed the group that the Malaysian government had instituted incentives for solar and other renewable energy. Bowles, who was formerly the Massachusetts secretary of energy and environmental affairs, brought government policy insights that the P&G team may not have considered. "This immediately opened up opportunities for solar and biomass," notes P&G's Zenezini. In addition, the internal P&G team had originally suggested using biomass from residue from the palm industry, and that also became a major solution for the Kuantan facility.
The elephant in the room
But coming up with solutions for every plant wasn't easy, given P&G's stiff criteria. P&G needed the green energy options to clear its internal rate of return benchmarks and use proven technology at or near the site, while also providing additional renewable energy to the world on a scale big enough to make a dent in the company's 2020 goal. "The return hurdle was the elephant in the room," says external green energy finance expert Scott Gardner, managing director of Gardner Energy Advisors in Santa Monica, Calif. "It made a lot of the projects hard to achieve."
The U.S. plant at Cape Girardeau, Mo., proved a case in point. "The U.S. site was the most difficult," Bowles notes. "The cost of power is incredibly low there, and there are limited state incentives." Yet the site provided plenty of land and access to the Mississippi River. Members of the group decided that relatively low-cost biomass energy fueled by wood or agricultural feedstock nearby was the best solution, and they also agreed to explore hydropower and biogas options.
Run-of-the-river hydro, in which power is harvested from natural currents via small generators in the water rather than by dams, was not high on P&G's original list. But after input from external experts, P&G is now watching this emerging technology for the medium term. "My guess is it will be seven to 10 years out before it's widespread," says Scott Borcherding, alternative energy leader in P&G's global facilities engineering. Meanwhile, P&G has since largely discarded the idea of biogas at Cape Girardeau because the agricultural and organic waste available locally to generate the methane or natural gas falls short of the plant's power needs.
The Mariscala, Mexico, plant raised some of the most provocative exchanges during the tournament. For the easy part, solar photovoltaic power was an obvious suggestion from external experts for sunny Mexico. But because the Mexican government provides no incentives for solar, that option was not financially feasible. The group settled instead on using solar energy for heating, rather than electricity. They also decided to explore biomass, identifying possible local sources of forestry or agricultural waste.
The biggest question for Mexico, as well as for the Missouri site, was the potential for wind energy. "You can't look at renewable energy without looking at wind" because it is so competitive in cost, says external wind expert Chris Varrone, president of Riverview Consulting in Irvington, N.Y. But none of the sites had enough wind to generate more than 1% of each plant's electricity.
Says P&G's Borcherding: "It became clear to all of us that if you want to make a significant impact on energy use, you need multiple turbines. Most of our plant sites are sized for a manufacturing facility, a parking lot and maybe a little room for growth. We don't have vast plots for 80 wind turbines." Yet if P&G could locate a wind farm at a more promising location offsite, it could generate 10 megawatts or more per installation and wheel the energy to the plant, or, if too far away, sell the new green energy to the grid. Mariscala could provide a proving ground because Mexican utilities allow power produced anywhere to be distributed onto the grid for use anywhere else via a complex accounting system.
From this discussion came one of the biggest differences in perspective between the external and internal teams. External finance expert Gardner suggested that P&G should add utility-sized renewable power projects to its portfolio. "Their overall electricity demand is 800 megawatts worldwide," says Gardner. "At each plant, if you have less than 5 megawatts of renewable energy potential, that's not significant enough to move the needle to 30% renewable energy at each plant. You could get 25% of your goal with one few-hundred-megawatt wind project."
The P&G team was intrigued enough to ask for more information, and Gardner spent the first evening of the tournament preparing a presentation on project finance for the next day. From the presentation, it was clear that new approaches could be beneficial, in particular for large projects. For example, instead of self-financing a large wind initiative, P&G could improve paybacks and mitigate risk by investing alongside a third party to develop the effort, use the energy it needs, and obtain a 10- to 20-year power purchase agreement to sell excess power to a utility at a set per-kilowatt-hour rate. "You're betting on future prices," says Varrone. "While an energy company has no trouble doing that, that's probably a little outside P&G's comfort zone."
Finally, P&G's financial requirements present a hurdle. "Leverage finance is one of the ways the power industry has worked for decades," says finance expert Gardner. "It could make the difference between projects being done or not." Again, P&G's Borcherding is supportive. "You're playing in a different industry," he says. "This is big stuff, big dollars, and relatively small returns."
"Because our plants are everywhere in the world, every solution is different," adds P&G's Zenezini. "I don't think scale is necessarily the answer to all these things. We also need to drive to local solutions." Moreover, says P&G's Johnson, "P&G has very strict processes for calculating return on investments. Because we want to compare different processes in different places, we have the same approach everywhere. If we do these [plant-by-plant] projects exceptionally well, we will be at 30% to 50% [renewable energy], up from a current state of about 3% to 5%."
Moving ahead, P&G energy teams are now figuring out how to turn the sites' plans into reality and gauge where else they may apply across the globe. "The next 12 months will be important," says Johnson. "We will be really able to determine if these ideas can be executable projects." P&G continues to develop technology mapping for each plant, assessing green energy scenarios per site. It has already mapped solar, geothermal, and wind options, and -- based on ideas from the tournament -- will now explore biomass. "Those are the big ones that will get us to step-level changes towards the 2020 goals," notes Johnson.
P&G participants say the tournament yielded significant results. "In a totally traditional world, the company conceives of an idea internally and then hires an engineering firm or expert to start developing it," says Borcherding. "Immediately, the expert is heavily invested in the idea's success, whether it has merit or not. Here, because there was no predetermined list of options, it drove us to a better discussion." Adds Zenezini: "It probably would have taken us at least a year to gather input from this number of outside experts. Overall, it was a more resource efficient process and produced more robust options. We know we don't have all the answers ourselves, so we will continue to seek and engage experts everywhere."
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