Larry Huston was vice president of knowledge and innovation for many years at Procter & Gamble. During that time, he was the architect of its Connect + Develop program, the creator of P&G’s Brand Bootcamp operation, and innovation leader for the company’s global fabric and homecare business, among other initiatives. He is now managing partner of 4INNO, and recently joined Wharton’s Mack Center for Technological Innovation as a senior fellow. Knowledge at Wharton asked Huston to talk about innovation and its role in the global economy.

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Below is an edited version of the podcast.

Knowledge at Wharton:  I’d like to start out by asking you, what is the Connect + Develop approach to innovation and why is it innovative?

Huston: Terrific question. You’ve got to start with: What is innovation in most companies today? For most companies, it’s all about inventing everything yourself. Yes, some companies do joint ventures. They mostly do that out of trying to fill in a weakness or a capability gap. But most companies invent everything. Procter & Gamble invented 90% of its innovations. Everything came from basically within the four walls of P&G. We had 9,000 R&D people at Procter & Gamble, but the world has about 1.8 million people who are equal in education and have access to first-class lab facilities, [like] P&G people.

So basically, Connect + Develop is all about redefining our organization as 1,809,000 people — that 1.8 million plus our 9,000 people — and then leveraging the intellectual assets and capabilities of the world in a connected model to bring big innovations to our consumers. So it’s about connecting, not just inventing. You can think about it as: You want to continue to invent, but you want to connect. It’s what you know plus who you know on the outside, so that you can really create a lot of value for your customers or consumers.

Knowledge at Wharton: So if I get it right, the model that you’re describing is about harnessing the innovative ability and creativity of external constituencies … in order to drive the innovation process.

Huston:  Absolutely. It’s not outsourcing. It’s an in-sourcing. I think that’s another misconception.

Knowledge at Wharton: What are some of the challenges, especially on the intellectual property front, that come up when you use that kind of model?

Huston:  I think, frankly, the biggest challenge is the mindset inside companies. Most people have the attitude that if we share our briefs with people on the outside, our competitors are going to read what we are going to do. It’s really changing the inside culture to accept ideas. What you do in Connect + Develop is what companies always do. If someone comes and knocks on your door, you will ask them to share things with you non-confidentially, or you’ll share things non-confidentially. If you think they have something, hopefully it’s patented.

However, if it’s not patented, you then reach out and you begin to develop confidential agreements, one-way, two-way agreements, and so on. That’s how you operate today. What you do under Connect + Develop is the same way. It’s just that I’m doing it at scale. Think of doing what you’re doing on a small scale basis, typically, where you have the innovation office at each company or an out-licensing and new business development office. But you’re now doing it at scale.

So what you’ve got to do is put controls and vetting processes in place, so that the whole organization isn’t sending confidential information to the outside. They’re sharing non-confidential information. But the normal processes of confidential agreements still exist as if you were still small. It’s a scale issue, for the most part.

Frankly, in the entire time that we did this when I was at Procter & Gamble, I can’t think of a single significant intellectual property issue where we tipped our hand to a competitor. Now there are ways to handle this. Briefs are very important, trying to define what you’re looking for. Sometimes we just deliberately put our name on a brief and sent it to the world, because we’d get a much higher hit rate if we put our name on it. They want to be associated with a big company.

In other cases, you may describe your problem in a very oblique way. You may not say what you’re doing, or you can disguise it in some way. So there’s a whole variety of mechanisms to deal with this. It will be the first reaction that people have, that this is going to be a barrier. But my experience and the experience of other companies who are doing this is that it’s blown way out of proportion.

Knowledge at Wharton:  If IP isn’t an issue, then what are some of the biggest challenges of pulling this off?

Huston:  Well, the biggest challenge of making a company into a connected innovation company is number one: It’s got to be a strategic capability. This is a strategic platform for a corporation. This is not something that a department within a pharma company or a car company or a consumer products company can do. This has to be something where the CEO and the management team says, we’re going to make a fundamental shift. We believe that our current invented model is not sustainable to create the needed levels of top line growth we need, and that we’ve got to find a new way to create shareholder value and value for our consumers or customers.

We are going to embrace a new model of innovation; a model that basically depends upon us getting very clear what will drive value for our customers, expressing that in a way that the intellectual assets of the world — people’s ideas, institutions, other companies — can come in. Our door will be open and they can come in and join with us in solving these problems for our customers. It’s a major, major mind shift for companies to do this.

So that’s why I say the senior management has to be involved. It’s really incumbent upon the CEO and the top management to say, we really don’t think our current innovation model can create the needed levels of growth. If you take a company like Procter & Gamble, we have to create 7% growth per year from innovation. This is a $72 billion company. That means we have to create $5 billion a year. Imagine if you’re GE, which is well over a $100 billion company, what you have got to do.

So is our organization capable of embracing all the new science that’s coming at us? Bioscience? Nanotechnology? You can’t. There’s not enough money to embrace the new technology and build all the capacity you need for all the stuff that’s coming at you, yet create all these needed levels of growth. So we fundamentally decided that the current R&D model or innovation model that we are following and most companies are following, is a broken model. It’s not sustainable. So when the top officers of the company reach that conclusion, it’s time to change.

I really do think that the most important thing is that wake-up call — for people to realize, then for companies to realize, that big companies have lots of money but need to act like little companies who don’t have a lot of money. And be open to the outside world and making connections. That’s fundamentally what it’s about. I do think that’s the most important thing.

Now under that are a huge number of things about changing the culture and building capabilities — but I think that’s the most important thing in this whole scenario.

Knowledge at Wharton: I think you’re quite right that a number of companies are starting to hear the wake-up call. They want to be innovative, but very often they don’t know how. What do you find are some of the main barriers to innovation within companies that want to be innovative?

Huston:  Well, I think, other than really having the will and walking the talk — which I do think is a very significant barrier, by the way — other than that, and assuming those things are in place, what’s the next thing that you need to do? One of the things that you need to do is to be very clear on a very basic model, which is how do you combine what’s needed with what’s possible. At its core, at its essence, innovation is bringing together a really deep understanding of what’s needed from the customer with what is possible technically. When those two things come together, there’s a sweet spot that happens and you can create products that delight your customers.

Often, a major issue is that companies just simply do not know the needs of their consumers or customers. They know obvious needs or top line needs, but often the reason the products fail in the marketplace is because the concept is wrong. This morning I had a conversation here with one of the faculty members about Segway. Look at Segway. The thing performs terrifically, right? Technically it is not a problem, but it is a poor concept. It solves a problem that doesn’t really exist for people. It has all kinds of conceptual problems in terms of the benefit and how it improves consumer’s lives at a price that they can afford.

Getting very clear on the consumer need and really understanding that at a deep level, at a price consumers are willing to pay, is what I mean by the market concept and often many, many failures. I’ve looked at hundreds of products. Probably 60% to 70% of the time, the source of the failure is that they didn’t understand the consumer. So just think of your product, things that have failed for you. Just go down your list and say, was this a technology failure or a concept failure? Often they are concept failures.

Even successes are often beyond the basis of concept. Let’s take iPod, which is an enormously successful product. Name a new technology that’s in iPod. There isn’t a new technology, right? It’s a concept. It’s a concept in terms of the business model. It’s a great insight around consumers — that they don’t want to buy albums anymore; they want to buy individual songs. The assembly and the user interface, again, is a concept. I mean it’s not a new technology. This is a long-winded way to say, “Getting the customer insight at a profound level is enormously important and building the capability and skills to do that is enormously important.”

Once you have that, then you have to get very clear on what are the ways that I can solve problems for consumers, or customers, and to not just think about innovation as a product. You also have to think about innovation as a total solution — both products and services. How do you deliver better experiences, shopping experiences, the total brand experience, or the usage experience? How do I develop a meaningful, trusted relationship with the consumer?

All of those areas require innovations. It may not just be on a product feature but across solutions, experiences in building relationships. It partly deals with mindset as well. I keep coming back to the word mindset because people often just run to … ‘I need the stage gate model or I need a piece of technology and I’m innovating.’ It’s a lot more than that. It takes a lot of experience, but with commitment and discipline it’s one that people can master. A number of companies are mastering it.

Knowledge at Wharton:  How can companies fail to understand what the consumer wants or needs when they spend millions of dollars in market research?

Huston:  Well that’s the problem. Have you ever looked at the output? A [company rep] called me the other night [to ask] about my drive-thru experience at McDonald’s. I proceeded to try to tell them, ‘You are asking me the wrong question. You are asking my about my drive-thru experience when I don’t like the food experience. I would like you to put my comment on your form,’ at which point I knew that they had hung up.

You tend to ask questions, number one, with pre-conceived notions, so you don’t have a good discovery process. Consumers in focus groups often tell you what you want to hear. Focus groups are like the movie “Groundhog Day.” I’ve been involved with developing new products. On average, you have eight consumers in a focus group and each consumer gets 12 minutes of airtime and you proceed to do focus groups from city to city. It’s like the movie “Groundhog Day” — over and over again. Consumers are very slick in either grandstanding with other consumers or telling you what you want to hear. They’re very confusing.

Now let’s go to another consumer research technique, which is doing survey documents. Often people will say, “Tell me a long list of questions and attitudes of usage and everything.” By the time it is over then you might do 400 consumers and what do you get? Tabulations of statistical data. You cannot read one consumer’s holistic experience, mind, body, soul and task of a product.

So what if I said to you, “I want to develop the ideal beer product.” What I want to do with you is not focus groups; what I want to do is understand your mind, your logical experience. You’re going to probably talk about high carbs and taste. Mind, body, the sensorial experience…. You’re probably going to say you want it cold and all kinds of things about the sensory experience, soul, the emotional experience.

Look how Budweiser owns, and really owns, the relationship with men. Budweiser isn’t about beer; it’s about guy-to-guy relationships. What you really want to understand is one consumer in terms of mind, body, soul and task. Map a holistic experience and spend 12 hours with one consumer spent over a one-month period [instead of] running 50 focus groups where you have eight minutes with an individual consumer and do the “Groundhog Day” event over and over again.

So what we have done is we have created, for example, a studio process and we have learned that we can get as much information from five consumers, mapped in depth, mind, body, soul and task, as you can from 50 focus groups. Five consumers, 12 hours each, over a month versus 50 focus groups, over and over again, on average eight minutes per consumer in a focus group.

Knowledge at Wharton:  What do you do with these consumers for 12 hours?

Huston:  What you do is you start with a hypothesis of how you are going to create a huge business. This hypothesis feeds a very deliberate protocol that is designed to elicit logic and emotion. The emotion is gathered up and is often the most important aspect of what you need to get from consumers is the unconscious. Now the issue is that if I’m talking to you, if I do an interview with the two of you right now about this bottle of water sitting here on the table, you’re going to give me some rational right-brain comments.

However, if I gave you 12 photographs, none of them about water, out of the magazine and I said, “Tell me your thoughts and feelings about how water can positively improve your life.” I would ask you to look at a photograph. I would probe into your unconscious because as I’m speaking right now and as people are listening to this – what’s going off in their minds are pictures. You’re not processing a word; there are images and that is how the brain works.

However, our consumer research methods are verbo-centric. They’re words which get you into the conscious level. If I can interact with you on your thoughts and feelings about water through imagery, you won’t believe the amount of stuff that would flow. It’s unbelievable, and we understand, we unravel, we elicit the dream with consumers through these deep probing methods that get at the unconscious.

So we have entire protocols that are designed to get at the logic, the emotion, the sensory experience and the task. It takes 12 hours to do that over multiple weeks with very detailed maps put together. The first consumer will give us 400 concepts, the second consumer will give us 400, but there will only be like 200 new, the third will give us 400, and there will be about a 100 new. By the time I get to the fifth consumer, I have elicited the entire experience domain of a targeted group of consumers.

So let’s say I am trying to get to Moms who have had their first baby and I am trying to elicit the ideal diapering experience. I only have to get the five moms because I build these maps and I pretty much elicit the domain space. But that doesn’t necessarily say what one mom tells me is the most important. I’ve only elicited the experience space. I then have to develop concepts and product prototypes…

So managing five maps of Moms, first-baby moms, on the wall with each of their 400 concepts: Imagine the amount of insight there. I deeply probe them like a psychologist ….You can see how this is very different than the call that I get at home where I tell [the caller,’ “You’re asking me the wrong question” — or looking at a bunch of statistical data. It’s a very different kind of approach to the world and so it’s really, really powerful.

Knowledge at Wharton: We were talking sometime ago in this very room to senior consultants from the Boston Consulting Group. They had written a book called Payback about innovation and their argument was that the problem that companies face is not so much that they lack for ideas. In fact, there are too many ideas. Their real challenge is taking those ideas and getting and implementing them in a way that you can make innovation pay for itself. Do you think that’s right and how do you manage that in your process?

Huston:  Well, number one, I disagree with BCG.

Knowledge at Wharton: Why?

Huston:  Well, number one, you never have enough great ideas, and if you have a better idea, you drop that idea off the bottom of the list. Look, companies have idea files, and they have “submit an idea” systems. I would say that companies have file drawers of many meaningless ideas, that they certainly don’t have file drawers of ideas that have the legs to drive business growth. I totally disagree with this, by the way, and I am interacting with CEOs all over the place right now. But let’s set that aside for a minute. I feel so strongly about that.

The question then is: Let’s assume that you have a good idea. How do you get a good return on it? Well, the major thing that I think is important early on, is to do financial modeling and good pro-forma work and identify killer issues along with the ideation process.

For example, this bottle of water. Let’s assume that I’ve created a new concept in engineered water. Let’s say I have a prototype here. I want to really understand immediately what the business plan looks like and to financially model that. What’s going to be the trial rate? What’s going to be the repeat rate and what are going to be the killer issues?

To really have the concept process and the innovation process, [you should] be very informed by the financials on an innovation. Most companies go and invent things, and then at the end figure out, “How am I going to price it?” They find that it’s priced too high; the consumers aren’t going to pay for it. And so what you’ve really got to do is move way upfront the whole financial modeling and identification of killer issues so that you can be successful. That’s one very important thing.

The other important thing is you’ve got to get to a buying experience with your customer very early. You’ve got to find a way to make a little and sell a little. You can’t rely on market forecasts, which are notoriously wrong. They’re almost always wrong. You have to be informed by trying to find the way to sell this product, getting out into some sort of market situation and trying to sell it. [For example], you might go on QVC and try to sell it.

The other day I had a company come to me and say: “Well, that’s great for consumer products. You can make a little and sell a little but we make enterprise software that sits on a computer.” I said, “Well, let’s think about this. How would we change your decision on your process? Let’s assume that you came to me, I am a big corporation, and you say, ” I’ve got this concept, are you going to buy it?”

Well, I could say, I’ll always say, “yes.” Probably most companies will say “yes.” But if you came to me and said, “Hey, This is really going to improve your business. We would like $50,000 to develop the concept further. We’re going to give you a preferential position. You’re going to get five times that back in terms of pricing that’s going to save you all this,” and if I say “yes,” that’s going to be a big signal but if I say “no,” that’s going to tell you that I really didn’t believe in it.

So you’ve got to find a way to invent into your process a real value exchange that forces the customer to put up something, to have some skin in the game when they give you advice on whether or not something is going to be successful. Most companies don’t do it. So one of the most important things that any company can do is figure out early in the process how to run the test.

Consumers will say, “Oh, I am going to buy this” [when they are] in focus groups. So  I’ve learned to go and knock on their door two months later and say: “Oh, you said you would buy this. Could you just give us your credit card because we’re ready to ship this to you”, and they say: “Well, I really don’t want it.”

So you have got to figure out these kinds of things, and not work in rote ways because frankly, I think so much of the advice out there is very rote. Everybody is implementing the same systems and they’re not thinking through the human behavior issues, flaws and problems, and are not inventing around these. This is very much a thinking person’s game in trying to figure out how to be successful.

Knowledge at Wharton:  In an earlier conversation you mentioned the discovery studio operation. What is that?

Huston:  Well, discovery studio is an idea that we’ve implemented at 4INNO: “How do we create a really big business in one fifth of the time that it normally takes you to create a business? How can we create or conceptualize a half a billion or a billion dollar business in 16 to 20 weeks?”

What we do is really work against a major three-step process which is, number one, let’s make sure on the front end that we’re asking the right questions; second, once we’re asking the right questions, how do we dig deep into the consumer, as I’ve just described to you; and then third, once we’ve dug deep into the consumer, how do we put together the concepts and technologies that are going to solve the problem?

It’s driven from the right questions, which is very hard to do. [That’s because] it is very hard for you to ask a question that is out of your frame of experience. So if I say to you, “Tell me what you would do to create a new beer business or a new brand, and what are the right questions to ask,” you would have a hard time doing that.

So what do we do? We look for analogies. What business has a situation that is similar to the beer business that is flat in sales? Coffee used to be that way. Think about coffee. You knew the coffee drinkers by how much grey hair they had, right? That wasn’t too long ago. It’s not that way now. But why did coffee go from declining sales to being a growth business?

Well, there are all kinds of answers frankly, and it’s more than Starbucks. For example, I just came from another building, and we had a terrific espresso. The reason we had the espresso is that they had terrific espresso machines. All of a sudden you have terrific machines that have been deployed all over the place. Devices became important. Could we use a device strategy in beer in some way? Maybe we could find a way to do draft beer at home.

How do I begin to ask right questions? One of the most important parts of creating big growth is asking new questions, asking the right questions, because most people operate in very rote ways about how they do things. Think of it as an environment and studio where it’s very inquiry driven, and you’re building in-depth knowledge, and you have all the creative tools to quickly formulate these things. Instead of taking three years, you could do it in six months and in significantly less time. Having the freedom to create a studio kind of environment where that kind of inquiry and learning can go on is very important.

Knowledge at Wharton: Can the consumer be a brand builder?

Huston:  I think that the consumer can be a brand builder.

Knowledge at Wharton: How so?

Huston:  First of all, social communities are really important. The Internet’s important. You see consumers being involved in brand building through things like YouTube, and creating advertising for companies. The key question is: In what ways can companies create benefits for consumers to build brands and to make a contribution to brand building at many more touch points?

I think right now, there’s the storytelling, the news out there, and the things like the YouTubes of the world. There is an emergent whole new world where consumers are much more motivated to be involved with building brands at different kinds of touch points. This is an area under rapid development and evolution right now. It’s an area that we’re documenting in terms of stories and the like. I do think the next wave of open innovation is around consumers as brand builders.

Knowledge at Wharton:  What are some of the challenges of launching new products in global markets?

Huston:  In global markets, I think probably the biggest challenge for most companies is that they take an idea from a western geography, let’s say the U.S. or Europe, and just basically try to take the cost out — to get the price down in order to sell it in India or China or Indonesia, or wherever it might be. That mentality has been proven to lead to a lot of failure.

You have to start with a clean sheet of paper and say, “What are the needs of these consumers?” You have to respect the needs of these consumers as unique. You have to design a product at a price point that meets their needs under their local conditions. That is the biggest challenge that the companies face. They have to develop the local consumer research, technology and sourcing strategies in each region in order to create terrific products at a price that consumers find delightful.

Knowledge at Wharton: What companies have been successful in doing this?

Huston:  I don’t know. That’s a hard one for me to answer, because I don’t pay too much attention to products, and I don’t have many stories on the tip of my tongue. But I think Procter & Gamble is driving the growth of its international business quite well, and is creating good value for consumers. I don’t have enough of those details to give you a good answer.

Knowledge at Wharton: You may have answered this question in different ways in our conversation so far. How would you sum up your innovation philosophy?

Huston:  I would say innovation philosophy, number one: It’s all about superior insights and intellect. It’s not all about money and scale. It’s knowledge driven and connections driven. To me, creativity is about connecting things. People sometimes confuse creativity and innovation. It’s really about having deep insights and connecting them: the consumer, the technology.

I would say that current mental models are a big barrier. You have to learn to ask new questions. Setting big goals is big because it forces you outside the box. A discontinuous goal means an incremental answer is not going to be good. I’ll give you a simple example. Let’s say you are a high jumper, and you can get over a bar that is seven feet high. If I said, “I want you to get over a bar that is seven feet two,” what would you do? You would improve your kick or leg strength. If I said, “I want you to get over a bar that is 10 feet high, and I don’t care how you get over it,” what would you do? You would get a ladder, jump over a trampoline, or pole vault. But notice, as soon as I gave you a discontinuous goal, your mind went to a totally different dataset.

That’s why discontinuous goals are important. If I give you an incremental goal, you will go to the dataset and the answers you already have in-house. If I give you a discontinuous goal, it will force you to immediately say, “I can’t solve this inside with what I know. I have to go outside.” Discontinuous goals are very important — the ability to ask the right questions, the ability to create deep knowledge and insights about consumers, and finally the idea that we can connect and create value rather than invent everything ourselves. Most people have the idea that if the consumer needs something we will run to our labs and invent it ourselves.

The first question should be, do we already have it solved some place in our organization? Secondly, if not, has the world solved it? Most often, the world has solved it. Finally, if it’s not inside, and the world hasn’t solved it, then go invent it yourself. But don’t immediately have a knee-jerk reaction that we’re under the bench and think that you’re going to invent these things yourself. It’s just a waste of time and money. It doesn’t add value for the consumer in the end. It’s punishing to do that. Again, it all ties back to what I said about mindsets. Mindsets are a very big part of this.

Knowledge at Wharton: Thank you so much for joining us.

Huston:  You’re welcome. I enjoyed it. Thank you very much.