P&G is reported here to befalling behind its competition in introducing new products. Reasons giveninclude:

1. A reduced percentage of salesspent on research and development.

2. Decentralization of R&D tobusiness units. This has caused a concentration on short-term profitability.

3. Unwillingness of customers to payP&G’s premium prices for marginally-enhanced new products.

Admitting its deficiencies, thecompany has recently recentralized some of its R&D.

Formuch of its history, Procter& Gamble (PG) didn’tjust launch new products, it created new product categories, from the firstmass-produced disposable diapers to Crest teeth-whitening kits. That’s onereason P&G has more than 1,000 Ph.D.’s among the 8,000 employees at its 26innovation facilities around the world. “P&G is largely a branded sciencecompany,” says Larry Huston, former innovation officer at P&G who’s nowmanaging director of 4inno, a consulting firm.

Lately, though, there’s been a dearth of pioneering brands emerging from theworld’s largest consumer-products company. Spending on research and developmentin fiscal 2012 ended June 30 was $2.03 billion, or 2.4 percentof sales, the same as the prior year and down from 3 percent of sales in2006. P&G’s most recent homegrown blockbusters—Swiffer cleaning devices,Crest Whitestrips, and Febreze odor fresheners—were all launchedat least a decade ago. Says Peter Golder, a professor at the Tuck School ofBusiness at Dartmouth College: “P&G is built on creating new categories,and innovation is in its DNA, but they need to rediscover it.”

Regaining its new-product mojo is crucial because P&G’s businessstrategy has long been to charge premium prices for cutting-edge products. A150-oz. container of liquid Tide detergent is $18 at Target(TGT), forinstance, 20 percent more than the retailer’s house brand. As risingcommodity prices have increased the cost of most basic household products,cash-strapped customers may still be willing to pay more for true innovationsbut not necessarily for the kind of product extensions and embellishmentsP&G has turned to.

That’s created a challenge for Chief Executive Officer Bob McDonald, who haslowered profit forecasts three times since Jan. 1. He’s trying to cut$10 billion in costs by 2016 and reverse market-share declines in such keycategories as U.S. detergents. McDonald is under pressure from activistinvestor William Ackman, who in July took a $1.8 billion stake in P&Gand may seek management changes. Blockbusters have “dried up a bit,” acknowledgesBruce Brown, P&G’s chief technology officer. “We want to get back to moreof that.”

McDonald earlier this year assembled a team of researchers, marketingmanagers, and senior executives from across the company to chart a bolderinnovation course. The group spent 10 weeks analyzing P&G’snew-product pipeline and selecting the most promising ideas for development.But most won’t be ready for at least another year.

P&G’s 175-year history is filled with such consumer-product innovationsas the first synthetic detergent (Dreft, in 1933), the first fluoridetoothpaste (Crest, in 1955), and the first stackablepotato chip (Pringle’s, which later dropped theapostrophe, in 1968). Researchers typically have leveraged technologies alreadyused in P&G products to come up with entirely new ideas. For CrestWhitestrips, launched in 2002, they adapted bleaching methods from P&G’slaundry business, film technology from the food wrap business, and glue techniquesfrom the paper business.

In recent years, however, the company’s product pipeline has been mainlyfocused on “reformulating, not inventing, products,” says Victoria Collin, ananalyst at Atlantic Equities in London. Among these are new scents of Tide forEastern European markets and Secret deodorant’s Natural Mineral line. As aresult, analysts say P&G has lost customers in the U.S. and other developedcountries, who’ve switched to cheaper products made by such rivals as Unilever,as well as store brands.

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