1. Read the first three paragraphs of the article and answer these questions.

1. How is Procter and Gamble better than its competitors in terms of innovation?

2. How has Procter and Gamble benefited from organic growth?

3. Which companies are having problems innovating?

4. Which of these statements is true?

a) Over 66 percent of senior executives think innovation is very important.

b) More than 50 percent of senior executives are pleased with the return on their

investment in innovation.

2. Read the rest of the article. Choose the correct heading for steps 1 to 6 of Lafley's model for innovation from the list below.

• One-on-one consumer research • Reach outside for ideas

• Stop testing so much • Give designers more power

• Know what not to do • Get employees to exchange ideas

Inside Procter and Gamble's innovation machine

By Patricia Sellers

G. Lafley, the CEO of Procter and Gamble has brought a lot of creativity and rigor to P&G's innovation process. During the past 2 years, P&G has raised its new-product hit rate (the percentage of new entries that deliver a return above the cost of capital) from 70% to 90%. That's terrific in an industry where half of new products fail within 12 months, according to market research firm Information Resources. 'In the 18 years that I've followed Procter,' says Deutsche Bank analyst Andrew Shore, 'I have never seen the company this good'.

Organic growth - meaning growth from core businesses, excluding gains from acquisitions - is at the root of P&G's transformation. According to Lafley, organic growth strengthens a company's ability to innovate.

Coke, Kraft and Unilever are just a few of the giants that are struggling to innovate and build the brands they already have. According to a recent Boston Consulting Group survey of senior executives, more than two-thirds say innovation is a priority, but 57% are dissatisfied with the returns on their innovation investments.

Lafley has a model for innovating in a big company:

1…………………………………………….

Jim Stengel, Procter's Chief Marketing Officer, has cut his reliance on focus groups ­ the conventional method for studying consumers. 'You don't really learn anything insightful,' he says, contending that P&G and its rivals have already met consumers' obvious needs and that today's opportunities lie in meeting needs that consumers may not articulate. So he has urged the marketers to spend lots of time with consumers in their homes, watching the ways they wear their clothes, clean their floors, and asking them about their habits and frustrations.

2…………………………………………….

Procter and Gamble has 7,500 R&D people located in nine countries. In order to collect feedback over this vast area, the company encourages employees (both scientists and to marketers) to post problems on an internal website. Lafley evaluates the ideas that have been shared between employees. Each year he presents his findings in half-day 'innovation reviews' for each business unit.

3…………………………………………….

Lafley says that his goal is to get half of P&G's invention from external sources, up from 20% four years ago and about 35% today. 'Inventors are evenly distributed in the population, and we're as likely to find invention in a garage as in our labs,' he explains.

4…………………………………………….

It’s not the P&G way to put out a product without test-marketing it. But consumer testing takes time - a luxury that P&G executives increasingly don't have. Says Susan Arnold, P&G's beauty queen: 'We don't have time to cross all the T's and dot all the I's. This business is trend-based and fashion-based. You have to be intuitive.' By cutting down on test-marketing (but not, mind you, on science), P & G has reduced product launch time from laboratory to roll-out from three years to eighteen months company-wide.

5……………………………………………

Lafley believes that P&G needs to market not just the product itself. but the consumer's experience of the product - how it looks, smells and feels. Three years ago he added a head of design at P&G, a company veteran named Claudia Kotchka, who reports directly to him. Her designers used to labour in anonymity on logos and packaging. But they are now deeply involved in all aspects of product development. For Olay Regenerist, they helped with the formulation and the fragrance too.

6……………………………………………

In an attempt to encourage growth, some companies offer fat bonuses for innovation or hire stars from outside. Lafley hasn't done either of those things. He doesn't need to revamp pay schemes, he says, noting that managers who fail to share ideas simply do not get promoted. He does motivate the rank and file by giving out modest rewards, such as giving 50 stock options, for creative ideas and by celebrating innovators on P&G's internal website.

From Fortune Magazine