P&G’s stunning success is in marked contrast to its performance at the turn of the millennium. In the late 1990s, P&G's existing businesses had begun to slip, and in 1999 and the first part of 2000, the company missed a number of consecutive quarterly earnings forecasts, which caused its stock price to plunge precipitously. In January 2000, the stock stood at just over $118 per share. But by mid-March, the stock had tumbled to $60 per share – a 31% drop that was one of the biggest single-day declines ever for an industrial stock.

In the summer of 2000, P&G brought in a new CEO, A.G. Lafley, to help steer P&G in a new direction. Lafley, who had been running P&G's North American beauty-care business, began to work with Gil Cloyd, P&G's chief technology officer, to get the company to accelerate its growth by opening its innovation process to external sources of technology. Under the Connect + Develop initiative, Lafley proclaimed that in five years P&G would receive half of its ideas from the outside and, to achieve that ambitious target, he formed a research and development team under the leadership of Larry Huston, the vice president of R&D innovation and knowledge.

Today, about 35% of the company's products come from outside ideas, and several of these products are very successful. For instance, Olay Regenerist, an antiwrinkle cream, and Swiffer Dusters, a household cleaning product, have come from P&G's drive to seek external ideas and technologies. And there's the Crest SpinBrush, a battery-operated toothbrush, which generated first year sales of $200 million. Technology scouts at P&G had learned about the SpinBrush technology and convinced the company to acquire it from Dr. Johns Products Ltd., a start-up.

Dividing labor this way – one company develops a novel idea, then another company brings that idea to market – is a savvy way to get around innovation's two key problems: rising development costs and increasingly shorter product life cycles.

Using more external technology reduces innovation's development costs. This saves time as well as money. The company also no longer restricts itself to the markets it serves directly. Instead, it participates in other segments through licensing fees, joint ventures and spinoffs. These different streams of income create more overall revenue, which means that innovation becomes economically attractive, even in a world of shorter product life cycles.

Through SpinBrush and other similar deals, P&G was able to tap into a cost-effective means of spurring its innovation activities. According to Huston,"I set a goal with my boss to double our innovation capacity at no increase in costs." At the start of that initiative, P&G had roughly 8,200 people working on innovations: 7,500 inside the company, 400 with suppliers and around 300 external people. Now, according to Huston, P&G has increased that number to about 16,500."We still have 7,500 internally," he says, "but now we have 2,000 with suppliers and 7,000 virtual and extended partners."

This article is adapted from "Why Companies Should Have Open Business Models," by Henry W. Chesbrough, which appeared in the Winter 2007 issue of MIT Sloan Management Review. The complete article is available by clicking here.