Focus on the Core

On March 7, 2000 Procter & Gamble announced that it will miss its earnings forecast for the quarter. The stock fell from $87 to $61 in one day. The company had lost $85 billion in market capitalization since the beginning of the year. The company suffered from its high cost structure, inappropriate pricing levels, overinvestment, decreasing market share across many of its leading brands, and poor service. But more importantly, Procter & Gamble suffered from loss of confidence and leadership. Advertising Age magazine wondered “Does P&G still matter?”

On the day of announcement (6/8/2000) that the board of the company had elected A.G. Lafley as its new president and CEO, the company’s stock declined more than $4. Calling it a “great confidence builder,” Lafley, who served in the U.S. Navy and graduated from HBS in 1977, went on to share with the audience in Spangler Auditorium the measures that were necessary to turn the company around:
1. face up to the reality
2. be accepting of change
3. make clear choices of what to do and what not to do
4. build a strong, cohesive global team

What followed was a set of decisive, focused moves that reinvigorated the company’s growth. Specifically, Lafley decided to concentrate on four core businesses, 10 leading brands, top 10 countries in which the company operated, and top 10 customers – all accounting for substantial portion of the P&G business. The company shut down non-performing businesses and wrote off a number of investments. The company laid off 10,000 people, to which Lafley referred as “emotionally draining experience.” P&G helped its former employees either transition smoothly into the hands of new owners in case of divestitures or find new jobs in case of plant and business closures. In order to support this transition, Lafley put together a strong leadership team, half of which consisted of newcomers and half were from outside the U.S. He instituted Monday meetings – every Monday until this day the leadership team has gathered together to discuss the business, organizational issues, customer needs and competition.

Since Lafley took over the helm as CEO of Procter & Gamble, the company has beat all of its goals, the earning per share are growing at double digit rate, and the market share is growing. The company is much closer to its consumers and retail partners, and, in words of Lafley, has “clarity of purpose.” Lafley attributes the success of the company to its strong leadership team, saying that “leadership is what really matters, leadership is what makes a difference.”

After telling the story of P&G’s turnaround, A.G. Lafley had an interesting exchange of questions and answers with the audience. Below are some of the issues that were addressed in this Q&A session.

Q: How did it feel to shave so many jobs? In what way did the company help its employees to deal with the problem?

AGL: Just a recent example, we have signed an agreement with Hewlett-Packard to outsource our entire IT infrastructure management to them. Under this deal, about 2,000 of our employees will become HP employees. The same happened with our Ivorydale plant, the company’s oldest plant, when we sold it to Trillium Healthcare Products – our employees had an option to stay in the new company. P&G is build around core values and at the center of those core values are our people. I think it is important to have those values, but I also think that you need them most when the company is going through difficult times. That’s what helped us during the turnaround.

Q: You have been with P&G for 26 years. Do you think one can be a better CEO by having worked in the same company for so long?

AGL: It’s very situational. For me, it was helpful to be an insider – I could be tougher and harder-nosed than most other people because I had worked in the company for so long and knew the culture. I knew instinctively what to change and what to keep. It was also invaluable to have traveled around and spent several years in Asia as an Executive VP for that region. On the other hand, there are always executives like Lou Gerstner who did so well at IBM as an outsider. So I think it depends on the situation.

Q: Why does the company pay so much attention to developing its beauty products business?

AGL: P&G is dedicated to developing the products that people use everyday, and branded beauty products fit that description. Also, demographics primarily drive this business – people are living longer, they are more affluent, and this industry is one of the fastest growing. More importantly, there’s that intersection between health and beauty – how does one determine where one ends and the other begins? They are very interrelated and both are part of our everyday life.

Q: How important will the contract manufacturers be to your business going forward?

AGL: Right now we are outsourcing about 8% of the company’s manufacturing. Many times in fact we can be as efficient as our outsource partners. Going forward, I see us use more of the contract manufacturers in the emerging markets.

Q: How the success of Crest SpinBrush will affect innovation at P&G?

AGL: Right now, about 10-15% of our new products come from the outside and our goal is to move those numbers up to 25-35%. I think eventually half of our products will be innovated outside the company. It is important to remember that no one can corner the market on innovation, but that P&G has what inventors want – ability to develop and market their products.

Q: How valuable has it been for you to serve on the boards of other companies?

AGL: I am on the board of GE and GM, and it has been a great experience. GM CEO Rick Wagoner and I were in the same section at HBS, and so he called me one day and invited me to join his board. I eventually did join and had an opportunity to learn a lot from it, because our companies in some way faced similar set of challenges. What I brought back to P&G from the GM’s board is an understanding of what our business was really about. We had to focus on the core. GM, by the way, has since decided to do the same and become a car company again.

Q: Why is P&G in pharmaceuticals and how important will that business be for the company?

AGL: Before we decided to go into pharmaceuticals, I talked to a lot of people and tried to understand the essence of successful drug companies. Pharma is changing and it seems there are two ways in which you can succeed in this business – you can either be a consolidator like Pfizer or Novartis that have a portfolio of products, or you can have a superdrug that just works out for a company. We would like to adopt a latter approach, or, in other words, a riffle approach to developing drugs in the future. I also think that branding will matter more and more in pharmaceuticals. So I believe there are certain dynamics in this business that will move the pharmaceuticals market closer to the P&G’s capabilities.

Q: How important will the non-traditional marketing be for the company?

AGL: We are trying many things in this area., which is provider of personalized care to our consumers, is just one example. It produces only $8-10 million in sales, but we are learning a ton about our customers, our customer service and microproduction – things that are very important for our business. I think that we will continue to experiment in this area and that non-traditional marketing will be very important for us going forward.

Q: What has driven you in your position and what tradeoffs have you had to make to get to where you are?

AGL: There are 3 things that drive me:

1. I believe there is a great match between my personal beliefs and the mission of P&G. I have a desire to help people and so does P&G. This is especially pronounced when I know the type of difference our products make, how they change the lives of people, and especially women, in the developing countries.

2. I joined the company because of its people and it is still true today. You can’t work alone at P&G, you always work in a team. Our people is what drives me.

3. P&G is dedicated to innovation and discovering new products. That’s really exciting to me as without innovation our lives would be really dull.

I chose P&G on purpose, and I didn’t want to go into consulting or banking because of the lifestyle consideration. I do travel a lot and have to be available to go to places around the world at a moment’s notice.

The first 100 days in the CEO position were really tough, and I never have worked so much in my life. But I also like and have an opportunity to do things outside work. I usually don’t work late during the day, I like to exercise, listen to music and spend time with my family. I have three children and sometimes my family joins me on the trips when I travel. I learned one important lesson that helps me in life: you can never outwork the problem, you have to outthink it.

Q: What’s the most important lesson that you learned from the turnaround of the company?

AGL: I am the kind of person who always tries to see the things as they are. That’s the approach I took to turning around P&G and it has worked so far. So the most important lesson is be realistic. Deciding what you’re not going to do is as important as deciding what to do.