Reinventing a 170-year-old company
A.G. Lafley, president and CEO of Procter & Gamble, attends a session of the World Economic Forum in New York.
Who: Procter & Gamble CEO, President and Chairman A.G. Lafley.
Education: Lafley earned an undergraduate degree from Hamilton College and an MBA from Harvard Business School.
What you may not know: Lafley served in the Navy before joining Procter & Gamble as a brand assistant for Joy dishwashing liquid in 1977.
Kai Ryssdal: Mr. Lafley, welcome to the program.
A.G. Lafley: Good to be here.
Ryssdal: Give me the thumbnail sketch. What does this company do?
Lafley: We make everyday, household and personal care products for today, somewhere between three and four billion consumers around the world.
Ryssdal: Does that make you shake your head and go, "Man, what are we doing?"
Lafley: Not what are we doing but the size, scale and global complexity of the business has changed a lot over the last 31 years. When I joined the company in the mid seventies, we were $5- or $6-billion in sales. We were mostly a U.S. company with some businesses in Western Europe. Today we are truly a global company. Only about 40% of our sales is in the U.S. and 60% outside, almost 30% of our sales are in emerging markets. We're in far more businesses than we were in 30 years ago, so the scale has changed. The complexity has changed. We're serving a lot more consumers.
Ryssdal: What is your job here?
Lafley: My job is coach.
Lafley: Coach and teacher. Hopefully I don't have to get involved as a player/coach but sometimes I have to do that.
Ryssdal: So you have some of the most recognized brands on this planet . . . Tide, Crest, Pampers . . . yet, you sitting ath the top of this pyramid, I guess you are worried most about people?
Lafley: I'm worried most about the current . . . I'm not worried. I spend most of my time on growing and developing the current and future leadership of the company and on hopefully, making the few strategic choices we need to make so that we grow and prosper for another thousand years. We're over 170 years old this year, so we try to stay focused on the mid and long term.
Ryssdal: How do you bring change though, to a company that is 170 years old as you say, has brands that are . . . Ivory Soap is what, a 130 years old. Right?
Lafley: Ivory Soap is, yes well over a 100 years old.
Ryssdal: How do you bring change and innovation to a company of this size with brands that are that established, I guess we'll say?
Lafley: Slowly and patiently and carefully but persistently because we have to change. And the reason we have to change is because change is probably the only constant that we can count on. Our consumers are changing. Who they are is changing. You know, they're not all Americans anymore as I've said, they are from all over the world.
Ryssdal: They're also not all housewives.
Lafley: They're definitely not all housewives. You know, the majority of women in a lot of countries from around the world are working. Our business is driven by demographics, right? So it's where are the babies born? Ok and more of the babies are going to be born in Asia O.K. than are going to be born in the Occidental world than in Western Europe, or the U.S. or Japan. And then, how do households form? How big are the households when they form? And how do their incomes rise? And we need relatively modest amounts of household income for consumers to be able to begin to buy our brands and products.
Ryssdal: Give me an example of how that drives product development in this company.
Lafley: I'll give you three really quick ones. When we go into developing markets in the laundry business, ok, very basic business for us, the way laundry is done is totally different. It's done by hand. It's done in rivers and streams. Or it's done by collecting a bucket or tub of water from whatever is the central water supply is in the village. Or it may come from a single tap in your home. So we have to deal with a lot of variation in water quality and some not very good water. And we have to deal with some more heavily soiled clothes because more people are working with their hands and they are washing their clothes less frequently. And we have to give them a great cleaning end-result because washing your body and washing your hands is really important. It's a basic, it's an essential of life so we deliver the best laundry technology and product we can in the world in an affordable sachet, it's a small plastic pack that she can buy every week and use every day. And it has to deliver in that tough, hand wash environment. We recently introduced in the last couple of years a product called Single Rinse. The big issue, the big cost is the water, often. Not the product. The big time consumption is she has to rinse the product multiple times to get the soil out and to get the suds out. So we created a product that enables her to rinse one time because once the soil is removed from the fabric, it holds those soils away from fabric and the dirty wash water. So you dump out the dirty wash water and you rinse it one time. We introduced a line of shampoo products in single use sachets. So literally for pennies a week, she could afford to wash her hair. We introduced a line of feminine hygiene products called Naturella, which is more affordably priced and designed in a way that she can begin the conversion from cloth to disposable feminine care products. So we're very much attuned to her needs, her habits and practices, what she can afford, and what she really needs and what she really wants.
Ryssdal: For most of this company's history, those innovations came from within, I mean Procter & Gamble was famous for insularity to be blunt about it, in terms of product development and in innovation and in grooming of executives and all those things. You have now made the decision, since you have been running this place, to go outside for a lot of those innovations and changes and new ideas. Why?
Lafley: That was probably the single biggest change, or certainly one of the biggest changes we've made over this decade, and we made change because we felt like we could deliver a lot more innovations to consumers in the market place and commercialize that innovation more successfully if we moved to what we call an open architecture or a connect and develop system.
Lafley: First of all, we would get a look at a lot more early stage innovation and early stage product prototypes. When we started in '99, 2000, maybe 10 to 15% of the products we brought to market that were new every year, had an external partner. Last year, for the first time, half of all the new products innovations we brought to market had one or more external partners. So we've almost doubled our "at bats." O.K. And in the innovation game, which is a risky game, more "at bats" leads to more "hits". It's sort of the Pete Rose approach to innovation. You get up more times, you get to swing the bat a few more times, you get a few more hits. That's point number one, and that's the biggest motivator. The second biggest motivator was, when we stepped back and thought about it, what we're really good at is connecting new products and new product ideas to consumer needs and then developing those products and qualifying and commercializing them for the market. We're probably not all that much better at inventing or creating the ideas, so this opened us up to all kinds of idea sources. And we said, "O.K. Let's bring in the ideas from anywhere and everywhere and then we'll do what we do best. We'll play the game we play best."
Ryssdal: Let me continue the baseball analogy here, right. What you're doing in essence by outsourcing all this innovation, is your buying innovation. Sort of like the New York Yankees buy hits, right?
Lafley: I don't know. I'll have to think about that analogy. I think what we're doing is we're running a continual tryout camp and they can be veteran ball players or they could be young ball players. But what we're trying to do is, I don't know how many we look at a day, we can double check this and get back to you, but I'm sure we look at several new product prototypes literally every day. And from those our innovation leaders and our businesses choose some that they then try to co-develop. And that's what we're really trying to do. We're trying to get a lot of players in the game. We're trying to get these players a lot of "at bats" and we think we'll get more hits with more players in the game.
Ryssdal: You write actually, in your book that about half of your product innovations fail.
Lafley: That's right.
Ryssdal: That's not so good.
Lafley: That's the game. That's the game and in fact, in our industry, about 80 to 85% of new products fail in the sense that they're no longer on store shelves, you know, 3 to 5 years after they're introduced. There is a museum in up-state New York that is full of failed consumer products, and we have our fair share there. So, I think we know we're in a game where you fail a lot. Innovation is that kind of a game, and what we are trying to do is improve our success rate. And what we are also trying to do is fail earlier, fail faster and reallocate the resources from the failures . . . the humans, the human capital and the financial capital, so we can put the money against innovations that have a chance to make consumers lives better and become a commercial success.
Ryssdal: You've said that you want innovation at Procter & Gamble to be a routine and methodical thing that everybody does every day, not just you as the C.E.O. making pronouncements. How does it follow then, that what is routine and methodical continues to be innovation, right? I mean, it's sort of a . . .
Lafley: Yeah, it sounds like an oxymoron. The first step or the front end of the innovation process is all about ideation and creativity. That's the idea stage. That's when a new technology is invented or created. But once you have even the crudest of prototypes, once you have a hypothesis of who the consumer target might be for that new brand or product prototype, then we believe you're in a process that you can manage for consistency and reliability, and frankly for higher levels of output. And that's what we try to do. Once we have the innovation and what we call the development stage and the qualification stage, we try to be very disciplined and manage that innovation in a way in that we know whether it really connects with the intended consumer and we determine whether it's feasible, whether it's affordable and whether we can turn it into a commercially viable new brand or product line.
Ryssdal: Consumers are notoriously fickle. They're sensitive to price. They're sensitive to packaging. They're sensitive to position on store shelves, I mean, the list goes on. What is your plan then for keeping ahead of your competition like Colgate- Palmolive, Kimberly Clark, I mean some other, not quite as big as you, but substantial forces in this industry?
Lafley: Consumers are great! I mean honestly . . .
Ryssdal: You have to say that.
Lafley: No, no, no. But what you said is what makes this industry and this business so wonderful. We are in the business of serving consumers and trying to create brands and products and services that make their every day life better. And they are demanding, they are inconsistent, they are hard to understand, they do not say what they mean. You know, we work very hard to get at what we call unarticulated needs because it's very difficult for consumers to tell us what they really want and what they really need. So, regarding your question vis a vie are very good competitors an we compete against some of the best in the world. When we're at our best, we stay focused on the consumer and we try not to get too distracted by the competitor. In other words, we keep our eye on the target and the target is... understanding who the consumer is, finding out what she wants, now with Gillette, finding out increasingly what he wants, and then finding a way to give it to her or him. That's really the job.
Ryssdal: It's interesting that you speak of the consumer as they because you're a guy who goes to the grocery store and buys laundry detergent and razor blades. When you do that, somewhere in the back of your mind is it churning that, "Oh this product design isn't really all that great and we need to see about shelf space"?
Lafley: All the time. I think my . . . one thing my people know is when I've spent a Sunday in stores. Because I come back with a lot of suggestions on Monday morning.
Ryssdal: It must drive them nuts.
Lafley: Well, hopefully not. I think they're probably used to me by now. I try to . . . I try very hard to make sure that I am a consumer. And I am in a very real sense a consumer. And I try to on a regular basis to get into stores, not just alone, but also to shop with women when they are . . . when they are doing their weekly shopping. I try to get into homes whenever I am in emerging markets, I'm always in homes. When we are in homes, we prefer to do the job with them so we can see what they do and talk to them about what they are doing and what we can do better. But no, we're um . . . every single brand we sell, every single product we make and sell can be improved. We sell some very good ones, we sell some outstanding products but even the ones that are outstanding can be improved.
Ryssdal: Is that how you stay ahead?
Lafley: It may be. I think you have to have that mind set and if you think about it, I think that's what you have to have if you're a consumer. You know, as good as your I-pod is, it can be improved. You know, as good as your laptop computer is, it can be improved.
Ryssdal: So in a sense, you're never going to be done. Right?
Lafley: Never done. That's where there is plenty of work for another 1000 years.
Ryssdal: There's a great quote that I read from you. It was in the context of talking about senior management in this company and your executives and you were quoted as saying, "I want them to feel the hot breath of the consumer." What does that mean?
Lafley: I want them to feel the pressure of the consumer. The biggest challenge we have, and I would argue any successful company has is that you become successful. And that's a problem. I'll use the sports team analogy again. If you win a championship, it's harder to repeat and win a second time and then it's harder to repeat and win a third time. If you think about it, for us to succeed, our brands have to win year after year after year. Every year we have to attract more new consumers. We have to generate higher trial of our brands and product lines and ideally, we have to generate more trial and repeat purchase of our product. That's our basic business model. So we have to be very careful not to become complacent . . . very careful not to become complacent. The other thing that can happen to big companies is that these walls become barriers between you and the consumer. You know, you're in an office. You spend too much time in an office. You spend too much time on the phone with your blackberry, with your head buried in your laptop and you don't spend enough time in touch with your consumer or customer if you are a business to business operation that you serve. And I just believe very deeply that if you have a choice in how you are going to spend your time, you are going to get a better return from spending your time with your consumers and your customers.
Ryssdal: Is it something about consumer products that gets you going or could you be selling machine tools or swimming pools or whatever you can think of?
Lafley: Well I chose P&G, and I chose this industry over 30 years ago versus investment banking, versus consulting, versus other manufacturing company choices because I thought I would like consumer work. I thought it would be more interesting and I thought it would be more challenging and I think it has been that. But I think if you are referring to the principles and strategies and practices of business innovation, I think those are broadly applicable. Applicable across industries.
Ryssdal: You are perhaps the ultimate company man around here. You've been here for 30 something years, you got the job as C.E.O. after having been here straight out of your MBA program. Why did you get this job? You . . . A.G. Lafley.
Lafley: I'm really not sure.
Ryssdal: That's not promising.
Lafley: I'm really not sure. I think . . . I was surprised at the time. We really did not expect a change in leadership, but you know, I honestly have not thought about it. I really haven't thought about it. Every time I have been asked to do a new assignment here, I've sort of thrown myself into the new assignment and tried to do my best to figure out how to do it . . . what I should be doing, where I can add value. And given the circumstances in 2000, we were struggling a bit and I was very much a part of the leadership team that was struggling. I just sort of threw myself into the job. I think what's more important is what influence I have today and maybe in a few years, what legacy I leave. And I hope that three of the legacies I leave will be this constant and intense focus on delighting the consumer; this commitment to innovation which is at the core of our business model at least; and this programmed approach to identifying, developing and growing the leadership that our company is going to need for the next century.
Ryssdal: You're lucky in a lot of ways that you sell stuff people really need. We're always going to have to brush our teeth, we're always going to have to shave and do our clothes. Are you worried about the state of the economy and the consumer mind-set?
Lafley: Well I am a worrier by nature so I am worried. I think it's very difficult to understand what's really going on in the U.S. economy right now. What do I mean? If you listen to the politicians and a lot of the discussion in the media, you would think that we are mired in recession and ain't things awful. If you look at the hard numbers, we are still eeking out very modest growth, and maybe it's no growth and maybe we have slipped into no growth and into negative growth in the last month or two. I do know the U.S. consumer is under pressure, especially lower income consumers. They're under pressure because of the home situation . . . the situation with their home mortgages and the situation with the home prices; they're under pressure because of gasoline prices at the pump; they're under pressure because of price inflation of basic food and other staples products; but the employment rate is still reasonably solid, at around 5% and at least in our experience, that has been the critical indicator to watch. Employment. As long as Americans are employed, they are creative, they are resourceful, they find a way to get through it. If we had a major change in unemployment, I think that would not bode well for the U.S. economy and it would be tougher for P & G's business. There are clearly things the consumer is doing differently right now. Because of gasoline prices, they are making fewer shopping trips. They are buying more on each trip. They are clearly shopping more with the discounters. WalMart reported this week and had a pretty decent April. Some of the other key discounters, I think Costco and Target had better numbers, but right now what we're seeing in the U.S. across all our staples businesses, the household businesses and the personal care businesses is a slowing. But our markets for the most part are still growing.
Ryssdal: Let me ask about retailers and discounters and how you get your products into consumer's hands. You just make them and you ship them out there and then you're dependant on the retailers to get them into households and be used. WalMart accounts for an incredible proportion of your sales.
Lafley: Fifteen percent.
Ryssdal: Do you worry at all that maybe you are perhaps too dependant on them? What if Lee Scott came to you and said, "Hey A.G., you need to cut the cost of Crest by a buck." What do you do?
Lafley: Not really because WalMart represents 130 million American shoppers and that's why we have 15% of our business at WalMart. We also have important businesses with the whole range of retailers down to relatively small regional and local retailers, you know, the Publix of the world, the Wegman's of the world, the H.E. Butts of the world. So the key point I want to make here is that we go to where the consumers shop and we serve consumers where they choose to shop. If 130 million choose to shop at WalMart, then we obviously have to be there. Now, on the second part of your question . . . is there competition among the channels or is there tension among the channels? There is. O.K. there is. That's a fact of life. What we've tried to do and what we've by and large succeeded in doing particularly in the U.S., is work together with the retailers to serve their shopper, our consumer, better. We try to stay shopper and consumer focused. We try to set short business goals. So what are the goals that will enable WalMart or Publix or Costco and P&G to win? And then we put together join business plans. They usually extend for one to three years. And then what we do is we track, you know we deliver the plans and we track the results against the plans. And then when we are off plan, we do whatever it takes together to get back on plan. But this idea of joint business strategies, joint business goals and joint business plans; this idea of coming together to serve their shopper and serve our consumer better has really worked well for us.
Ryssdal: Do you follow consumers where they are based on the retail shopping experience or do you lead them with your products and what you think they need?
Lafley: Well obviously both. O.K. You know part of what we do is try to understand their changing needs and wants and be there, O.K. Part of what we do is, as I mentioned earlier, is try to anticipate needs that they can't articulate and then create brands and/or product lines that meet those unarticulated needs. No consumer asked for Febreeze. No consumer came in and said, "Gee, I'd really like a product that removes malodors from my upholstery or my curtains or from the air." O.K., there was an air care category. So when we created that technology, still the only one of its kind that actually takes bad odors away instead of masking bad odors or covering them up. There was no category. There was no market. So we had to sort of co-design and co-create with consumers the product, the package, all the rest of it. Now retailers like Febreeze because it created totally new business for them. It was all extra. And that's the perfect kind of business. When we did Crest White Strips and we basically allowed consumers to do at home some of the whitening job that they were getting in the dentist office. That created new business for retailers and created a new category for consumers. When we created Swiffer, what was going on is frankly we just weren't cleaning. We were cleaning in the Spring and maybe at the Holiday season and the rest of time that stuff stayed tucked away in a closet. And with Swiffer, we allowed consumers to do these quick clean-up jobs, you know a few minutes a week. And that created more consumption and it's a brand that does 800 million dollars and will probably eventually do a billion dollars. So, yes we try to create demand but that's still a relatively small percentage of the total business.
Ryssdal: It's staggering really, that Swiffer is going to be a billion dollar brand.
Lafley: It's unbelievable. And you know the trial rate on Swiffer in the U.S. I think it's still only 15,16,17 percent so we still have 80% of U.S. homes who haven't even given it a try. And we know if you give it a try, 60 - 65% of consumers will convert to regular purchase and usage of the product.
Ryssdal: P & G is, if not the biggest, it certainly is one of the biggest spenders on advertising in this country and yet you have said you are thinking about changing that model and looking for different ways to spend that money. What might that be?
Lafley: We have been evolving our advertising strategy, our marketing strategy and changing fairly continuously how we spend the money and I think that will continue. And the reason it will continue is because consumers are changing. And without going into all the details, the primary drivers of the change are fragmentation. There really are very few, if any real mass markets anymore. All markets are segmenting, many markets are fragmenting. And that simply represents many the needs, wants and choices that consumers want to have. The second thing that's going on is we're consuming all different kinds of communication in media. When we would introduce a major new product in the '60s and '70s, we made our buys, right? We bought the three television networks, we bought National radio and we could reach 80% of U.S. homes. Today, I'm not even sure we could put together a plan to reach 80% of U.S. homes, and the last time I looked at it, we would have had to make 97 different buys to amass an audience of 80%. So we're in a world of serving consumers what they want, when they want it, and how they want it. That's what you do in your business and we're doing the same thing. Even a fairly basic household product like a paper towel, Bounty paper towels. About 10 - 15% of U.S. homes account for 60 - 70% of all Bounty consumption. So there are Bounty lovers; I happen to be a Bounty lover. Once you've moved to Bounty, all the sponges, all the rags, all that other stuff goes out of the house, right? But there are still a lot of homes that are using sponges and rags for clean-up. So that's the world we're in and in that world, we have to try to reach you and we have to try to touch you and communicate with you when you want, where you want and in the way you want. And that's why we are using everything.
Ryssdal: This company is entirely dependant on consumers willingness and ability to consume; to buy and use your products. That is not an entirely sustainable business model given everything that we all know about; given global warming to environmentalism to sustainability. What are you going to do about that?
Lafley: Well there are two elements to the question. The first one is sort of the fundamental question around consumption, and what we've been able to do over time is to create brands and lines of products that become essentials, or staples. My mother was quite happy with cloth diapers and the cloth diaper service. It's hard to find many people in America today who don't want to use a disposable diaper. Frankly, it's more hygienic and there are even studies that show that disposable diapers are even better for sustainability. So, I think part of our business model depends on rising incomes, rising expectations and improving lives. And as part of that improved life, more of the kinds of products that we make become essentials and really a critical part of your and your family and your households' daily life. The other part of it is the sustainability question that is clearly a very important one. We have a major effort and have had a major effort going for a decade on sustainability and environmental quality. I'm always pleased, and I'll admit somewhat proud when we're selected as a sustainability leader in our industry; and we need to stay there. What are we working on? We're working on a whole range of technologies and products and packaging that will enable our consumers to use less, to recycle where recycling infrastructure is available, to biodegrade what can be biodegraded. And frankly to just return to our planet what we take from our planet so that our children and our grandchildren and generations to come will have a world that's at least as environmentally sound as the one we live in. So it's a major effort. We work with our suppliers. We work with our retailers. We spend a fair amount of innovation time and effort against it.
Ryssdal: Talking about the economy for just a second . . . you have been quoted as saying that facing up to the market realities in this economy is not going to be fun. What does that mean for this company? Does it mean layoffs? Does it mean cut-backs on products and innovation? What does it mean?
Lafley: Well we're definitely not going to be cutting back on innovation because the best way to work your way through an economic downturn . . . I mean you need to be even more innovative when times are tough. You need to broaden your definition of innovation. You need to be innovating not just with new products but with new business models. You need to be innovating in your costs and the way you organize and the way you work together. The biggest pressure right now is clearly costs. You know it's energy costs and commodity costs. Even in the 1970s which was the last tough period for commodity costs; most of the pressure was coming on oil and oil-based derivatives. This time, frankly it's coming everywhere. Just about anything that is dug out of the ground, all of the minerals, most of the agricultural commodities, the prices are just up across the board. This year that we will finish June the 30th, that will be our fourth year of major cost inflation. We have had to cover about 1.4 billion in additional cost as this year has progressed. Next year we have already said that we are going to have to cover another two and what that means is that we are going to be taking more pricing than we've taken for awhile and that's going to put pressure on consumers.
Ryssdal: So you're not taking the pricing; consumers are taking the pricing.
Lafley: Well, we're taking the pricing. Consumers are going to have to pay for it and you know, we end retailers are all going to have to pay for it. Now, let me tell you what we've try to do to soften the blow. First, we don't price to recover everything. We've been able to balance in a way that we price to recover about 70% and we cost save to cover about 30%, so two thirds we priced for and one third we cost save. Second thing we've been able to do is, and this is why innovation is so important, is to continue to improve the products so, and this is the key point . . . so the consumer gets a better value. You may be paying 5% or 6% or 7% more for your laundry detergent in the U.S. but you're getting a compacted liquid detergent that performs better than the prior product and that is better from a sustainability and environmental quality standpoint. So we try very hard to give you more when we ask you to pay more. And I think that's critical.
Ryssdal: P & G has 20 or 25 brands, product lines that are worth a billion dollars or more: Tide and Pampers and Crest and Swiffer the floor mopper is going to be there soon. What's the next new, new thing from you guys that we should be looking for?
Lafley: Well the next brand that will achieve a billion dollars in sales will be Gillette Fusion, which is the new male shaving system that we just introduced.
Ryssdal: Also known as a razor.
Lafley: Yep, razor. Yeah, the five-bladed razor. The best shave in the world.
Ryssdal: Five blades! C'mon.
Lafley: Five-bladed razor . . . and one including the trimmer. We introduced that new product in about two years and three months ago. It will be the fastest brand ever, the fastest product line ever to a billion in sales so that'll be the next one. We talked about Febreeze and Swiffer; they'll definitely get to a billion dollars. And then of course, we're working on new products that I can't talk about but which will come to market over the next year or so. And we hope that in that next product portfolio, there will be one or two or three products that will eventually grow into a billion dollar business.
Ryssdal: How do you define success for this company?
Lafley: Success for us is ultimately delighting consumers and making their everyday life better. And when we do that, consumers buy, try P & G brands a little more often than the other choices in the market. And then when they use them, they like them and then they are more loyal to P & G brands and products. And that is our business model: Higher trial and purchase rates of better brands and product lines; higher loyalty and that multiplies itself and that's what generates the growth, that's what generates the profitability, and that's what generates the cash that enables us to reinvest in the business.
Ryssdal: Does it have to be delighting them happy and satisfied?
Lafley: At a minimum, satisfied . . . O.K. at a minimum, satisfied . . . ideally . . . delighted.
Ryssdal: A. G. Lafley is the chairman and C.E.O. of the biggest consumer products company in the world. It's Procter & Gamble. Mr. Lafley, thanks so much for your time.
Lafley: Thank you very much.