Lafley Q&A: Returning P&G CEO talks corporate strategy in new book
"Playing to win" unlocks P&G strategy secrets
Dan Monk, WCPO Digital
11:29 AM, Jan 23, 2013
9:49 PM, May 23, 2013
CINCINNATI - A.G. Lafley is widely credited with bringing Procter & Gamble Co. back from the abyss. When he took the top job in 2000, market share was shrinking, growth had slowed and P&G's stock price was suffering. Lafley energized the company's innovation efforts, preached endlessly that the "Consumer is boss" and engineered the $57 billion acquisition of Gillette in 2005.
Since leaving the company in 2010, Lafely, 65, has served as a special adviser to the private equity firm, Clayton, Dubilier & Rice. He's also a director for General Electric Co. and Legendary Pictures. He was in Cincinnati in February to promote a new book, "Playing to Win: How Strategy Really Works." Co-authored by Roger Martin, dean of the Rotman School of Management in Toronto and published by Harvard Business Review, Lafley describes the book as a "do it yourself guide" to business strategy.
In January, WCPO Digital reporter Dan Monk interviewed Lafley about his book, exploring how strategic choices helped P&G grow its beauty care business and why the growth has slowed in recent years. Here are excerpts:
Q: What is strategy?
A: The reality is most companies, most not for profits, most governments don't understand what strategy is. They think it's a vision or a mission. They think it's a plan, or a part of a plan. They don't understand that it begins with a clear definition of what is winning. Strategy has five elements. What is winning? Where am I going to play? How am I going to win where I play? What competencies do I need and what systems do I need to win where I play? People don't understand strategies or they have incomplete strategies. Or frankly they're afraid to make the hard choices. Strategy fundamentally is about choices, choosing where to play and where not to play. And people don't like to make choices. It's scary to make choices. It's risky.
Q: Explain how strategy helped Oil of Olay become a leading brand at P&G.
A: The fundamental strategy that worked on Olay was threefold. They identified a different point of entry for consumers for anti-aging skin-care products . They were being sold to mature, say 50-plus women. Some very good consumer research at P&G found that actually women in their 30s start to become concerned about their skin aging. The second insight was that aging skin wasn't just about wrinkling. It's about a whole bunch of other things, skin dryness, skin coloration, skin spots, on and on. That became the "Seven signs of aging" (slogan). The third thing, and this was huge. At the time, here were prestige products sold in department stores at price points up to several hundred dollars. And there were mass products sold for five to ten bucks in chain stores and grocery stores. P&G created this segment with Olay called mastige, which was all of the packaging, design, fashion and experiential side of selling in the prestige market but at a price below prestige but higher than mass (merchandising). They filled this gap between $10 and $25, first with Total Effects, then with Regenerist, which actually sold at $24 to $35 or so. Last thing, and this was critically important, they created projects that really delivered. Dermatologists endorsed them. Beauty editors endorsed them. Consumers basically said these Olay products are as good or better than the Prestige products. But they're priced below Prestige and that represents a great value for me. That was the winning Olay strategy.
Q: How much involvement did you have as CEO in developing that strategy?
A: The only decision made at company level and CEO level was are we going to play in beauty care or play to win in beauty care. If we're going to play to win, we have to be real contenders and get ourselves in the leadership position in the hair care business and skin care business. Those are the two biggest beauty care businesses by far. More importantly, they're the two businesses where women are most involved. They were at the time the fastest growing and among the most profitable. So, we had over the ‘90s established a leadership business in hair care, primarily with Pantene and Head and Shoulders. But we had not, even though we had acquired Oil of Olay, we had not done nearly as well with Olay. So, that's the company-level strategy piece. We helped the skin care business and Olay with global purchasing, access to our perfumer network, with global business shared services. A lot of the support stuff that enabled them to focus like a laser on the marketplace, on the consumer, on the products and on the brand. It allowed them to focus on where to play and how to win.
Q: After nearly tripling in size in a decade, the growth has slowed in P&G beauty care. Why is that?
A: Some of it is probably strategy. In other words, competition was copying their strategy or coming back at them with strategies that had more appeal to consumers. Some of it was execution. In other words, the competition out-executed P&G on the marketing side. I don't know for sure. But my guess is it'll be a little bit of both. The big question for P&G in beauty care is, OK, that was great. We went from 7 billion to 20 billion. They went from Oil of Old Lady, barely playing in the skin care business to one of the leading brands. But now the question is, how do you take it to the next level? I think P&G is the second largest beauty care company in the world after L'Oreal. So, the question for P&G is can you become the leader in the beauty care business worldwide? Clearly, what happened is competition pushed back on P&G's success and they slowed P&G's progress down and stopped it in some cases. So, P&G's going to have to renew itself. But that's the normal course of business, right? Companies don't grow in a straight line. Look at what's happening to Apple right now. They lost 10 share points in a few months in the iPhone market. That's a lot. Ten share points was like a third of their share. And why? Because their competitors changed their strategies and improved their execution.
Q: Does P&G have too much bureaucracy?
A: What you're trying to do is have a dialogue that has all the people who need to be involved in the organization involved only where they add value. That's what you're trying to do. It's easy to say. It's harder to do. From time immemorial big companies are going to be guilty of too much bureaucracy and they're going to be accused of not being as innovative. But I think if you look at the facts, P&G led an awful lot of the innovation across its industries. Unless I'm missing something, the competition has not been more successful the last two or three years because of new product or new service innovation. They didn't do Pods. They didn't do Always Infinity. They're not leading most of the baby care innovation. They have executed well and operated well. I'm on the G.E. board. G.E. is a bigger company, arguably a more bureaucratic company and in a lot of their industries, they're still leading in innovation. So, I could actually make the argument that big should enable you to be even more innovative. More patents, more new products created, more cash to test new products, etc. The part that's difficult and is real is the bureaucracy part. The part that's real is the bureaucracy part. That's what Bob's working on now. I think a big part of what he's trying to do is helping P&G become even more agile, even more flexible and even more innovative because innovation is a core strategic competency for P&G, always has been, always will be. You have ups and downs in the innovation cycles, but Bob's continued to be very clear about the importance of innovation as a core strategy for the company.
A: Is Bob McDonald doing a good job? (Note: McDonald announced he will retire in June)
Well, you know, I think so. But my view is one of the biggest issues that U.S. companies have to deal with is the tremendous over focus and overemphasis on the short term. It's absolutely ridiculous to focus on quarterly profits. He doesn't have a single business that has a business cycle as short as a quarter. Some of his business cycles are multi-year. When you're looking at how a company performs in its industry it's absurd to look at quarters. It's absurd to look at years. And I think that's the biggest problem in American industry. There's way too much emphasis on short-term accounting and financial results. There ought to be way more focus on long term. There ought to be way more focus on the strength of the strategy and the execution of the strategy. And there ought to be way more focus on value creation, which is three things. What's my revenue growth rate over time? What's my operating margin growth rate overtime. And what's my cash productivity over time. Bob's been very public about that. I think he's said our cash productivity is very good. Our revenue growth rate is very competitive, ahead of the industry growth rate and he's said ‘we've got some work to do on margin growth rates. There is too much focus on the short term. And by the way it's not just the consumer products industry and P&G. it's everywhere. Look at how fast people abandoned Apple. Look at how they abandoned Facebook after they went public and now they're buying into Facebook because Facebook made an announcement that they're going to compete peripherally with Google on some of the search space. It's so short term. It's crazy. We have no idea how that's going to work, absolutely no idea. But too much of the stock market has become a casino driven by hedge funds and day traders. And those aren't P&G shareholders. You know, P&G shareholders are individuals and long-term holders. Fortunately, most of the shares are held there. But when you're in a period where a significant minority of the shares are held by the hedge funds and the short-term guys, they're going to try to put pressure on the company because that's how they think they make money. Frankly, they don't have the interest of the company, the interest of the employees, the interest of all the other shareholders in mind. They're trying to make a fairly quick buck.
Q: Would you ever come back and run P&G again?
A: Are you kidding? What are you talking about?
Q: Has anybody asked you to return?
A: No, gosh. Before we announced the transition I moved out of the office. I moved away to the second floor to support Bob as chairman during the startup and then I moved out of town. I moved onto the next chapter in my life. I thought it was very important to separate from the company. You do something for 33 years. You give it your best. Then, you turn the reigns over to the next leader and the next leadership team and the next generation of P&Gers and their job is to take it down the road for another decade or so. That's always the way it's worked.