The Corporation: STRATEGIES
P&G'S HOTTEST NEW PRODUCT: P&G
A soup-to-nuts redesign aims for global speed and focus
At Washington State's Clark County Fair last month, coffee lovers got a front-row seat at a corporate revolution in the making. The local sales force for Procter & Gamble Co. was out in force at the Pancake Feed, distributing samples of P&G's Millstone Coffee. To the amazement of the Fred Meyer supermarket employees running the pancake breakfast, the Procter reps worked the crowd, chatting with customers, even taking turns in the full-size coffee-maker costume with the cup-and-saucer hat. "You don't generally see them out there doing that kind of grassroots work with customers," says Jeanne Lawson, a Fred Meyer buyer. Procter is better known for serving up advertising dollars and display-design tips, she says. "I'd never seen anything like it."
But then, P&G has never needed ordinary customers quite so badly. Battered by disappointing revenue growth and demanding retail customers, Procter & Gamble is a company in a bind. Two years ago, its executives boldly declared that the consumer-products giant would double its net sales by 2006, to $70 billion. P&G has consistently missed its growth targets ever since. Olestra, the company's high-profile fat substitute, more than a decade in development, is showing weak sales. And global economic turmoil is crimping overseas operations. Shares have dropped from $94 apiece in July to $70. The behemoth so used to leading the pack is looking lost.
So P&G, a company notorious for secrecy, has set itself on a remarkably outward-looking self-improvement plan. Breaking from decades of tradition, it has sought external advice. It is undergoing a structural shift prompted at least in part by outsiders--namely, its big chain-store customers. And it is already rolling out an aggressive global marketing blitz, from working the fairgrounds to marshaling the Internet.
Chief Executive John E. Pepper will step down about two years early to make way for President and Chief Operating Officer Durk I. Jager, who will drive the changes. It's a shift away from internal themes of recent years in which Procter focused heavily on such tasks as cost-cutting and shedding underperforming brands. But even as the giant revs its engines to push for faster sales growth, critics wonder if it can overcome both economic turmoil around the world and what will surely be cultural turmoil within its own ranks. "This is a very big deal, for Procter and for all the companies that watch Procter's moves," says Watts Wacker, chairman of consulting firm FirstMatter in Westport, Conn. "But great plans often come with great obstacles."SIMPLIFY, SIMPLIFY. In preparation for the task, Pepper and other top execs have been traversing the country, visiting the CEOs of a dozen major companies, including Kellogg Co. and 3M, in search of advice. Pepper went to Jack Welch at General Electric Co. to learn how the company streamlined global marketing. He persuaded Hewlett-Packard Co. CEO Lewis E. Platt to share enough secrets about new-product development to make a 30-minute instructional video for P&G staffers. The message from all was clear, says Pepper: "What thousands of people have been telling us is that we need to be simpler and move faster."
The result of this unprecedented road trip is Organization 2005, a shuffling of the P&G hierarchy and a new product-development process designed to speed innovative offerings to the global market. The old bureaucracy, based on geography, will be reshaped into seven global business units organized by category, such as baby care, beauty care, and fabric-and-home care. The global business units will develop and sell products on a worldwide basis, erasing the old system that let Procter's country managers rule as colonial governors, setting prices and handling products as they saw fit.SWIFT ROLLOUT. This new global vision has already had an accidental test run. Last year, P&G introduced an extension of its Pantene shampoo line. The ad campaign for the product was almost entirely visual, with images of beautiful women and their lustrous hair, and had a very limited script. That meant the campaign was easily translated and shipped to P&G markets around the world without the usual months of testing and tinkering. The result: P&G was able to introduce the brand extension in 14 countries in six months, vs. the two years it took to get the original shampoo into stores abroad. "It's a success story that gets quite a bit of talk internally," says Chris T. Allen, a marketing professor at the University of Cincinnati, who spent his sabbatical year working in the P&G new-products department. "I see the reorganization as an attempt to do more Pantenes on a regular basis."
P&G didn't come to this global focus entirely on its own. Its biggest chain-store customers, such as Wal-Mart Stores Inc. and French-owned Carrefour, have been agitating for just such a program to mirror their own global expansion. It has been Topic A at retail conventions for months, says Robin Lanier, senior vice-president for industry affairs at the International Mass Retail Assn. While P&G craves an international image for its products, retailers want something more tangible: a global price. As it stands, prices are negotiable on a country or regional basis. What an international retailer pays for Crest in the U.S. could be considerably less than what it costs the chain in Europe or Latin America. A consistent global price gives big chains more power to plan efficiently and save money. Wal-Mart Chief Executive David D. Glass describes his company's goal as "global sourcing," which includes worldwide relationships on pricing and distribution. Moving P&G products from regional to global management is "pointing somewhat in that direction," Glass says.
In addition to marketing and pricing, global business units will supervise new-product development. P&G will move away from its long-used "sequential" method, which tested products first in midsize U.S. cities and then gradually rolled them out to the world. An example: Swiffer, a new disposable mop designed by P&G, is being tested simultaneously in Cedar Rapids, Iowa; Pittsfield, Mass.; and Sens, France, in hopes of sculpting a globally popular product right out of the box.
Jager concedes that it won't be a quick fix. The new regime won't start until January and won't really be functioning for about 18 to 24 months. He expects to see some top-line growth improvement within 12 to 16 months, with obviously better results two years out. Many observers doubt that will be fast enough to make the 2006 deadline. "[The plan] seems to work on paper, but it requires an accelerated sales growth in the final four years," says Constance M. Maneaty, an analyst at Bear, Stearns & Co. "We haven't seen that kind of sales growth from them in a while."
Even if P&G could implement its strategy more quickly, it would still run into the ugly realities of global economic markets. For its extra $35 billion in revenues through 2006, Procter is counting on about $8 billion from emerging markets in Eastern Europe, China, and Latin America, says Clayton C. Daley Jr., P&G's treasurer, who becomes chief financial officer in October. Yet Asian emerging markets are likely to remain mired in deep economic slumps for at least two more years. Recent turmoil in Russia, which was a bright prospect for Procter just a year ago, has gotten so bad that the company has temporarily halted shipments there. "Growing in underdeveloped geographies is clearly questionable," says Jay Freedman, an analyst at Lincoln Capital, a big institutional holder of Procter & Gamble stock. "Whatever they thought the purchasing power of those new customers was going to be is less now.""A LOT OF EX-CHIEFS." Procter has additional obstacles closer to home. How, for example, will tradition-bound P&G managers react to the new hierarchy? "You're going from 144 chiefs to 8. That's a lot of ex-chiefs," says consultant Wacker. And everyone will be affected by the change in tone that is sure to come from the corner office. Gentlemanly Pepper, 60, will be succeeded by Jager, a Dutch-born P&G lifer with a reputation for aggressive moves and abrasiveness. In the 1980s, he turned around Procter's failing Japanese business with such a fury that his Japanese managers called him "Crazy Man Durk" behind his back.
Crazy or no, Jager is sticking to the 2006 target date. He's wasting no time stepping into his new role as champion of the global focus: Already, even before taking on the official title of CEO, he has started preaching the new structure to P&G managers. After all, the clock is ticking.By Peter Galuszka in Cincinnati and Ellen Neuborne in New York, with Wendy Zellner in DallasReturn to top