How Procter & Gamble Plans to Clean Up

The consumer-products giant Procter & Gamble is investing in game-changing innovations even amid the recession, says CEO A.G. Lafley

Since becoming chief executive of Procter & Gamble (PG) in 2000, A.G. Lafley has never had it tougher. Shares of the world's biggest consumer-products company have lost a third of their value since last fall. U.S. shoppers are trading down to private-label products from premium-priced brands such as P&G's Tide, Gillette, and Pampers. And the economic downturn is spilling into developing nations where P&G has notched its best growth. Lafley, nonetheless, seems undaunted. The 61-year-old sat down in his Cincinnati office with BusinessWeek's Roger O. Crockett to talk about managing through the recession. Here are edited excerpts:


We continue to invest in our core strengths. First, we don't skimp in understanding the consumer. Second is innovation. Our capital spending will go up in 2009 for new engineering and manufacturing technology. And third is branding. Although we actually are spending fewer dollars on advertising because the price of media has gone down, we're delivering more messages to our consumers.


In our industry only 15% to 20% of new products succeed. P&G's success rate is a little over 50%. But we were at that industry average in the '90s. We improved our batting average by clarifying and simplifying the innovation process. We set checkpoints with clear measures for each phase of the process from ideation through development and commercialization. If a project looks like it will not make it, we drop it. You learn more from failure than you do from success but the key is to fail early, fail cheaply, and don't make the same mistake twice.


The key thing to understand is that we're not in the commodity business. We're not selling items that fluctuate based on the price of the input materials. We're selling a brand. We can create better value for $1 with a new Downy dishwashing product in Mexico. Or we can do it for $5 or $10 with a household cleaning product like Tide, or for $40 to $50 with a personal-care product like some Olay facial creams. It's all about who is the consumer and what represents value for her.


You need creativity and invention, but until you can connect that creativity to the customer in the form of a product or a service that meaningfully changes their lives, I would argue you don't yet have innovation. We invented a material back in the '60s that would absorb a lot of water. Until we converted it into a Pampers disposable baby diaper, it was just a new kind of material. We created this entirely new product category, and that created an industry. We'd like to have these kinds of discontinuous innovations be 20% to 25% of what we do. For us to sustain sales and profit growth, we have to innovate.


Virtually every retailer we work with likes the fact that we lead innovation. It creates sales growth in existing categories. It creates new categories that are a source of sales and profit growth in the future. It brings consumers into their stores to try new products, and it brings consumers back to their stores, where they can get products they trust.


Private label is less than 1% of the U.S. retail market, and where it gains traction is in segments that lack innovation. It is difficult to innovate in commodity food categories, which is where private label is winning the most. Private labels are imitators. P&G brands and products are innovators.


Today we reach a little more than half of the world's 6.7 billion consumers. We want to reach another billion in the next several years, and much of that growth is going to be in the emerging markets, where most babies are being born and where most families are being formed. We see growth across our entire portfolio.


Our focus is on long-term, sustainable growth. Acquisitions and divestitures have always been part of that strategy and will continue to be in the future.


Back in 2000 we set a goal of having partners for half of all new products. We hit that goal in 2007-2008. That obviously saves us a lot of money. We can take a P&G dollar and turn it into a dollar and a half to two dollars. Virtually all the work you don't see—taking an order from a retailer or wholesaler, processing orders, scientists working in research centers—is all run collaboratively in back rooms with partners. So our operating margin increases, even though we're still spending on R&D and branding and capital to support innovation.


C'mon, I'm not even 62. I've got some runway left. Right now I'm focused like a laser on P&G and P&G stakeholders. It will probably be something a lot different at 65 and beyond. But this is a seven-day-a-week job, and I still feel young.

Business Exchange related topics:Procter & GambleBusiness InnovationRetailLeadership

    Before it's here, it's on the Bloomberg Terminal.