What Should Lafley Do Now?

Yesterday, we learned the shocking news that embattled P&G CEO Bob McDonald had resigned abruptly, and that former CEO A.G. Lafley had been hired to replace him.  P&G's performance had lagged investor expectations during much of McDonald's tenure.   Activist investor Bill Ackman had been pressuring the company to make significant changes.  

What should Lafley do as he resumes command of the company he led successfully for many years?

First, he has to streamline his other professional commitments, accumulated since he left P&G.  Why?  Ackman criticized McDonald heavily for holding many board seats at other organizations.  Ackman claimed that McDonald held more than 20 board positions at other institutions!  P&G claimed that Ackman was incorrect.  Yet, the company admitted that McDonald held 7 other board positions. Yikes! Even 7 board positions sounds very, very high to me, particularly for a CEO whose company is not performing as well as expected.   Lafley has to show his people and outside investors that he is giving P&G his undivided attention.  

Second, Lafley should consider streamlining the P&G portfolio.  During his tenure, he divested a number of brands that he considered non-core products or businesses.   More work needs to be done.  I believe two strong candidates for divestment are IAMS (pet food business) and Duracell (battery business).  Why?  P&G has divested nearly all of its food brands over the past decade or so.   IAMS is an anomaly.   In fact, if you go to the company website, IAMS falls under the category of "household brands" - along with the company's large stable of soaps, detergents, and household cleaners.  How does dog food fit in that category?   The US pet food industry is less consolidated than the European market.  It could consolidate further.  Lafley ought to seek a buyer for the business.    He also ought to consider divesting the Duracell business.   It also seems like an outlier amidst the company's other household care brands.  Duracell is a leading brand in its category and surely would fit better at a company selling other similar products.  Having divested these brands, Lafley can reinvest in innovation efforts to ignite more top line growth in P&G's core categories. 

Finally, Lafley has to make a decision about the competitive positioning of the company's portfolio of brands.  During his first tenure as CEO, Lafley divested many low cost brands and focused heavily on products with a differentiated, premium position in the market (think Gillette, Braun, and many high-end fragrances, for instance).   During the recession, the company found itself struggling in some categories, as customers opted for lower price alternatives.   Pressure built to offer lower-priced options.  Meanwhile, Ackman pressured the firm to cut costs.  There's danger in this situation.  Is P&G determined to be a differentiated player in many markets or a low cost player?  Or, is it stuck in the middle, muddling along with an unclear position between the high and low ends of many markets?  Lafley needs to make some tough decisions about the firm's competitive positioning.  

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Did Decentralizing R&D Hurt P&G?

Coleman Lochner at Bloomberg Business Week writes today about the struggles at P&G.  Specifically, Lochner examines the slowdown in product innovation at a firm famous for its breakthroughs in the past.  Lochner displays a chart, posted below, which shows the slowdown in the company's R&D spending over the past few years.














Why the decrease at a firm so well known for innovation?  After all, Lafley made a major push to increase the rate of innovation.  He invested heavily in ethnographic marketing research and the introduction of design thinking methods.   He also embraced open innovation and collaboration with external partners.  Many observers credited these moves with accelerating the pace of innovation at P&G during his tenure.

Lochner offers an interesting explanation for the decrease in R&D spending, given that Lafley did emphasize new product development so much.  He writes,

 "Lafley also decentralized R&D, making business-unit heads responsible for developing new items. R&D chief Brown says that inadvertently slowed innovation by more closely tying research spending to immediate profit concerns. Between 2003 and 2008, the sales of new launches shrank by half. By the time McDonald became CEO in 2009, the number of what the company considered to be big product breakthroughs had fallen to an average of fewer than six per year as unit heads focused on short-term results and smaller inventions, says Brown."

 I found this observation very powerful.  Often, we advocate decentralization in organizations, because we want to empower those closer to the customer.   However, this example demonstrates a key downside of decentralization.   If you couple decentralization with an incentive scheme that may put a bit too much focus on short term profits, then you could get decisions that are harmful in the long run.   The business units may simply feel too much pressure to "make the numbers" and not invest enough for the long run.   Leadership development programs that rotate executives often into new roles also can result in excessive focus on short term results.

One caveat though... Much research shows that R&D spending is not strongly correlated with successful new product development.  It's not just how much you spend; it's how you spend it.  Therefore, before we can jump to conclusions about the chart above, we would need to know more about how P&G is engaging in R&D.  Perhaps the challenges lie in the methods and processes, not just the spending levels. 

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Struggles at P&G

Apparently, the heat is on Proctor and Gamble CEO Bob McDonald.  McDonald reported some disappointing sales and profit news this week.  According to the Wall Street Journal, "He said the company's sales likely fell by 1% to 2% in the current quarter from a year earlier, compared with a previous forecast of 1% to 2% growth, and said core earnings would come in at 75 to 79 cents a share, down from a previously expected range of 79 cents to 85 cents."  Investors are becoming restless and asking increasingly tough questions.

P&G clearly needs to find a way to jump start organic growth.  However, I believe investors also will begin asking questions regarding the corporate portfolio.  Does the firm need to trim some operations that appear outside the core?  For instance, Iams is a billion dollar brand for P&G, yet pet food does not represent one of the company's main product lines.   P&G focuses primarily on health and beauty as well as household care.   The US pet food market is not as consolidated as the European market.  Therefore, perhaps there may be an opportunity to find a buyer for the business.   Investors may begin asking questions about other brands too, such as the Duracell battery brand.  Does it fit well with P&G's portfolio.  Whenever a company begins to struggle and investors become restless, these types of questions will begin to be asked.

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The Dollar Shave Club: Look Out Gillette?

The Wall Street Journal reports today about the rapid and surprising emergence of a new competitor to Gillette in the razor and blades business.   The Dollar Shave Club provides a subscription service, whereby customers can sign up to have blades shipped to them each month.  Customers choose from among three plans - a good/better/best set of options.  The prices range from $3 to $9 per month.   The company has garnered a great deal of attention, as a YouTube video went viral recently - surpassing 4.1 million views as of this morning. The company's motto might offend some, but it sure garners attention: "Our blades are f— great."

What's going on here?  With Gillette, we see a classic case of a company innovating constantly to try to upgrade its product quality.  The efforts result in a continuing "premiumization" of the product.  However, at some point, those enhancements "over-shoot" the needs of some customers.   The price point begins to exceed the willingness-to-pay of some consumers, as they don't necessarily see the value of the most recent product upgrades.  Is there some evidence that consumers were beginning to feel that the price did not match the value for Gillette's high-end razors?  Certainly.  As the Wall Street Journal indicates, the company had become the butt of jokes about the number of blades that they could stick on a tiny razor.  Moreover, customers have been reported to go to great lengths to try to get as many shaves as possible from a particular razor. 

The barriers to entry in the razor/blades business seemed insurmountable though.  Getting on the supermarket shelf was no mean feat.   Moreover, promoting a new line of razors could be very expensive.  However, the Dollar Shave Club has found a way around those traditional barriers to entry.   They've gone direct to consumers with a subscription service, avoiding the supermarket shelf entirely.  In addition, they've used social media to promote the product at virtually no expense. 

The question remains:  Is the Dollar Shave Club truly a better value than Gillette?  The answer: it depends.  As the Wall Street Journal reports in this complementary article, the true cost to the consumer depends on shaving habits. Those habits, in turn, depend partially upon the physical attributes of the customer.   Gillette, of course, has been trying to persuade customers that their blades last longer, making the true cost of ownership less expensive than competing blades.   That argument raises one final interesting point related to this story.   With industrial marketing efforts, customer willingness-to-pay is often something that a firm can quantify.  With B2B marketing, a company can persuade a customer of the superior economics of buying their product instead of a competitor's goods.   With consumer marketing, one can try to explain those economics to the user, but it's a bit more challenging.  You aren't sitting with a purchasing agent and walking through a spreadsheet.  You are trying to persuade someone in a 30 second commercial.  Therefore, Gillette will have to come up with a very clear and concise way to convince consumers that the total cost of shaving will be lower with their products, even though the price per blade is significantly higher. 

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Kellogg, Pringles, and P&G

Over the past few weeks, a scandal at Diamond disrupted the firm's intent to purchase the Pringles business from P&G.   As a result, Kellogg swooped in yesterday to acquire Pringles instead.  Investors and analysts generally reacted positively to the deal.  The Kellogg stock price rose 5% on the news of the deal.  Analysts believe that Kellogg will accelerate its international growth with the Pringles purchase for two reasons.  First, many countries do not consume cereal as much as the United States.  Second, the existing snack business at Kellogg is fairly US-centric as well.  Pringles offers access to many international markets through its extensive distribution channel, as well as a product more appealing to many foreign consumers. 

While most people are focused on Kellogg today with this news, my attention has turned to P&G.  The Pringles divestiture continues a strategy undertaken by former CEO A.G. Lafley several years ago.  Lafley began to divest many of P&G's low-growth food businesses such as Jif, Crisco, and Folger's Coffee.  He refocused the firm on two categories in which it was dominant, and in which it had strong international growth prospects - i.e. health/beauty and home care/household cleaning. 

A natural question to ask:  What remaining brands might be candidates for divestiture?   I would focus on the Iams pet food business.   While the product line represents a billion dollar brand for P&G, it faces a number of challenges.  First, private labels represent strong competition in the pet food category (unlike some strong P&G categories such as razors/blades).  Wal-Mart's private label, Ol' Roy, is the top-selling dry dog food in the United States!   Second, Iams doesn't benefit from purchasing synergies with other food businesses, as some pet food brands owned by rivals do (for instance, Nestle owns the Purina family of brands, as well as a host of other businesses that procure agricultural inputs).  Third, the Iams business has not performed as well financially as many other parts of the P&G portfolio. 

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P&G's Organic Growth Strategy

Business Week reports on new P&G CEO Bob McDonald's strategic push to emphasize organic growth over acquisitions, particularly growth in emerging markets.   I must say that I applaud any CEO who is willing to put a priority on organic growth vs. acquisitions.  I think too many chief executives fall in love with doing deals, rather than doing the hard work required to grow existing brands.   Moreover, too many firms pay an overly high price tag for deals.

Having said that, the P&G organic growth strategy has some risks.   First, a company of that size must generate a ton of new growth simply to "move the needle" - i.e. to grow the overall top line by a small percentage.  Second and perhaps more importantly, P&G must take care not to diminish its brand equity in various product lines as it tries to grow in emerging markets.  Under McDonald's predecessor, A.G. Lafley, P&G definitely shed many of its lower-priced brands and focused instead on premium positioning of its products.  That strategy proved very successful.   Now, however, to grow in emerging markets, P&G will face pressure to offer lower-priced versions of its products.  The question is this:  Can P&G effectively maintain its premium strategy in the developed world while catering to lower income customers in emerging markets?  In an increasingly global economy, might that strategy dilute certain brands?  In the past, it may have been easier to position brands differently in different countries.  That has become a bit more difficult with globalization, increased international travel, and the like. 

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