'The consumer is boss'
Back in 2000, P&G was stumbling; earnings, execution, and morale were all poor. Now this historic company, founded in 1837, is on a roll. How did it regain its footing? One key: getting to know its consumers better.
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| A.G. Lafley took over the CEO job at P&G when the company was stumbling. |
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| Management consultant Ram Charan |
(Fortune Magazine) -- In this adaptation from their forthcoming book, The Game-Changer, A.G. Lafley and management consultant Ram Charan describe the principles of innovation and give a grass-roots example of how listening to the bosses in this instance, Mexican housewives - can pay off.
The first section describes, in Lafley's own words, the difficult circumstances he faced on becoming CEO of Procter & Gamble (PG, Fortune 500) in 2000. The rest is the work of both authors.
A.G. Lafley: A few minutes before a business meeting in California on June 6, 2000, I received an unexpected phone call from John Pepper, former chairman and CEO of P&G. John got right to the point: "Are you prepared to accept the CEO job at P&G?"
I was stunned. Just the afternoon before, I had been speaking with chairman and CEO Durk Jager about our plans.
"What's happened to Durk?" I asked.
"He resigned."
"Why? What happened?"
"I don't have time to go into that now. I just need to know whether you're prepared to do the CEO job for P&G."
"Of course I am."
"Then get on a plane as soon as you can and come directly to my office when you arrive back in Cincinnati."
"Okay." I turned to my P&G colleagues and told them I had to leave.
On the plane, I considered this sudden turn of events. I tried to put first things first: What would I need to do in the next 24, 48, 72 hours? What about the first week, first month?
No question, P&G was struggling. We'd issued a big profit warning in March, and the business was still performing below expectations. We'd moved to a new global-business-unit-led strategy. We'd totally changed the organization structure. We were adjusting to more global competition, a faster-changing industry landscape, and the challenges of the Internet. In the midst of all this, we'd raised the company's goals to unprecedented levels. In hindsight, we were trying to change too much too fast.
Job one was to determine the state of P&G's business. When I began digging into the numbers, I found that we were in worse shape than I had suspected. On June 8 we issued another profit warning, and the stock fell further. We had lost more than $50 billion in market capitalization in six months.
I knew it would take another three to six months to know whether we had bottomed out. In the meantime, I had to retain key people. I talked one-on-one with each leader to come to a clear understanding of the business challenges and opportunities. I encouraged them to compete like hell externally but to collaborate like family internally. Just about everyone signed on to this vision. Proud P&Gers, we were embarrassed by recent results. To turn the company around, we focused on a few simple, powerful things.
1. We put the consumer at the center of everything we do. Three billion times a day P&G brands touch the lives of people around the world. Our goal is to delight consumers at two "moments of truth": first, when they buy a product, and second, when they use it. To achieve that, we live with our consumers and try to see the world and opportunities for new products through their eyes. At P&G the CEO is not the boss - the consumer is. In ways large and small, we were not living up to the "consumer is boss" standard - and we were paying for that lapse.
2. We opened up. Long known for a preference to do everything in-house, we began to seek out innovation from any and all sources. Innovation is all about connections, so we get everyone we can involved: P&Gers past and present, customers, suppliers, even competitors. The more connections, the more ideas; the more ideas, the more solutions. And because what gets measured gets managed, we established a goal that half of new-product and technology innovations have some contribution from outside P&G - such as licensing or buying a technology, finding a partner, or making an acquisition. We are already beyond that figure, compared with 15% in 2000.
3. We made sustainable organic growth the priority. Organic growth is less risky than acquired growth and more highly valued by investors. This strategy also suited our decision to increase the emphasis on core brands like Tide and Crest, where adding a few points in market share can mean hundreds of millions in new revenue.
4. We organized around innovation. To get organic growth, we needed to innovate. Innovation enables expansion into new categories, allows us to reframe businesses considered mature, and creates bridges into adjacent segments. By running a disciplined development, qualification, and commercialization process, we have proved that we can manage a large portfolio of innovations in various stages of development. Innovation is at the core of our business model.
5. We began thinking about innovation in new ways. We started from the premise that it is possible to run an innovation program in much the same way we run a factory. There are inputs; they go through a series of transformative processes, creating outputs. It is possible to measure the yield of each process, including the quality, the end product, and the financial and market results. We also developed tools and know-how to manage the risks of innovation.
A.G. Lafley and Ram Charan: Great innovations come from understanding the consumer's unmet needs and desires. Regardless of the market, innovation must be consumer-led. That is not the same thing as consumer-decided. As Henry Ford once put it, if he had listened to the marketplace, he would have built a faster, cheaper horse. He understood that what people really wanted was a better way to travel. Consumer insights lead to innovation opportunities. You must develop an appreciation for who your consumers are and how they live, to know their needs and also their aspirations. Only then can you figure out how to deliver a product that can improve their lives.
You might think that P&G, of all places, would know that. After all, it created the first market research department and has long been acknowledged for the almost relentless way it seeks knowledge of consumers. For a long time, though, P&G did not really see consumers as active participants in innovation. Their role was essentially passive: responding to stimuli in experiment after experiment to provide "quantitative research data." P&G was talking to a lot of people, but not listening to them. The company also tended to narrow in on only one aspect of the consumer - for example, her mouth for oral-care products, her hair for shampoo, her loads of dirty clothes for laundry detergents (most P&G consumers are women). P&G had essentially extracted the consumer (and at times a particular body part as well!) from her own life and focused on what was most important to the company - the product or the technology.
Recognizing that it needed to look at consumers more broadly, P&G has moved away from traditional behind-the-mirror focus groups to more immersive research techniques, increasing its spending on such research more than fivefold since 2000. How does it do this? Among other things, thousands of infants and toddlers crawl through the Baby Discovery Center every year as P&G researchers watch how infants interact with their mothers, how they move, how their diapers work. There are also specially designed innovation labs. One looks like a grocery store, another a drugstore, and another the different rooms in a typical middle-class American home. Consumers might be asked to come in and be given $100 to spend. By watching how they navigate the aisles and what catches their eye, the company is able to unlock deeper insights into their behavior. The Feminine Care unit once even created a club for teenage girls to get them to relax and talk about menstruation.
This kind of research is particularly important when P&G ventures outside the U.S. The most promising sources of business opportunity these days are in countries that are not yet rich but are growing fast, such as China, India, Russia, Mexico, and Brazil. P&G needs to listen to these bosses particularly closely, because it does not know them as well as its neighbors in Cincinnati.
Through a gate on a back street in Mexico City, into a courtyard, and up two flights of stairs is the modest two-bedroom apartment of Marta and Carlos. Marta, 32, is a stay-at-home mother of two basketball-crazy girls; Carlos is an accountant at a car repair shop. Their home is no larger than a good-sized hotel room, with a tiny kitchen and a dining room just big enough to hold a table and four chairs. There are no closets, so the couple has put up wooden shelving for the family's clothing. The walls are covered with family pictures; on the door is a printed prayer and two crosses. This home is truly their castle. They saved for 12 years, living with Marta's parents, to buy it. Marta takes meticulous care of every inch: Even the family toothbrushes are kept in order, snapped to attention by a device that hangs on the wall above the sink.
Marta is P&G's kind of consumer. In fact, she is a P&G consumer - Ariel laundry detergent, Downy fabric softener, and Naturella sanitary pads.
Carlos makes the equivalent of about $600 a month, making the family part of what P&G terms the lower-income consumer market - households with income between $215 and $970 a month. These families account for about 60% of the country's 106 million people. The poorest 25% of Mexicans do not have the disposable income to be much interested in what P&G has to offer; as for the top 15%, since P&G entered the country in 1948, its products have done pretty well.
But for a time the company was not as successful with the middle 60%, which is where the most population growth is. "We tend to hire from relatively high [Level A] socioeconomic classes," notes Carlos Paz Soldán, vice president of P&G Mexico and Central America, but most consumption comes from C and D household incomes. Continues Paz Soldán: "We were pretty ignorant about them in a deep way." That ignorance represented opportunities lost. "We have to win in this segment today," the P&G Mexico office concluded in an internal study. It went on to ask, "What are the business opportunities we have with them, and why?"
That was the right question, and P&G's past failure to think it through has cost it. In one case, innovation did deliver a better product - but it still flopped because it didn't deliver what consumers wanted. Launched in the late 1980s, Ariel Ultra laundry detergent was concentrated so that women needed to use only half as much detergent per load. P&G saw that as a significant benefit because most lower-income households have limited storage. Ultra's enzymes also delivered better cleaning. P&G was convinced that it had a winner.
The bosses told them otherwise. For one thing, Mexican women didn't believe that they could really get their laundry clean by using so little. For another, Ariel Ultra didn't foam. Many members of lower-income households do manual labor and are acutely conscious of odor; they considered foam a signal that their perspiration was being rubbed out. In a matter of months, Ariel Ultra was gone.
One manager put it bluntly: "We could have understood. We should have understood. We didn't, so we failed." Paz Soldán drew the correct conclusion: "We had to get out of our offices and become immersed in the real world and daily routines of lower-income consumers and in the stores of the retailers we partner with."
Starting in about 2001, P&G developed the "consumer closeness" program to create such experiences. "Living It" enables employees to live with lower-income consumers for several days in their homes, to eat meals with the family, and to go along on shopping trips. In a related program, "Working It," employees work behind the counter of a small shop. That gives them insight into why shoppers buy or do not buy a product, how the shopkeeper stacks the shelves, and what kind of business propositions are appealing. The idea behind Living It and Working It was to sit down with the bosses and to hear what they needed, even if they couldn't articulate it directly.
Maybe that sounds vague, even touchy-feery. In feet, P&G employees report that those have been profound experiences for them. But that is not why these programs exist; P&G created them to help create new business - and it works. Downy Single Rinse proves that such understanding can, in feet, be translated into profitable products.
In the early 2000s the Mexican market share for Downy fabric softener was low and stagnant. P&G wasn't sure what could be done about it, since the assumption was that people who didn't have modern washing machines didn't use softener. Not wanting to compromise the Downy brand by dropping the price too much, P&G decided to try to come up with something specific to the needs of the lower-income consumer.
One of the things P&G people notice - often to their shock - by Living It and similar experiences was the problem of water. Before the Europeans arrived in the 16th century, Mexico City was surrounded by a lake; now the metropolis is parched. Suspicion of drinking water is high. Carlos and Marta buy bottled water, as do a large proportion of families who make much less than they do. Millions of rural women still lug buckets back from wells or communal pumps. In the cities, many have running water for only a few hours a day. Most homes do not have fully automatic washing machines; even fewer have dryers. All this makes doing the laundry a seriously draining chore.
At the same time, lower-income Mexican women take laundry very, very seriously. They cannot afford to buy many new clothes, but they take great pride in ensuring that their family is turned out well. Sending your children to school in clean, ironed clothing is a visible sign of being a good mother. On Marta's wooden shelves and hangers, every single item, from jeans and T-shirts to Carlos's suits, is tautly ironed - and she is the rule, not the exception. P&G found that Mexican women spend more time on laundry than on the rest of their housework combined. More than 90% use softener, even women who do some or all of their laundry by hand.
"By spending time with women, we learned that the softening process is really demanding," recalls Antonio Hidalgo, P&G brand manager for Downy Single Rinse at the time of its debut in March 2004. A typical load of laundry went through the following six-step process: wash; rinse; rinse; add softener; rinse; rinse. No problem if all this is just a matter of pressing a button every once in a while. But it's no joke if you are doing the wash by hand or have to walk half a mile to get water. Even semiautomatic machines require that water be added and extracted manually. And if you get the timing wrong, the water supply might run out in the middle. "The big aha!" says Paz Soldán, was discovering how valuable water was to lower-income Mexicans. "And we only got that by experiencing how they live their life."
Putting it all together, P&G knew that Mexican women liked to use softener; they had high standards for performance; and doing the laundry was arduous and time consuming, and required large amounts of water. These ideas were put through the wringer, as P&G launched the kind of large-scale quantitative research it is known for. They stood up to the scrutiny.
Having identified a problem (making laundry easier and less water-intensive), P&G turned to the labs for an answer. Their solution: Downy Single Rinse. Instead of a six-step process, DSR reduced it to three - wash, add softener, rinse saving enormous time, effort, and water.
Launched in 2004, DSR was a hit from the start. Hidalgo recalls when he told one mother he had worked on DSR, her face lit up. "She thanked me," he says, with satisfaction, "and asked me to please bring more of these kinds of products to her life." Hidalgo is, of course, trying to do just that.
Particularly when innovating for lower-income markets, it is important to think about value, not price. Lower-income consumers are price sensitive, of course, but they will pay for products if they deliver a benefit they consider worth the money. By listening to women like Marta, P&G created a trusted brand and a profitable product. Marta positively purrs when she recalls how her nieces tell her, "Your clothes smell so good." 
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