The Un-CEO A.G. Lafley doesn't overpromise. He doesn't believe in the vision thing. All he's done is turn around P&G in 27 months.
(FORTUNE Magazine) – "We've got to keep our eyes on France and Spain," cautions a senior executive at Procter & Gamble. "They could be the next Germany!"
It is late afternoon, and a dozen of P&G's top staffers have been huddled for hours in a small conference room at the company's sparkling new European headquarters, an airy glass-and-steel compound in a suburb of Geneva, Switzerland. Despite the bright, lush setting--one that seems a universe away from the company's gray towers in Cincinnati--there is an air of concern among the assembled execs, a sense of heightened alert. Here, in the aptly named war room, are poster-sized surveillance photos of supermarket aisles lined with consumer products like toilet paper and diapers. Next to them, tacked to the walls, are fragments of intelligence reports, direct quotes from shoppers in large type: "I buy store brands and not the big advertised brands. There is really no difference." "I buy mostly store brands--except when it comes to soup." Along one wall are shelves stacked high with captured enemy materiel: bland packages of tampons, toilet tissue, and deodorant marked with the "private labels" of big-box European retailers such as Germany's Aldi and Carrefour in France.
Make no mistake, this is the next billion-dollar battleground in the European theater, and the P&G brass here have been heatedly, if wearily, debating both offensive and defensive tactics all afternoon. Kerry Clark, who presides over P&G's global market development and who was just named as one of the board's two vice chairmen (Bruce Byrnes is the other), stresses to the group how high the stakes are in Germany, where discounter Aldi has had huge success selling its private brands. And now Aldi is fast moving into other European countries, he says. (The company, in fact, already has 578 stores in the U.S.)
Another clutch of executives begins arguing the "If you can't beat 'em, join 'em" defense--that is, maybe P&G should make its own traceless, private-label products for its big outlet customers. "Kimberly-Clark is doing it," sniffs one manager. "They play at whatever will cut us deeper."
There's one person in the room, however, who hasn't said much of anything. White-haired and wearing rimless eyeglasses, he's seated off to one side, hunched over a white legal pad, scribbling notes. He looks like a college professor--fresh scrubbed, a bit nerdy. Finally, in a fleeting moment of quiet, he looks up and clears his throat. "I don't want to bog us down," he begins with a hint of apology. The voice has a bit of New England twang: slightly nasal, flat. It's so soft that the others in the room have to bend in to hear. "I think the obvious question, though, is, How can we be distinctive? You know, 'Tide with Bleach is the only...'" He doesn't finish the pitch but rather prods the others to continue the thought: "See where I'm going?"
With that, Alan G. Lafley--"A.G." to everyone--stops talking. An observer might have easily missed his words altogether, were it not for two things. For starters, A.G. happens to be the boss--he's chairman, president, and chief executive of America's largest household- and consumer-products company, a brand powerhouse that earned $4.4 billion last year on sales of $40.2 billion. And second, there is an immediate change in the conversation's direction. As if a radio dial has turned, the talk in the room goes from grousing about the competition to discussing ideas for new marketing tactics. Lafley, for his part, listens intently for a while, then turns back to his pad and scribbles some more notes.
Watching A.G. Lafley at work is a deceptively unimpressive sight. As far as CEOs go, it's fair to say that the 55-year-old New Hampshire native doesn't have much dazzle or flair. He's not someone who wows a crowd, like Herb Kelleher, the former chief of Southwest Airlines, or GE's legendary Jack Welch. The most flamboyant thing about him is his shock of hair, the color of Xerox paper, shooting up two inches from his scalp like a two-month-old Army buzz cut. "If there were 15 people sitting around the conference table, it wouldn't be obvious that he was the CEO," says Ann Gillin-Lefever, an analyst who covers P&G for Lehman Bros. Adds P&G board member Johnathan Rodgers, a former president of Discovery Networks: "He doesn't have that superstar CEO personality." In truth, Lafley, who got his start at P&G a quarter-century ago as a brand assistant for Joy dishwashing liquid, wouldn't be all that interesting to watch--were it not for the fact that he's so darn good at his job.
In the two years and three months since he's been P&G's chief, Lafley has managed to pull off what neither of his two predecessors could--turn around the global behemoth. And he did it in the midst of a world economic slowdown to boot. When he took over in June 2000, on the same day as CEO Durk Jager's sudden resignation, the company was the sort of ink-stained mess you'd find in a Tide commercial. It had slammed four profit warnings into two quarters, according to Thomson First Call. Its stock had dropped by half in the previous six months--losing a crushing $70 billion in market value. And the combative Jager, whose 17 volatile months on the job had made his the shortest CEO tenure in P&G's grand 165-year history, had left the company unsure of its footing. The day Lafley got the keys, no one had high hopes. The stock dropped $4 on the announcement and continued to slide over the next three weeks, bottoming out at $53. "We were all expecting the worst from P&G," says Salomon Smith Barney analyst Wendy Nicholson.
Two years later P&G is in its best shape in ages. It has beaten Wall Street's revised expectations eight quarters in a row. Net profits in the June quarter (also the end of the company's fiscal year) rose to $910 million from a loss of $320 million in the comparable 2001 period. For the fiscal year, net earnings per share rose nearly 52% over the previous year's. Fourth-quarter sales grew 6%, year over year--reaching a long-awaited target. Revenues for the full year are up 2.5%. (A P&G spokeswoman says they are as high as 4% before taking into account foreign currency exchange rates.) Even the stock dividend, which has climbed steadily upward since 1955, has been hiking much faster of late.
Such results have not been lost on investors. P&G's stock has soared 70% from that low of $53, to a recent $90. As Lehman analyst Gillin-Lefever sums it up: "He's restored our confidence."
There is a lesson to be learned in all this. It is not the fickleness of Wall Street analysts, or shareholders. It is not even that Durk Jager's strategy was so flawed or that Lafley's is so ingenious. It is not that Crest and Tide make teeth and T-shirts whiter and brighter, though perhaps they do. There is something else going on here--a lesson, as we said, for executive search committees, headhunters, and flailing boards of directors. A new breed of turnaround specialist seems to have slipped into the corporate habitat--and somehow managed to thrive. This type of chief executive doesn't come with a megaphone or cash out mammoth amounts of stock options. This leader speaks softly and would probably choke on the term "grand vision." This one--get this!--thinks of himself as an employee of the company. Call him the "un-CEO."
The concept may be foreign to most of us, especially after decades of chief executives with atomic egos--and a year in which many (Dennis Kozlowski, Bernie Ebbers, Jean-Marie Messier) have blown up so spectacularly. But after FORTUNE spent a week watching A.G. Lafley work, it is clear that in the case of P&G at least, the un-CEO approach can work wonders. Tagging along for a trip he took this summer to review the company's European operations, we got an exclusive, behind-the-scenes look at what it takes to run this truly global company. We followed Lafley into strategy meetings, manufacturing plants, grocery stores--and meals.
This is what we discovered: He's a listener, not a storyteller. He's likable but not awe inspiring. He's the type of guy who gets excited in the mop aisle of a grocery store. His plan to fix P&G isn't anything groundbreaking but rather a straightforward, back-to-basics tack. And so far it's worked. He has rallied his troops not with big speeches and dazzling promises, but by hearing them out (practically) one at a time. It's a little dull, perhaps. Workaday dull.
Maybe a bit like inspecting a cosmetics manufacturing plant. Indeed, that's why Lafley has come to Limerick, Ireland, a graying, industrial city along the banks of the Shannon River. It is a wet, drizzly morning. Still rosy-cheeked from the run he took earlier around some nearby ruins and the University of Limerick campus, Lafley visits the hotel's breakfast buffet and comes away with a bowl of mealy porridge and a cup of orange juice. He is wearing what he always wears (magazine photos excepted): an off-white, button-down shirt, dark gray trousers, thick-soled shoes, no jacket. When prodded to talk about his first days at the helm, Lafley lets go a shy smile: "I wasn't exactly greeted with cheers," he says. That day, as P&G's stock continued to tank, morale among the troops was at an all-time low. A quarter of P&G brand managers had quit. Loyalists were embittered. "The strategies the company had chosen were simply not working--everything we were doing was not working" sighs Jeff Schomburger, an 18-year veteran who is now head of sales in Western Europe. "And that was very frustrating."
Lafley's predecessor, Jager, had been brought in--like Lafley--for a rescue mission. Even before its earnings warnings and stock plunge, P&G had been struggling for years with the same basic problem: How do you grow a $40 billion company? After all, it takes $400 million in new sales just to move up 1%. Significantly, between 1990 and 2000, P&G had failed to double its sales--a goal that it had met every previous decade since 1940.
Jager had an aggressive plan: Launch a slew of new products in hopes of finding the next big billion-dollar product, like Tide or Pampers. Trouble was, he didn't find it. P&G's great hopes--Olay Cosmetics and Fit, a fruit wash--flopped. At the same time, Jager's other ambitious initiatives backfired. In an effort to globalize P&G's brands, for example, Jager decided its products should be sold under the same name all around the world. So in Germany, the name of P&G's dishwashing liquid changed from Fairy to Dawn--the name it sells under in the U.S. But since no one in Germany knew what Dawn was, P&G's sales for the brand plummeted.
As each initiative failed, the troops at P&G began to feel rudderless. "I was lost," acknowledges Chris Start, now vice president for fabric care in Western Europe. "It was like no one knew how to get anything done anymore."
When he came in, Lafley had to move fast. "I had to come up with something quickly to get people focused. I didn't want everyone sitting around worrying that our stock price had dropped in half," he says. Within days he set his plan. Actually Lafley had been thinking about how to fix P&G even before he got the top job. In his 25 years at the company, he had seen first-hand what had clicked with customers, and what hadn't. He'd run the launch of Liquid Tide in 1992--one of P&G's biggest hits; he'd also been in charge of the company's dismal launch of Physique, a high-end shampoo. (What, can't remember Physique?)
As he saw it, P&G didn't need a radical makeover. What it needed was, well, to sell more Tide. In its push for new products, P&G had neglected its older brands like Tide and Pampers. But those billion-dollar blockbusters are, and have always been, the company's bread and butter. "If Tide isn't healthy, P&G isn't healthy," says Jim Gingrich, an analyst with Sanford C. Bernstein.
So Lafley refocused the company on its big brands. He chose P&G's then ten bestsellers--the brands that each generated over $1 billion in sales and which combined made up more than half of total revenues. (There are now 12, including newcomers Iams pet food and Crest.) Those would now be top priority at P&G. They would get the bulk of P&G's resources, its manpower, and its financial backing. "It's a basic strategy that worked for me in the Navy," says Lafley, who, as a supplies officer during the Vietnam war, ran a department store for servicemen. "I learned there that even when you've got a complex business, there's a core, and the core is what generates most of the cash, most of the profits. The trick was to find the few things that were really going to sell, and sell as many of them as you could."
If the plan was shocking in anything, it was its simplicity. Everyone down the chain of command could understand it: Selling more Tide is less complicated than trying to invent the new Tide. More important, P&G already knew how to play that game. The company has been coming up with ingenious ways to sell boxes of Tide since 1946. It has been pushing Pampers since 1961. Nobody is better at hawking "new and improved" somethings-or-other on consumers than Procter & Gamble.
Consider the case of P&G's hair-care group. "When A.G. first came onboard, we were struggling: It was trying to get new brands out there and do everything at the same time," recalls Martin Nuechtern, head of global hair care. His group had gone through a particularly rough time when its launch of Physique floundered. At the same time Pantene, its dominant brand, had stagnated: In 2000 sales were flat.
"A.G. made things very clear: Make sure you focus on Pantene," says Nuechtern. That suddenly simplified everything about his job. Now instead of struggling to fix a failed new product, his job was to sell more of a product that already brought in upward of $1 billion in sales. Very quickly his group got to work. Instead of marketing the shampoo by the consumer's hair type--fine, normal, oily, dry (which customers, it seems, frequently misdiagnose)--they refocused the product on the benefit or look the user was hoping to achieve (volumizing, smoothing, curls). They revamped Pantene's bottle, changing its cap and curves and accenting each hair regimen with its own signature color. Volumizing products, for example, have a cap with a green accent. They encouraged retailers to shelve all of the products in the line together and "clump" each distinct hair regimen (e.g., the curl collection) as well. They tried new marketing materials at the point of purchase--graphics to guide the consumer to the right product for them. It worked. Pantene's sales grew 8% last year.
As he got P&G's mighty brands back on track, Lafley also had to get expenses in line. Under Jager costs had gotten out of control, prompting P&G's flurry of profit warnings. To cut expenses Lafley began a massive round of layoffs--eliminating some 9,600 jobs. He shut down skunkworks projects and pulled flopped launches such as Fit and Olay Cosmetics. He also sold off the Jif and Crisco units, which weren't strategic fits. Together, these measures yielded some $2 billion in savings.
For a traditionally dowdy grande dame of a company, with 102,000 employees in 80 countries, there was surprisingly little resistance to the transformation. Some credit Lafley's calm, unflappable focus, a directness that comes without an iota of bluster. Lafley credits the employees. "The fact that we were in a crisis made it easier to make changes," he says. "In a crisis, people accept change faster."
Norman Augustine, a retired chairman of Lockheed Martin who's served as an outside director on P&G's board since 1989, adds that it helped that the chief executive is also a tough nut. "He knows how to lay down the rules when he needs to," says Augustine. "Quiet people tend to be the toughest." Fostering competition in a once-collegial managerial culture is part of that toughness. Each quarter, at a meeting dubbed the Global Leadership Council, Lafley reveals his senior managers' financial results--to everyone at the meeting. It's a strong-arm tactic he picked up during his days in the service. "In the Navy they compete on everything. They'd make you do pushups and rank you by who did the most. It's very effective: They always pushed you to do better," he explains. At P&G "it motivates people who are performance-oriented. For the few people that it doesn't motivate, we are probably not the right place for them." And he means it: If you can't deliver results, you're out. Since Lafley took over, close to half of P&G's top management team has turned over.
For the survivors, the mood at P&G these days is almost bubbly. At a lunch with about 40 midlevel managers, Lafley is greeted with warm smiles and enthusiasm. Still, he seems uncomfortable playing the conquering hero. Quietly taking his place in line at the buffet table, Lafley plops a slab of tuna salad on his plate and joins a group of managers in the corner to chat, standing as he eats. Then he clears his throat, and raises his voice above the din. "I don't have a speech planned," Lafley says. "I thought we could talk. I'm searching for meaty issues. Give me some meaty issues."
Invariably, this is an awkward moment: The big-shot CEO asking his underlings for questions. You get a lot of nervous twitters as people look around the room waiting for some other brave soul to open his mouth. But there is something about Lafley's easy demeanor that has this room completely relaxed. "You can tell him bad news or things you'd be afraid to tell other bosses," says VP Chris Start.
His efforts to rip down barriers separating honchos from hired hands is not merely symbolic. In the fabled 11th-floor executive suites at P&G's Cincinnati headquarters, Lafley is having the oak-paneled walls torn down and donating the 19th-century oil paintings to a local art museum. The CEO and his top brass will sit in cubicles on half the floor. The other half is being transformed into an employee learning center.
Fixing the pH balance of P&G's culture is all well and good, of course. But that's over with. Mission accomplished. Lafley's next, and perhaps tougher, task is gaining ground on the competition. Most of P&G's rivals in the household- and personal- products sectors not only have entrenched brands of their own--fighting to grow market share too--but have trimmed organizational fat as well.
Still, P&G seems to be edging out its big rivals. Or that's certainly Wall Street's perception. Year to date, the stock has risen 15%, while its nearest competitor, Clorox, has seen only a 10% rise in share price. Meanwhile, shares of Kimberly-Clark are relatively flat; and those of Gillette and Colgate-Palmolive are down 4% and 6%, respectively. Bernstein's Gingrich, though, doesn't see much upside for the entire group. The companies have already reaped the benefits of the weak dollar and unusually low input costs for raw and packaging materials, he says. The macro picture isn't likely to get better.
Translation: Lafley's battle to boost the company's top and bottom lines is likely to get tougher. He has promised Wall Street that annual sales will grow 4% to 6% by next year (in local currencies)--as it did in the fourth quarter--and that earnings will continue to grow at 10% or more. For now he's on track to hit those targets. But the boost from earlier cost cutting should sag by the end of 2003.
On the sales front Lafley is sticking to his big-brands strategy--banking that new versions of old brands (Tide Clean Breeze has been a big hit) will win market share. But he can't rely on the old warhorses forever. At some point P&G will need new billion-dollar brands. For now, Lafley's tactic is to buy them. Last November he bought Clairol for $5 billion--betting that the fast-growing hair-dye market will bring in a big revenue boost.
Lafley is also, apparently, sticking to his strategy of being very hands-on. In his long career he has been in charge of laundry and cleaning products, global beauty care, cosmetics, and several other posts. Now, watching him walk around a giant Sklavenitis chain store--an outlet that sells everything from china to lawn furniture--in Athens, his panoramic knowledge of consumer marketing becomes clear. As he steps through aisles of toilet paper, diapers, and deodorant, Lafley is methodical. He scrutinizes each aisle. He asks precise and detailed questions. Standing by shelves of shampoo, he asks Maria Sklavenitis, the daughter of the chain's owner, "What are the current hairstyles of Greek women?" When she tells him they like to dye their hair, he replies, "Okay, so that'll be good for conditioner sales: You know when you dye your hair, it really tears it up, and you need to condition a lot." At the kitchen-cleanser aisle, he spots a stack of Swiffers--one of P&G's new products, a dry and wet mop line that has been a major hit. Immediately, he turns to Sklavenitis: "Do you think these would sell better over by the mops and brooms?"
In his aisle run-through, he discovers that Pampers Easy Ups have fallen into a communication gap--Greek moms, it seems, have had trouble deciphering the sizing on the back of the package. He learns that Colgate is dominating Crest in the shelf space wars (four shelves to two); and that even the battery- powered Crest SpinBrush--whose $200 million in annual sales have helped catapult Crest into a billion-dollar brand--isn't getting much play. The sporty new toothbrush is in a corner on the bottom shelf. "We're going to have to earn our way into better spacing," says Lafley.
Despite the tough competition, P&G's Greece unit has just closed the books on a great year. Later that evening, in a tiny taverna just outside Athens, he is celebrating with the group's marketing managers and sales directors. It's a cozy gathering, and as the grilled octopus and retsina are passed around, the general manager of P&G's Greek operations stands to present Lafley a gift--a biography of Alexander the Great. "We thought this would be appropriate. As you know, Alexander was a great general who built a great empire," the manager declares enthusiastically.
The speech is a big hit. The group is laughing, and then Lafley asks a question: "What happened to Alexander's empire after he died?" The Greek manager tells him happily that "it lasted for many hundreds of years." Lafley smiles, thanks him for the gift, and says nothing more.
Later Lafley, who once considered pursuing a graduate degree in history, reveals the real story: After Alexander's death, his generals fought among themselves and tore up the empire. "That's not what I want to happen here," he says quietly. "What I'm trying to build into this organization is something that will last long after I'm gone. This is a company that aspires to be around for 1,000 years."