BEHIND THE TUMULT AT P&G Figuring agitation is better than stagnation, CEO Ed Artzt is turning Procter & Gamble upside down.
By Bill Saporito REPORTER ASSOCIATE Ani Hadjian

(FORTUNE Magazine) – CALL IT the $725 restructuring. Not particularly pricey for a $30-billion-a- year packaged-goods gargantua like Procter & Gamble. Why $725? That's the premium a brand-loyal family had to pay in 1993 for a year's worth of P&G products vs. private-label or low-priced brands. In the value decade a premium like that spells trouble -- just ask Philip Morris. What P&G had was a few hundred bucks of evidence that high prices were slowly transforming the company from mass marketer to mastodon. But even continents can move, and seismic activity is under way at Procter to grind away that $725 bill. ''It is a tectonic shift in a huge, iconic corporation,'' says Gordon Wade, an ex-P&Ger with the Partnering Group who advises many P&G competitors. ''What we have here is a company that has created a platform to execute a strategy that is dramatically superior to anything its competitors have to offer.'' The new platform is anchored in value, a notion these days about as original as sin. It recognizes the obvious: P&G had been overcharging for detergents (Tide), toothpaste (Crest), cough syrup (Vicks), diapers (Pampers), and such; consumers then began underconsuming. So Procter, for decades the ultimate hierarchy -- to be unkind, an inwardly pointed pyramid of anal- retentive order takers loathed by competitors and retailer customers alike -- is upending the pyramid. The telltale of this course shift is the company's conversion to everyday low pricing (EDLP) -- value pricing to Procter -- as opposed to maintaining high list prices punctured by frequent and irregular discounts. Less understood, and far more critical to P&G's future, is the teardown and rebuild of nearly every activity that contributes to high costs. Says Frank Blod of the New England Consulting Group: ''EDLP is the manifestation of a very dramatic business shift, a bold, high-risk new direction for a corporation of this size.'' P&G is redesigning the way it develops, manufactures, distributes, prices, markets, and sells products to deliver better value at every point in the supply chain. A new management structure is three levels lighter, to make the company a swifter global marketer. As for P&G's vaunted brands, these once regal equities will bend to the wishes of consumers everywhere -- South America, China, the U.S. -- and take whatever forms and prices the far-flung consumers can afford. Value has made Procter a hunter of revenues rather than a gatherer. CEO and agent provocateur Edwin Artzt sees this reformation as the only way to rekindle the brand loyalty that fired P&G in the first place. Consumers aren't willing to subsidize costs that don't show up in the product, he says, so ''redefining consumer value relates to being aware of charging consumers for non-value-added costs. That's the point we drive home to our people. The hardest thing for a company is to change its thinking. And so you have to have rules that give us intellectual permission to make changes.'' The cynical may note the irony of P&G making a rule to make rule-breaking okay. Mind you, ''it's beginning to work like crazy,'' says Artzt, 63, a silo- smasher who has accelerated the revamping begun by his predecessor, John Smale. As he begins his fourth year at the controls, the company says that in 22 of 32 categories, domestic unit volume and market share are rising. Perhaps ''recovering'' is a better word. Introducing EDLP cost Procter plenty of sales, some from inventory adjustments, some from angry grocers who prefer frenzied promotions and took business elsewhere. Nevertheless, the company has momentum in the U.S. and abroad and is lowering costs dramatically. Says Andrew Shore, an analyst with PaineWebber: ''P&G is more than a winner long- term; it's one of the biggest winners.'' P&G's announcement in late 1991 that it would convert some of its products to EDLP shocked many retailers (a.k.a. the trade). Ditto many people inside the company. They had no inkling of the move, nor could they have known it was the first shot in a revolution whose outcome was unplanned and unknown. Says a former executive: ''The way Procter advanced EDLP was a preemptive strike inside the company as well as at the trade.'' Something dramatic was necessary, because Procter was struggling in the churning retail channel. The growth of membership warehouse clubs such as Costco and Pace, and of discount stores like Wal-Mart, pulled P&G in a different direction from the one that had worked with supermarkets and drugstores. The new-style retailers weren't interested in yo-yo prices; they wanted goods at the best price day in, day out, in truckload quantities and, in the case of price clubs, delivered directly from the factory, not via a warehouse. As P&G discovered in its relationship with Wal-Mart, this is an efficient way to do business. Some supermarkets and wholesalers like the old way just fine. They want case allowances, cooperative advertising dollars, and other discounts to be able to lure shoppers into the store with hot specials. P&G's approach doesn't eliminate deals completely. The company still wants to be able to reward consumers for their loyalty, and an occasional discount is still a good way to do it. But the company does want consistency in the price the consumer pays at other times. Procter and other companies didn't see the discounts passed on to consumers reliably. Many distributors stock up with huge quantities of deal goods, a process known as forward buying. When the discount expires, they can sell at regular prices goods that they purchased on the cheap, or ship them to regions that aren't ''on deal,'' a profit-spreading technique called diverting. All this wheeling and dealing became self-defeating. Pre-EDLP, consumers increasingly bought only when they had coupons or spotted a temporary price reduction, particularly in categories like diapers, where the yearly cost of keeping baby dry runs more than $500. This shrewd shopping is an important reason why supermarket sales decreased 1% last year, says a study by Information Resources published in Grocery Marketing -- the first such decline ever recorded. Consumers also discovered that private-label products were gaining in quality and were, in the throes of recession, much more appealing in price. During the frenzy to keep the private-label wolf from the door, P&G's controls began to crumble. The sales force converted ''flexible'' marketing programs to merely shipping pallet-loads of promotional money to retailers, even though internal rules limited the value of such arrangements to 5% of total sales for any product. Says Artzt: ''Somewhere along the line, and I don't know where, we argued that 5% was impractical, so let's raise it to 10%. Sooner or later the policy goes away.'' At one point, 17% of all products on average were being sold on deal -- and in some categories 100%. ''You've lost control,'' he says. ''And you don't even know what it's costing you.'' Worse, this promotional tail-chasing sent costs spiraling. The company was making 55 daily price changes on some 80 brands, necessitating rework on every third order. Ordering usually peaked at the end of a quarter (gotta make those numbers), sending factories into paroxysms of overtime followed by periods of underutilization. The phenomenon is known as the bullwhip effect. P&G plants ran at 55% to 60% of rated efficiency on average, with huge variations in output. The paper trail became bumper-to-bumper, and retailers disputed more and more invoices as inaccurate billing increased in the morass. P&G treated these contested charges as accounts receivable, yet 80% of the disputes were resolved in the customers' favor. The accountants began to balk. EDLP was shock therapy to break this cost spiral, but as the company got deeper into it, managers realized it wasn't enough. Says Artzt: ''I freely admit that we were just attacking the symptoms of a broader problem.'' Which was: P&G could not deliver everyday low prices without incurring everyday low costs. And P&G could not have everyday low costs unless it changed fundamentally its overmanaged organization. U.S. boss Durk Jager, a protege from Artzt's Europe days, pushed Artzt relentlessly to break the mold. Out of this emerged SGE, for ''strengthening global effectiveness.'' A group of 11 teams collectively examined every part of the company. There were four rules: Change the work, do more with less, eliminate rework, and reduce costs that can't be passed on to the consumer. Says Stephen David, a vice president in charge of one of the teams: ''The first thing we learned is that if you don't make the commitment to take some of your best people and pull them off line, you will not get the results.'' His project, originally scheduled for six to nine months with part-time participants, had to be converted to a full- time, yearlong effort. % David's team, guided by consultants from Booz Allen, spent six months benchmarking the costs of the sales organization. The team analyzed 41 work processes that the company calls its customer management system and found that Procter had the highest overhead in the business. No wonder. Procter's sales force faced U.S. retailers with five divisions in three sales layers, selling more than 2,300 stock-keeping units (SKUs) in 34 product categories with 17 basic pricing brackets and endless permutations. Result: The quarterly sales promotion plan for health and beauty products alone ran to more than 500 pages and was sent to every salesperson. Five P&G trucks could pull up to a retailer's dock on any day, representing five separate contacts for order verification, delivery times, and whatnot. Says Richard E. Fredericksen, an executive at American Stores, a Salt Lake City- based multiregional food and drug retailer: ''There were so many levels and so many parts; to get a purchase order correct was almost an act of God.'' The goal of the overhaul is to make the distribution chain linking supplier, wholesaler, retailer, and consumer more like a continuous loop. This partnering replaces the old piecemeal ordering system with continuous product replenishment (CPR) -- call it Just in Tide. In this new world, when a box of detergent is scanned at the checkout, the information is transferred directly to the manufacturer's computers, which figure out automatically where and when to replenish the product. This paperless exchange minimizes mistakes and bill- backs, squeezes inventory, decreases out-of-stocks, and improves cash flow. These improvements feed on each other. Since July, for instance, P&G has reduced the number of price changes from 55 a day to one and the number of pricing brackets from 17 to three. Improved ordering is increasing inventory turns at customer warehouses from about 16 a year to about 27, with one category, paper, doing as many as 70 turns. Factories are humming more steadily, boosting efficiency, as P&G measures it, from 55% to over 80% companywide. North American inventories are down 10%, and manufacturing chief Gary Martin estimates that figure could double in a year. That's because only 25% of orders fall under CPR. Some outside consultants believe that at 50% CPR, savings will accelerate disproportionally. Artzt has charged the factories to deliver products in the 1994-95 fiscal year at the 1990-91 cost. Martin says the company is ahead of the curve. One cost saver: P&G is demanding that suppliers to the catamenial (feminine products), diaper, hair care, and laundry detergent categories bid for global business. Artzt also wants P&G to get improved products to market faster, and he has never been mistaken for Job. It used to take the supply gang a tortoise-like 44 months to make a diaper change worldwide. For Pampers Phases, the calendar now reads 20 months. A recent detergent improvement was clocked at 13 months. IMPROVED efficiency has some ugly consequences. The company can make as much detergent in four plants as it used to make in 12. It took a $1.5 billion charge against earnings in July to eliminate some 13,000 jobs worldwide, 12% of the total. P&G announced in January it will close some 30 factories around the world, including four in the U.S. As it happens, America's packaged-goods manufacturers, wholesalers, brokers, and retailers are in the middle of an unprecedented cooperative reengineering effort to eliminate an estimated $30 billion of surplus costs caused by excess handling, paperwork, and inventory. For instance, the industry is trying to develop protocols for electronic ordering. The effort supports P&G's version of a manufacturer-wholes aler-retailer chain in which products are ordered, replenished, billed, and paid for electronically; inventories can be measured in hours rather than weeks; promotional deals are minimized; and most important, the prices consumers pay for P&G brands are competitive with store brands'. Achieving this last part may not be easy. Retailers complain that P&G products tend to provide low gross-profit margins. Reducing the price to retailers in some cases simply makes the margins decent -- and now P&G wants the retailer to give them up by cutting prices to consumers. ''Their overriding objective is to dominate the way these products are sold in American food distribution. I've never met a company ((other than P&G)) that actually hated its customers,'' says an unhappy food retail executive. But other retailers are buyers. American Stores says the program has improved its sales and profits on Procter products, lowered inventory, and increased cash flow. Others are impressed with the new attitude that has accompanied the change in business strategy. Says Hugh Farrington, CEO of Hannaford Bros., a New England chain: ''What has changed, and it's a significant change, is that they are working with us and we with them to look at collective businesses and look at efficiencies.'' For its part, P&G owned up to the fact that many of the myriad sizes of similar items are inefficient to distribute and often unprofitable to sell when all costs are properly allocated. So Procter decided to eliminate 25% of its SKUs. Yet EDLP makes up in higher profit whatever is lost on inefficient sales. Says Blod: ''EDLP gets you a 3% to 5% decrease on the cost of goods. You literally can afford a lower market share.'' The overwhelming number of changes is rattling P&G's insular culture, typically described as arrogant. That's not all bad, says Artzt: ''We have a much better view of our own mortality, and that is a great reliever of arrogance. When you realize that we lived with 25 years of declining shares in the hard-surface cleaner business in the U.S. ((that's Comet, Mr. Clean, and Spic and Span cleansers)) and with the near demise of Ivory, probably the greatest company brand, you realize there has to be some cultural change to reverse that.'' Artzt isn't everyone's favorite brand of cake mix. He's hands-on, with a range that extends from advertising details to throats. ''There are a tremendous number of P&G resumes on the street,'' says a former senior executive, now at another packaged-goods company. But even Artzt's critics admire his courage in tackling the P&G monster. Naturally Artzt prefers the subject to be P&G, and he has a point. Like him or not, he is a type of changemeister that doesn't come along often in American corporations, and his work merits a look. Many on the inside don't miss the old days. Says Stephen David of the customer management team: ''Most people haven't seen a whole lot of change in the top and middle of P&G in a long while. We had grown into the size of suits we were wearing. What happened is that this suit got a lot smaller all the way around.'' THE CULTURE shift extends even unto P&G's holiest artifacts, its brands. Where once they were monoliths, the company is devising a marketing version of hub-and-spoke: fashioning megabrands of America's Tide or Europe's Ariel to defend the fortress but also applying the mother brand to flanking or extender products -- Tide With Bleach, for example. That's a big change. P&G once created a new brand for every new technology; a new formulation like Tide With Bleach would have been given a completely new name. But that strategy left the old brands open to attack. Says Artzt: ''We trapped ourselves, at times, into thinking that the best way to bring new technology to the market was to bring it out as a second brand. But you don't deny it to your market leader, or you are going to lose market leadership.'' The company learned this lesson the hard way in the diaper business when it developed a new shaped-diaper technology and created a new brand for it, Luvs, instead of extending its main brand, Pampers. Kimberly-Clark immediately incorporated a shaped design into its main brand, Huggies, and gave P&G a thumping. Incredibly, P&G made the same mistake with gender-specific diapers in 1987 and got further behind the curve more recently when Kimberly-Clark introduced training pants. Similar goofs hurt Ivory soap and Spic and Span cleaner. ''My greatest disappointment has been the long-term decline of Ivory, which I have been convinced was due to the fact that we didn't properly understand the Ivory concept,'' says Artzt. Procter believed Ivory was soap and soap was Ivory, instead of seeing it as a pure cleaning product that could retain that identity while taking on new features. Improvements such as soap with cold cream were marketed as new, unrelated brands, to Ivory's detriment. Spic and Span has survived 45 years of share decline, a statistic that says as much about the lasting value of brand equity as about P&G's ineptitude. Last year the company finally imbued it with modern qualities and new formulas -- a Spic and Span bathroom spray cleaner, for example -- and a turnaround is possible. This is why you're seeing Tartar Control Crest and Crest With Baking Soda rather than new brands of toothpaste. Another revolutionary idea taking hold at P&G: reversing its decades-old method of creating new products. P&G used to rely on R&D to produce miracles, then priced them to cover the lab bill plus a profit and sold them to anyone who could cough up the premium. Problem: In a world economy where most of the growth is in developing nations, Procter's old model tends to keep new products out of the hands of consumers rather than in them. Seemingly obvious solution: Figure out what consumers in various countries can afford, then develop products they can pay for. For instance, in Brazil the company recently launched a diaper called Pampers Uni, a less expensive version of its mainstream product. The strategy is to create price tiers, hooking customers early and then encouraging them to trade up as their incomes and desire for better products grow. Aligned with the products-for-people-and-places approach is this somewhat surprising notion: P&G is globalizing. While it has long sought to make world products, the company has been slow in coordinating R&D, sourcing, and marketing strategy. Although this seems late in coming, the company is strengthening its global management matrix. In this matrix, an executive might have operating responsibility for the U.S. diaper business as well as responsibility for a global diaper strategy. The company is stressing regional management over country management. In South America a regional matrix focused on customers has replaced a country-by-country structure. Executives say this matrix can handle twice the business it is now doing with the same staff. The aim is reasonable enough: When Procter gets its hands on an innovation or a product with global potential, rolling it out quickly worldwide is important. Artzt is particularly proud of Procter's record with Pantene, a shampoo that zoomed to $700 million in global sales from about $50 million in 1985. With the additions of Max Factor and Betrix, a leading European brand, to its Cover Girl brand (purchased with Noxell in 1989), Procter has become an international power in mass-market cosmetics. There will be no withholding of beauty secrets. A longer-lasting lipstick developed by Noxell, for instance, will be available to all three brands simultaneously, even if packaging and colors reflect local tastes. At P&G the process is called ''search and reapply.'' Procter's grand plan still has some holes. The U.S. diaper business is struggling despite three price cuts in the past year. ''We'll have it right in 12 to 18 months,'' says Durk Jager with confidence. P&G recently introduced training pants to compete with Kimberly-Clark's Pull-Ups and promises a new product come fall. The cosmetics business has some blemishes too -- the company recently killed the Clarion brand. Industrywide, competitors have zeroed in on Procter's shrinking promotional pool and one-size-fits-all program. A recent Lever Bros. ad in Supermarket News promised, ''We know every customer is different. And every market unique'' -- a not-so-veiled attack on P&G's new pricing strategy. RETAILERS SAY P&G is about two-thirds of the way home on EDLP. The company still needs lower prices on some products and better coordination on ordering. Even if P&G doesn't get there, the journey will have been worth something. Says Artzt: ''You've got to envision the risk in staying where you are. If we don't change, we are going to decline. And any decline in an institution is a threat to its survival.'' P&G's main competitors, Unilever, Nestle, and Colgate-Palmolive, are sticking with a system of highly autonomous divisions and varied pricing. This raises a question: If P&G's overhaul is successful, will it compel the rest of the industry to follow? Says Gary Stibel of New England Consulting: ''People underestimate the commitment and conviction behind P&G's business strategy. But next year some companies are going to realize that P&G may have given itself a significant advantage longer term.'' And then it will be the other guys' turn to re-create themselves. If they can.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: J.P. MORGAN CAPTION: UPS AND DOWNS FOR A PANOPLY OF PRODUCTS Market shares plummeted after Procter & Gamble introduced everyday low pricing in 1991, then recovered in detergent, shampoos, and fabric softeners, as well as paper products (not shown). P&G's twin nemeses in diapers, Kimberly-Clark and private-label brands, still give it fits.