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Module 7 P&G On February 14, 2017, The Wall Street Journal…
Module 7 P&G
On February 14, 2017, The Wall Street Journal reported that Trian Fund Management, one of the biggest activist investors has built up a more than $3 billion stake in Procter & Gamble, a leading global consumer products firm. The move added urgency to P&G’s efforts to turn around its business and boost its stock price. The firm’s closely watched organic sales growth, which excludes acquisitions or divestments as well as currency swings, has been stuck between 1% and 3% in recent years . It has struggled to boost sales growth as it has confronted a sluggish global economy and competition from global competitors and Internet upstarts. Since its founding 175 years ago, P&G had risen to the status of an American icon with well-known consumer products such as Pampers, Tide, Downy and Crest In fact, the firm has long been admired for its superior products, its marketing brilliance, and the intense loyalty of its employees who have respectfully come to be known as Proctoids. But a downward spiral in the 1990’s led the firm to turn to Alan G. Lafley to try and turn things around. He spent $70 billion over his tenure scooping up brands such as Gillette razors, Clairol cosmetics and Iams pet food. With 25 brands that generated more than $1 billion in sales, P&G became the largest consumer products company in the world. Under Lafley’s chosen successor, Bob McDonald, however, P&G’s growth stalled as recession-battered consumers abandoned the firm’s premium-priced products for cheaper alternatives. More significantly, the firm’s vaunted innovation machine stalled with no major product success during his tenure. P&G’s decline eroded morale among employees, with many managers taking early retirement or bolting to competitors. Says Ed Artzt, who was CEO from 1990 to 1995: “The most unfortunate aspect of this whole thing is the brain drain. The loss of good people is almost irreparable when you depend on promotion from within to continue building the company.” Pressure from the board forced Lafley to back come out of retirement in May 2013 to make another attempt to pull P&G out of its doldrums. Soon after he took back the helm of the firm, Lafley announced that he would get rid of more than half of its brands. Over the next three years, the firm sold off many of the brands that it had acquired, capped by the $11.6 billion sale of dozens of beauty brands to Coty. He announced that the company would narrow its focus to 65 or 70 of its biggest brands such as Tide, Crest, and Pampers. “Less will be more,” Lafley told analysts. “The objective is growth and much more reliable generation of cash and profit.” David S. Taylor, who had spent years managing P&G’s businesses finally took over as chairman and CEO of the firm in November 2015. He has been confident that he can resurrect the firm but has opted against launching new brands or making new acquisitions. “I understand the desire for faster growth and for a single-minded short-term objective, but we’ve seen this movie before” he said at a meeting with analysts last November.
Fighting off a Decline For most of its long history, P&G has been one of America’s preeminent companies. The firm has developed several well-known brands such as Tide, one of the pioneers in laundry detergents, which was launched in 1946 and Pampers, the first disposable diaper, which was introduced in 1961. P&G also built its brands through its innovative marketing techniques. Nevertheless, by the 1990s, P&G was in danger of becoming another Eastman Kodak or Xerox, a once-great company that might have lost its way. Sales on most of its eighteen top brands were slowing as it was being outhustled by more focused rivals such as Kimberly-Clark and Colgate-Palmolive. In 1999, P&G decided to bring in Durk I. Jaeger to try and make the big changes that were obviously needed to get P&G back on track. However, the moves that he made generally misfired, sinking the firm into deeper trouble. He introduced expensive new products that never caught on while letting existing brands drift. He also put in place a company-wide reorganization that left many employees perplexed and preoccupied. During the fiscal year when he was in charge, earnings per share showed an anemic rise of just 3.5%, much lower than in previous years. In addition, during that time, the share price slid 52%, cutting P&G’s total market capitalization by $85 billion. In 2000, the board of P&G asked Lafley to take charge of the troubled firm. He began his tenure by breaking down the walls between management and the employees. Since the 1950s, all of the senior executives at P&G used to be located on the eleventh floor at the firm’s corporate headquarters. Lafley changed this setup, moving all five division presidents to the same floors as their staff. He replaced more than half of the company’s top 30 managers, more than any P&G boss in memory, and trimmed its work force by as many as 9,600 jobs. Moreover, he moved more women into senior positions. In fact, Lafley skipped over 78 general managers with more seniority to name 42-year-old Deborah A. Henretta to head P&G’s then-troubled North American baby-care division.
Gambling on its Brands Above all, however, Lafley had been intent on shifting the focus of P&G back to its consumers. At every opportunity that he got, he tried to drill his managers and employees not to lose sight of the consumer. He felt that P&G has often let technology dictate its new products rather than consumer needs. He wanted to see the firm work more closely with retailers, the place where consumers first see the product on the shelf. In addition, he placed a lot of emphasis on getting a better sense of the consumer’s experience with P&G products when they actually use them at home. Over the decade of Lafley’s leadership, P&G managed to update all of its 200 brands by adding innovative new products. It begun to offer devices that build on its core brands, such as Tide StainBrush, a battery-powered brush for removing stains and Mr. Clean AutoDry, a water pressure powered car-cleaning system that dries without streaking. P&G also begun to approach its brands more creatively. Crest, for example, which used to be marketed as a toothpaste brand, was redefined an oral care brand. The firm now sells Crest-branded toothbrushes and tooth whiteners. In order to ensure that P&G continues to come up with innovative ideas, Lafley had also confronted head-on the stubbornly held notion that everything must be invented within P&G, asserting that half of its new products should come from the outside. Under the new ‘Connect and Develop’ model of innovation, the firm pushed to get almost 50% of its new product ideas from outside the firm. This could be compared to the 10% figure that existed at P&G when Lafley had taken charge. A key element of P&G’s strategy, however, was to move the firm away from basic consumer products such as laundry detergents, which can be knocked off by private labels, to higher-margin products. Under Lafley, P&G made costly acquisitions of Clairol and Wella to complement its Cover Girl and Oil of Olay brands.
Losing the Momentum On July 1, 2009, Lafley passed the leadership of P&G to McDonald, who had joined the firm in 1980 and worked his way up through posts in Canada, Japan, the Philippines and Belgium to become chief operating officer. McDonald took over after the start of a calamitous recession, and had to deal with various emerging problems. Even as consumers in U.S. and Europe were not willing to pay premium prices, the firm’s push to expand in emerging markets was also yielding few results in the face of stiff competition from Unilever and Colgate-Palmolive, who already had a strong presence. Furthermore, commodity prices were surging, even as P&G’s products were already too expensive for the struggling middle-class that it was targeting everywhere. In order to deal with all of these challenges, McDonald replaced Lafley’s clear motto of “the consumer is boss” with his own slogan of “purpose-inspired growth.” In his own words, this meant that P&G was “touching and improving more consumers’ lives, in more parts of the world, more completely.” “Purpose” was an undeniably laudable ambition, but many employees simply could not fathom how to translate this rhetoric into action. Dick Antoine, P&G’s head of HR from 1998 to 2008 commented: “‘Purpose inspired growth’ is a wonderful slogan, but it doesn’t help allocate assets.”
Striving for Agility Shareholder dissatisfaction with lack of improvement in performance led P&G to push McDonald out and bring back Lafley in May 2013. As soon as he stepped back in, Lafley was under pressure to respond to investor concerns that P&G had become too large and bloated to respond quickly to changing consumer demands. In April 2014, he began the process of streamlining the firm by selling of most of its pet food brandsincluding Iams and Eukanuba to Mars for $2.9 billion. A few months later, in August 2014, Lafley took a bolder step. He announced that the firm would unload as many as 100 of its brands in order to better focus on 60 to 70 of its biggest onessuch as Tide detergent and Pampers diapersthat generate about 90% of its $83 billion in annual sales and over 95% of its profit. Lafley did not specify which ones would be sold off or shut down, but the company owns scores of lesser brands such as Cheer laundry detergent and Metamucil laxatives. Lafley insisted that sales would not be the only criteria for shedding brands. He stated that some large brands would be jettisoned if they didn’t fit with the firm’s core business: “If it’s not a core brandI don’t care whether it’s a $2 billion brandit will be divested.”7 He demonstrated this by the decision to spin off its Duracell into a standalone company. Although batteries have been generating $2.2 billion annually in sales, their sluggish growth did not fit with Lafley’s push for a more focused company. Although analysts have been receptive to the reduction of brands, they have pointed out that P&G has already sold off more than 30 established brands over the past 15 years which were supposedly hindering growth. Many of these sold off brands have been performing well with other firms. J.M. Smucker, for example, that brought Crisco shortening, Folgers coffee and Jif peanut butter, has had 50 percent sales growth since 2009. Some critics charge that P&G, which was once was most successful in building and managing brands, has lost its touch. In large part, the focus is on the cumbersome centralized and bureaucratic structure that has developed at P&G. Unlike many of its newer competitors, the firm still tends to rely less on working with outside partners. The ‘Connect and Develop’ program that had been started by Lafley to bring in new ideas from outsiders has led to 50 percent of its new technologies coming from outside, but these are then reworked or modified by P&G’s internal R&D group. This has stifled innovation, with most of the firm’s growth coming from line extensions of existing brands or from costly acquisitions. On November 1, 2015, Lafley stepped down, passing the reins to David Taylor, who had built his career at P&G. He had most recently been assigned to take over the firm’s . struggling beauty unit. Taylor continued with Lafley’s strategy of cutting back on P&G’s brands. The sale of 43 of the firm’s beauty brands to Coty in a $12 billion deal was completed in October 2016. A few months earlier, P&G had completed the transfer of Duracell to Berkshire Hathaway through an exchange of shares.
Fighting for Its Iconic Status For years, P&G had spent heavily to build on its success with legacy soap and detergent brands to acquire hundreds of additional brands in new businesses that it hoped could also become part of consumers’ daily routines. The latest effort to jettison over half indicated that the strategy was not working anymore. In particular, P&G has been struggling with its push to place more emphasis on products that carry higher margins in order to move it away from its dependence on household staples. The firm’s aggressive push into beauty, for example, has struggled to show much growth. Lafley had tried to build the firm’s presence in this business for years, regarding it as a high margin, faster growing complement to the firm’s core household products. The firm has struggled to show growth in this business and it has been generating the lowest profit margins. Sales of Olay skin care products and Pantene hair care products have mostly sagged in recent. years. Its efforts to build a line of perfumes around licenses with Dolce & Gabbana, Gucci and Hugo Boss were also running into problems. Having discarded more than half of its brands over the past two years, P&G was optimistic that its turnaround efforts were starting to show results. On January 20, 2017, the firm offered a more upbeat outlook for sales growth in the coming year. “We are essentially on track with where we hoped we would be,” finance chief Jon Moeller said in a call with analysts.8 Yet a half-dozen analysts have cut their downgraded P&G’s stock over the past month. “Cosmetics, household and personal care stocks are no longer in vogue,” wrote Barclays analyst Lauren Lieberman in a recent report.
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Alternative 1 is the Status Quo or to do nothing different that the current situation.
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Recommended Alternative
Given the information above select your recommended alternative and explain why you feel it is the best alternative: This should take five to seven paragraphs and be based upon the information presented in your case. The recommendation is made to the decision maker you identified. You need to justify why this is the best alternative. (I have no preselected alternative and what I am looking for is your ability to support a given recommendation.)
