When A.G. Lafley took over as chief executive of Procter & Gamble in 2000, and later became chairman, the company produced a dizzying array of well-known brands and products including Tide, Pampers, Crest, Always and Pantene. But its portfolio of products also included coffee, snack foods, peanut butter, shortening and oils, household cleaners and pharmaceutical drugs. Lafley began asking himself: What businesses should P&G be in?
Lafley approached his job as chief executive as a product innovator and strategist. His strategy chops were earned during a 33-year career at P&G and through his interactions with Roger L. Martin, a former consultant who is dean of the Rotman School of Management at the University of Toronto. Over the course of nearly 10 years, when Lafley was CEO, the two men met regularly to discuss P&G’s challenges and prospects and to review its strategic issues and opportunities.
The fruits of these discussions can be seen and measured. When he took over as chief executive, P&G’s market capitalization was in the $50 billion to $60 billion range. When he retired in 2010, it was $160 billion. Gone were less-strategic brands and businesses. Lafley sharpened P&G’s focus to concentrate on household and personal care products. To that end, he acquired the razor maker and personal grooming products company Gillette, which accounted for nearly half of P&G’s growth in market value.
With decades of experience between them, Lafley and Martin decided to capture their learning in a book called “Playing to Win: How Strategy Really Works” (Harvard Business Review Press). The book draws on the foundations of master strategists like Peter Drucker and Michael Porter, a professor at Harvard Business School. (Lafley worked with Drucker, and Martin worked with Porter while a consultant at Monitor Group). But even more importantly, it is based on the insights and real-world experiences of Lafley when he was at P&G’s helm.
To explain their perspective on strategy, Lafley met with Michael Distefano, Korn/Ferry International’s senior vice president and chief marketing officer, and Joel Kurtzman, editor-in-chief of Korn/Ferry Briefings on Talent & Leadership. What follows are excerpts from their conversation.
Why did you write this book?
Lafley: To give CEOs, business and functional leaders, managers of all kinds a simple, practical guide to business strategy. … A “do-it-yourself” playbook that would encourage clearer, better choices and result in better performance and results. The basic idea was to bring together a practitioner, which is what I am, and a theorist, which is what my co-author, Roger Martin, is, even though we both practice and we both conceptualize. We both believe you can only really understand strategy by bringing those two perspectives together. That’s why we included P&G’s performance results in the book from when I led the company. But there’s something even more important we wanted to convey.
Lafley: For a lot of reasons, CEOs, presidents, governors, mayors, heads of hospitals and schools, don’t understand what strategy is all about. We wanted to help them.
What is strategy all about?
Lafley: It’s about winning. It’s not about just playing the game. It’s about winning, and you need to be very clear what winning means. In our view, it means three things — uniquely positioning a firm in its industry, creating sustainable advantage and delivering superior value versus the competition. It’s important that you make the necessary choices to get all three elements right.
One interesting idea in the book is that leaders don’t like to make choices, they like to have options. What did you mean by that?
Lafley: There’s a mindset among CEOs and other leaders that they don’t want to get pinned down or painted into a corner. They want to keep all their options open. Why do they want that? Because they don’t want to take on the risk of making a bad choice or a wrong choice. But the fact is, strategy is all about making choices — choosing where you’re going to play and how you’re going to win, along with what winning means.
Is it fair to say many CEOs choose to play but not necessarily to win?
Lafley: Yes. That’s why so many companies turn in lackluster results, because they just want to stay in the game — they just want to hold on to their jobs. But what’s really going on in the CEO universe? In the ‘80s, the average CEO served for something like eight to ten years. In the last couple of years, the average CEO’s tenure is three or four years. Why is that? It’s because the stakeholders aren’t happy with the results she or he is delivering. And why aren’t the results good? I’d argue it’s because they don’t know what winning means — and they won’t make the hard choices that really distinguish and separate their company from the rest of the pack.
Some CEOs say, “Our strategy is to be opportunistic.” Do you buy that?
Lafley: No. It’s a rationalization. It’s not a strategy.
What about CEOs who say strategy and planning are the same thing?
Lafley: That’s also a common mistake. Planning and strategy are not the same. It’s also a mistake to equate goals and strategies, or vision and strategy. I would argue if you spend a few thoughtful hours with the right team of managers and advisers, you can frame 80 percent of the critical choices you need to make to create a good strategy in virtually any industry.
If you had two or three hours, what would you focus on?
Lafley: I would want to understand the industry. I would want to understand the consumers and customers. I would want to understand the firm’s capabilities and costs. I would want to understand what the relevant and important competitors are going to do. And then I would want to go through what winning means.
Can you give an example of what you mean by winning?
Lafley: Winning is all about uniquely, or at least distinctively, positioning your business or brand, product or service, to deliver a better experience and better value to a certain group of customers to attain competitive advantage versus certain competitors. At P&G, I often talked about winning with “those who matter most” — a specific segment of consumers — and “against the very best competitors.” When you win with consumers and against competition, you deliver superior value to your stakeholders — shareholders, employees, et al. A good example at P&G is SK-II, a small, high-end skin care brand we acquired with the Max Factor business. In that business, we needed less than 1 percent of women to buy SK-II to win. But we needed the right 1 percent: highly skin-involved women who use several skin care products every morning and every night. We needed women who were really into their skin care and appearance, and were really loyal to their skin care products and brand. But we only needed 1 percent of them to build a leading, high-end niche business with very high consumer loyalty and strong profitability.
That requires strategy rather than opportunism, correct?
Lafley: Yes. Our strategy leads to the very specific consumer and market segments we serve and to the very specific, highly differentiated positioning of our brands and products. It leads to the very specific ways we select technologies and design and formulate our products. It leads to the very specific way we choose to go to market in certain distribution channels.
What would be an example of that kind of differentiation and effort?
Lafley: Olay is an interesting story. We didn’t create the brand. It came to us when we acquired Richardson-Vicks in the mid-’80s. When we got it, Olay was a low-end skin care product that sold for about $5 in the drug and grocery store. It was a very basic pink or white beauty fluid. When we got it, we grew it from about $100 million in sales to several hundred million dollars by expanding it geographically over about 15 years. We “hoped” that Olay could become a more meaningful brand in P&G’s portfolio. Then in 2000, we needed to understand and assess the entire beauty care industry — where we were going to play — and whether we could win in beauty. We looked at the beauty care industry structure. All of the global leaders had a skin care business, a hair care business, and most had a cosmetics and a fragrance business. We learned that the skin care product lines really drove value. Shiseido had been around 150 years. L’Oreal 100 years. Estee Lauder 60 years. So, the best competitors had a significant head start and very strong skin care brands. We decided we had to win in skin, and at the same time try to learn our way into cosmetics and fragrance.
What did you do?
Lafley: We decided to see if we could create new customers for Olay. According to Peter Drucker, the primary purpose of a business is to create a customer. We began by developing what we call customer insights. In the late ’90s, anti-aging was the big segment of the skin care market and the high-end Shiseido, L’Oreal and Lauder prestige brands were sold in department stores and specialty stores. Their target market was women in their 50’s. And their products were promising wrinkle reduction and even elimination. In our consumer research, we learned that a lot of women started to worry about the condition of their skin at a much younger age — in their 30’s. And these women were concerned about more than just wrinkles — skin texture, fine lines, age spots, sun damage. … The more we learned from women about their skin care wants and needs, the more convinced we became that we could make two important strategic “where to play” changes for Olay. First, lower the target point-of-entry age for anti-aging skin care products from the 50’s to the 30’s. And, second, broaden the range of treatment benefits in Olay’s anti-aging products from only wrinkles to all of the important signs of aging — what Olay eventually called the “seven signs of aging.” These two strategic decisions effectively increased the size of the fast-growing anti-aging skin care segment, further accelerated growth of this segment, and gave Olay an opening to enter — re-enter, really — the segment serving younger women with broader-benefit products.
Did you do it using the same products?
Lafley: No. We redesigned and reformulated the products, and we created boutiques or product lines, like Total Effects, Regenerist and Pro-X, that offered different product segments at different price points. We also found a technology partner in Sederma, a French company. They had a unique technology and ingredient that worked well in our product formulations. We then made the next critical strategic where-to-play decision. Working with discount store and drugstore retail partners, we created a new segment called Masstige — positioned between low-priced mass skin care brands, where Olay had been, and high-price prestige brands. We re-priced Olay Total Effects right below Clinique’s opening price point, in the mid-priced $15 to $25 range. We designed a “prestige-like” package for Olay Total Effects. We tested the products successfully against prestige brands. Then we went to retailers like Target, Wal-Mart, CVS and Boots to ask if they would join us to create a better skin care shopping experience in their stores — a boutique-like merchandising approach that would bring Masstige to life for shoppers and switch some skin care brand and product purchases out of prestige channels and into mass channels.
Was this a new segment for your retail partners?
Lafley: Yes. This new segment, Masstige, offered brands and products that looked “prestigious” but were mid-priced and mass-marketed. That was our strategy — reframing anti-aging, lowering the point of entry and creating the Masstige segment — to disrupt prestige and reinvigorate mass marketing. Over time, we discovered that a lot of women didn’t like a lot of things about the department store prestige shopping experience. They didn’t like the pressure from salespeople on commission. Ultimately, we learned women were buying certain products in the department store, other products in the discount (store) and drugstore, and increasingly replenishing products online. More and more women were shopping across channels. P&G’s mass retailers saw this as a huge opportunity to shift business into their stores.
How important were the new ingredients to the product?
Lafley: Very important. Olay’s products had to deliver… and they did. Since time immemorial, the story of beauty care was “promises made, but not kept.” And yet the promises kept getting made. So we had a very simple approach with Olay. If we made a promise, we were going to keep it. Our fundamental approach with Olay and its consumers was a partnership. We’ll provide the brand and the products, but you have to use the products in your daily skin care regimen. If you buy the right products, and use them together, and you use them regularly — every day, every week — over time, you’ll see meaningful improvement in your skin’s condition. So, what we did with Olay was to promise continual improvement. We didn’t promise gorgeousness overnight. Our promise was continual improvement over a lifetime. It was a credible promise. The products delivered for many women. And enough women bought Olay to take sales over $2 billion by 2007.
With Olay, was your strategy to focus on profits?
Lafley: No, on consumers. We asked ourselves, “Can we create enough new Olay consumers with our brand and our products?” And “Can we create a better shopping experience in mass discount and drug stores?” And then we asked, “Can we build a business of about $1 billion?” In 2000, when we started to redo Olay’s strategy, if you told me the brand was going to do $2 billion to $2.5 billion in sales, I wouldn’t have bet on it. What we ended up with was a leading brand position in skin care.
As a strategist, how did you know the decisions you made were the correct ones?
Lafley: I didn’t. As we point out in the book, a potentially winning strategy shortens your odds, it does not guarantee success. Business is inherently risky. Customers are demanding. Competitors are formidable. To improve our chances of success, we looked at industry attractiveness and whether there was a segment we could serve. We looked at whether there was value we could create for the consumer and for the channel and customer. And, of course, we looked at whether there was value for us. And then, we looked at P&G’s capabilities.
What were your metrics?
Lafley: Three things. We looked at revenue growth, gross and operating margin growth, and various measurements of cash flow productivity, depending on the business capital structure. These could be return on capital employed, return on inventory investment, and so on. And then, in addition to these three things, we would look at the competitive environment. And then we’d take a step back and say, “Where do we want to be 10 or 20 or 30 years down the road?”
You sold a lot of P&G’s businesses. How did you make strategic decisions regarding what businesses to keep, what to sell and what to acquire?
Lafley: We used the same strategic framework. And then we looked at additional drivers of the decision depending on the businesses and our capabilities and, of course, the market. Pringles, for example, was a global snacks brand, but I wanted the company to move out of food and beverages.
So you sold Pringles for strategic reasons?
Lafley: Yes. It wasn’t in an attractive industry for us. To understand if an industry is attractive, you have to ask, are there customers and consumers you can serve in a unique way to create value for yourself? You have to ask, how do you stack up against the competition? Do you have the right capabilities and costs for the industry? And, you have to ask about the competition. You have to ask yourself those questions regarding every business you’re in, and with Pringles, none of those worked for us. It all boils down to the classic Peter Drucker question: What businesses should I be in? And what business should I not be in? When I joined P&G in the mid-‘70s, we were a food and beverage company, a paper company and a cleaning products company. When I left in 2010, we were a household care and personal care products company. All the food and beverage businesses were gone.
Sounds like strategy and capabilities were the most important determinants of what businesses stayed in the P&G portfolio.
Lafley: Yes. You have to face facts and say, “You know, we’re really not competitive here.” Which means you’re faced with the hard part — making a choice. We got out of the pharmaceutical drug business. We had a big success with Actonel for postmenopausal osteoporosis, and we were on the verge of a huge success with Intrinsa, a testosterone patch for women, which was approved in Europe and Canada but not approved in the U.S. It could’ve been a $1 billion-plus drug. But we got out of pharma because we didn’t think we could compete with global leaders like Pfizer or Johnson & Johnson or Novartis. We didn’t think we could keep up the huge research investment that’s required in that business. And we couldn’t compete on regulatory. To be in that business you need a huge regulatory operation to work with the U.S. Food and Drug Administration and its equivalent organizations around the world. And we couldn’t keep up with all the lobbying that’s required in that industry. P&G’s lobbying office in Washington has three people in it, while the health care industry has one of the biggest lobbying groups of any industry. And, finally, the decision to use pharmaceutical drug products isn’t made by the consumer. It’s made by the doctor. The fact is P&G’s strategic business model focuses on household and personal care products that are bought weekly and used daily. That’s not the business model for pharmaceuticals. So we sold that business.
You also bought companies. Why did you acquire Gillette?
Lafley: Strategically, Gillette was a great “where-to-play” choice. We wanted to be in male grooming and personal care — including skin and hair care. We wanted to be in female grooming. And we were interested in their Oral B toothbrush business to strengthen Crest’s position in oral care. But the most important reason we went for Gillette was that Gillette was a great fit with P&G’s strategic capabilities. We figured with our consumer knowledge and their category-leading positions, there would be opportunities. We thought our ability to innovate with them would be a big plus. The global reach and scale of our businesses was a good match. P&G was stronger in China, Gillette stronger in Korea. Together, we could see our way to billion-dollar businesses in Brazil and India. Gillette and P&G combined were much stronger partners with our suppliers and retailers.
The acquisition added a lot to the value of your company, didn’t it?
Lafley: Gillette added $10 billion to our sales and $50 billion to our market cap. But, more importantly, it opened up new categories and markets for us. In 2000, our market cap was less than $60 billion. In 2010, our market cap was about $160 billion. So we added about $100 billion of market cap in the first decade of the new millennium, with about half of it acquired, mostly with Gillette. The other half of our market cap growth was organic. Our top-line compounded annual growth rate was 11 percent, 5 percent organic, 6 percent acquired. Our bottom-line growth rate was 12 percent earnings-per-share growth. Importantly from a strategic perspective, in early 2000, 55 percent of our revenue came from P&G’s core strategic businesses. By 2010, 80 percent came from core strategic businesses. In 2000, P&G had 10 brands that did $1 billion or more in annual sales. In 2010, P&G had 25 billion-dollar brands.
Did all that growth result from the strategic choices you made?
Lafley: Absolutely. These results came directly from focusing on our three most important strategic decisions — grow P&G’s core, extend into beauty and personal care, expand into emerging markets. Fortunately, it worked. It shows just how powerful a few strategic choices can be. We wrote the book to help other CEOs, business unit (heads) and functional leaders make better strategic choices for their companies. The essence of strategy is making choices to distinctively position your company to win.