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Posts Tagged ‘R&D’

The consumer goods global company Procter and Gamble (P&G) is an acknowledged master of brand management. Overseeing more than 300 brands across 160 countries worldwide, its innovations and business practices in branding, product development, marketing and advertising are taught probably in almost every marketing course programme at business schools; over the years it has also been a source for exemplary strategies and tactics to many companies that chose to follow in its footsteps. P&G is actually credited with conceiving in the early 1930s the concept of managing-by-brand and assigning a brand team to be in charge of orchestrating and streamlining all marketing and other managerial activities for any given brand (an idea attributed to Neil McElroy).  It took another fifty years to expand and formalise a theory of brand management, and particularly develop the psychological concepts of brand’s role and functions in consumer decision processes; still, P&G has practically started this ball of brand management rolling.

Now the top management of P&G finds itself in a crossroad, how to sustain its record of excellence and leadership in marketing, product innovation, and business in general. The last four years — since the financial crisis erupted in 2008 and following economic recession– have proven a tough period for P&G: Lower earnings, market shares declining, and a stagnation of its share price (at $60-70 after recuperating from a bottom low of ~$45 at the outset of the crisis); just in the last 4-5 months P&G started to see some improvement.  A decline in consumer spending, particularly in the developed countries, must have aggravated P&G’s difficulties. However, the problems of P&G originate to a large extent from within: Bob McDonald, CEO of P&G from 2009, identified in a recent meeting with investors two key weaknesses, excessive bureaucracy and insufficient product innovation (1). Yet, a higher-order problem seems to hover above these causes, that P&G has allowed its distance from consumers to widen.  Internal problems appear to have inflicted on the company’s competence to reveal changes in consumers’ needs and concerns and react to them soon enough or proactively. Currently, major shareholders, analysts, and P&G alumni are skeptical if McDonald can return the company to the right course. In the last quarter the share price climbed to $76, but more time is needed to see if correction is indeed on its way.

McDonald initiated a vision and strategy ‘driven by purpose’ for guiding the company’s business initiatives and actions with a key motive “touching consumers’ lives”. Critics argue that the directive of McDonald had been at first too abstract and vague to execute, and then in attempt to become more focused he turned to over-emphasis on efficiency of internal processes, making P&G too much inward-looking (1).

The vision called “purpose-inspired growth” directs, as explained by McDonald, towards “touching and improving more consumers’ lives, in more parts of the world, more completely”. It implies for instance that employees were not selling merely soap but cleanliness itself or that diapers let parents sleep through the night and that would enable an improvement of the earning power of middle class families (2). The intention is positive, emphasising the connection of the company to consumers, but the implementation was flawed. On a ladder of product attributes – consequences (benefits) – values (Means-End Chain decision model) McDonald was trying to start right from the top.  Employees had difficulties to interpret the strategy and translate it into action, configuring what is ‘a purpose’ and how to pursue it. Consumers may feel quite uncomfortable relating explicitly to their end-goals and personal values or they may not admit to them in advertising claims made by the company — this has to be done implicitly by hinting consumers from the bottom up on the basis of prior research.

A.G. Lafley, CEO of P&G in 2000-2009, highly respected for helping to salvage the company from a previous major downturn, championed a strategy centered on “the consumer is boss”.  The important contribution of Lafley to make the strategy practical was his highlight of two “moments of truth”: when a consumer first sees the product in a store and when he or she first uses it at home (2). These are decision points at which a consumer makes a purchase decision and, after experiencing the product, decides whether he or she will be a continuing customer of the brand. Thereon, employees could direct their efforts to win on these two crucial moments of truth. In an interview last month to Wall Street Journal, Lafley emphasised that the importance of being close to consumers has to be demonstrated by personal example:”Whenever I went outside the US and into an emerging market, I would go inside a store the first day and shop with real consumers. I could have told my employees ‘the consumer is boss’ a million times, but it wouldn’t have made any difference if that isn’t what we did” (3). That kind of practical guidance and personal commitment to a consumer-centric vision was apparently lacking in McDonald’s executive approach.

Procter & Gamble owns and manages brands in five head categories: grooming; beauty; fabric and home; health; baby and family. Among its more renowned brands are Ivory, Camay, Tide, Ariel, Crest, Pampers, Pantene, Always, Head & Shoulders, Olay and Wella. The company has been divesting lately from the food category, giving up on brands such as Folgers and Pringles, and, on the other hand, made the substantial acquisition of Gillette in 2005 which brought under the roof of P&G also Oral-B, Braun and Duracell. 25 brands generate each more than $1Bn in sales. The brands have generally been organized and marketed at the level of single products or mostly product lines (i.e., close variants of the same concept and function) so that many consumers would not  know the parent company of the brands they use. On a spectrum of brand architecture that spans over four main grades of brand relationships — House of Brands, Endorsed Brands, Sub-brands, and Branded House — Procter & Gamble is distinctively a House of Brands: the company hosts a pool of brands, each in charge of a narrow range of products, but there are only loose connections between them or to a parent endorsing brand (e.g., the corporate name). The autonomy given to a brand to tailor its positioning and marketing for its product(s) is a blessing for a brand leading in its category but may limit and impose a risk for brands that take the third or fourth place in their categories (4). In practice the autonomy of brand teams has been reduced in recent years in a way that seems to limit rather than support smaller brands. In addition, assimilating acquired brands that arrive with different types of relationships is more difficult and may cause greater confusion in the brand architectural model of the company (e.g., the Gillette brand is an endorser of a broader range of grooming products for men and their sub-brands like razors (Mach 3), shaving creams, deodorants, body wash gel and more).

In the 1980s the company added another layer of category-level management; they shifted focus towards spreading more brands in every category (e.g., laundry detergent, hair care) with aim that every market niche may find its answer in a brand of P&G. McDonald added yet new priorities defined by combinations of category and country. Lafley instated a complex “matrix” structure that involved a system of checks and balances, and its grip is said to have even tightened more under McDonald as CEO. It means that actions have to be approved by executives responsible for marketing, human resources and finance, geographical regions and product categories; brand managers are required to get permission for relatively simple actions or consult a book of PACE models (Process Owner, Approver, Contributor, Executor) for finding who has the relevant authority to settle disagreements (2). Perhaps this was meant to achieve better co-ordination between brands and control of functions and budgets but it has caused much frustration and discouragement of employees.

  • Jennifer Reingold of Fortune magazine (2) summarised the effect pointedly: “Process itself was threatening to become more important than conceiving great products and selling them” (p. 39).
  • Sonsoles Gonzales, former general manager for Pantene (left P&G in 2011) commented to Fortune that “There was lots and lots of measuring for the purpose of promoting productivity, but it resulted in too many internal transactions and negotiations and had less to do with winning the consumer” (p.39).
  • And Ed Artzt, CEO in 1990-1995, expressed his exasperation with the “brain drain” from P&G: “The loss of good people is almost irreparable when you depend on promotion from within to continue building the company” (p. 37).

Complexity is only increasing in the company with time and managing at the brand level is becoming harder as decision processes slow down. Nik Modi, analyst with UBS, suggested that P&G “is not too big to grow, it is too complex to grow”, making the fine argument that in times of volatility this problem becomes critical because the company’s structure limits its ability to confront quick changes and improving competition (1,2).

P&G’s brands are losing market share particularly to competing brands of key consumer goods companies such as Unilever, Colgate-Palmolive and Johnson & Johnson. Criticism claims that P&G is creating too few breakthrough product innovations. The more recent products to be appreciated as successful innovations were a synthetic detergent of Tide, Swiffer sweeping mop and Febreze odour freshener, but they are already more than ten years old (1,2). However, the claims urging more breakthrough innovations may be somewhat impatient and too harsh because such achievements are usually not so frequent — research and development (R&D) processes can take several years (mostly in the range of 3 to 10 years), requiring much experimentation and testing, and deep pockets. It is fair to say that many of the categories in which P&G is marketing are crowded with solutions offering different benefit-strengths and it is increasingly challenging to create new products that truly change the way consumers do things and influence their lives. The question to be raised is how a company like P&G is handling these challenges and works to overcome the obstacles to innovation in its fields of operation.

Going back to 2000, Lafley recognized P&G’s hardship to generate growth by innovation from within the company, in spite of its large apparatus of R&D (7,500-strong). He started a programme called Connect and Develop to import greater knowledge to the company by co-operation with outside sources (P&G’s approach to Open Innovation). The company estimated that for every member of its R&D team there were about 200 scientists and engineers out there who had talents the company could benefit from. The programme directed by Larry Huston linked with suppliers and other business partners, highly experienced retired experts, and young scientists in or fresh out of academia, to initiate new R&D projects (5). This brave initiative has had successes in creating more new products, but unfortunately it came short of impressing the stakeholders. It is claimed the company, helped by Connect & Develop, did not manage to create significant ‘blockbuster’ innovations, more of minor line extensions. The implication is that these product formulations justify much less paying price premiums, turning away consumers especially in the current economic period (2, 6).

In the past decade the ratio of R&D investment as % of sales continuously dropped from its peak of nearly 5% in 1999 to 3% in 2006 and 2.4% in 2011-2012. According to Bloomberg-BusinessWeek, this cutting back in R&D is explained not necessarily by reliance on external resources through Connect & Develop but mostly by decentralising and passing authority for R&D to heads of business-units who have put other priorities before investment in R&D (6).  Notwithstanding, more factors may have had adverse effect on innovative achievements in P&G. First,  a drawback of the Connect & Develop programme may be that drive and commitment to innovate are slipping farther away from P&G. Second, a long tradition of acquiring brands over at least three decades can weaken the ability and motivation to develop home-grown brands and innovative products in-house.

Much of the pressure on P&G is directed squarely at CEO Bob McDonald, with some shareholders demanding him to step down. Alumni managers are reportedly divided between opponents and supporters of McDonald. Nonetheless, he enjoys the backing of three former CEOs, Lafley, Artzt and Pepper, from whom he sought advice in recent months. He deserves extra time to show what improvement he can make. It may be wise for him to consider giving back more autonomy to brand management teams but promote joint-actitivites between brands, and encourage more co-operation between R&D, the in-house market research division Consumer & Market Knowledge, and brand managers. It is a testing time for McDonald and P&G to convince the company can keep touching and improving consumers’ lives meaningfully.

Ron Ventura, Ph.D. (Marketing)

Sources:

1. “P&G Chief Reassesses His Priorities”, Barney Jopson, FT.com (Financial Times Online), 31 January. 2013 http://www.ft.com/intl/cms/s/0/eb442eda-6b27-11e2-9670-00144feab49a.html#axzz2Oqll9hRr

2. “Can P&G’s CEO Hang On?”, Jennifer Reingold, Fortune (European Edition), 25 February 2013, Vol. 167 (No. 3), pp. 34-41.

3. “Former P&G CEO: What Companies Get Wrong” (Interview with A.G. Lafley), Wall Stree Journal: At Work Blog (Management), 4 March 2013 http://blogs.wsj.com/atwork/2013/03/04/former-pg-ceo-what-companies-get-wrong/

4. “The Brand Relationship Spectrum: The Key to the Brand Architecture Challenge”, David A. Aaker & Erich Joachimsthaler, 2000, California Management Review, 42 (4), pp. 8-23.

5. “Innovating Innovation: Procter and Gamble”, Management Lab (MLab), New Frontiers (case study, pp. 28-32) http://www.managementlab.org/files/u2/pdf/case%20studies/procter.pdf (“MLab is a non-profit  corporation, based in California, with the aim to accelerate the evolution of management”.)

6. “At Procter & Gamble, the Innovation Well Runs Dry”, Lauren Coleman-Lochner & Carol Hymowitz, Bloomberg-BusinessWeek (Online), 6 September 2012   http://www.businessweek.com/articles/2012-09-06/at-procter-and-gamble-the-innovation-well-runs-dry

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