The Transformation of Procter & Gamble Into a Sustainable Serial Innovator

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The Transformation of Procter & Gamble into a Sustainable Serial Innovator

A New CEO
It is June 6, 2010. A few minutes before a business meeting in California A.G. Lafley, Procter & Gamble´s President – Global Beauty Care and North America receives a phone call from John Pepper, Chairman of P&G. John Pepper gets right to the point: “Are you prepared to accept the CEO job at P&G?” Durk Jager who has been P&G´s CEO resigned the day before after 30 years of service for P&G. Without too many questions A.G. Lafley accepts John Pepper´s offer. He becomes P&G´s new CEO.

What happened under Durk Jager
P&G is renowned for its innovations. Products such as Tide, the first synthetic detergent, or Pampers, the first mass disposable diaper, or Pantene, the first shampoo to provide “salon level conditioning”, have built the reputation of the company. But at the end of the 90s P&G´s leaders are dissatisfied with the company´s growth.

Fig.1: P&G´s net sales development at the end of the 90s

They feel the urge to accelerate the company´s progress in order to achieve the goals that they set in the preceding years: • Double the business in 10 years. • Grow shares in the categories representing the majority of P&G´s volume • Remain consistently in the top third of the group of peer companies in terms of total shareholder return. Jager is pushing his organization for faster, bigger innovations in every part of the business. Stretch goals are being set. Speed and the taking of bigger risks are the order of the day.

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The Transformation of Procter & Gamble into a Sustainable Serial Innovator

Jager who as a Dutchman is the first non-US-born CEO in P&G´s history is a demanding boss who at times can be very critical of P&G´s culture and people who appear too slow and risk-averse to him. In order to spur on disruptive innovation, he installs a generous $ 200 million corporate seed fund. New brands such as Swiffer, the innovative in-between wipe system for wooden floors, ThermaCare, ultra-thin wraps for soothing heat, Dryel, the at-home care for “dry clean only” fabrics, Olean, the fat-free cooking oil, Febreze, the odour-removal spray for fabrics, and Actonel, the advanced osteoporosis treatment, are rushed to the market. The whole organization, and in particular R&D are taxed to the maximum. As if this were not yet enough, on top, in September 1998, Durk Jager announces “Organization 2005” which will fundamentally change P&G´s organization from a region-led to a product-based global structure. In the future new Global Business Units will be responsible for driving innovation in their categories globally.

What went wrong
“We were trying to do too much, too fast. As a result, we lost critical balance in several key areas”, A.G. Lafley will note in P&G´s 2000 Annual Report. In fiscal year 1999/2000 which ends on June 30, 2000 P&G´s misses its quarterly business targets for the second time in a row, and it significantly falls short of the fiscal year goals. Compared to year ago, earnings are even down.

Fig.2: P&G´s Results Fiscal Year 2000 vs. 1999

Sales do not ratchet up as quickly as expected as the innovations take longer to generate sizable revenue and several of the innovations falter in the market-place, and as the core business softens. On the other hand the costs, in particular in R&D, and the capital expenditures skyrocket. R&D expenses as % of sales increase significantly. On this basis of slowly rising sales and over-proportionally rising R&D and innovation costs innovation becomes unsustainable. The seeming loss of profit and cost control in conjunction with the frictions in the organization that Jager´s abrasive leadership style generates lead to his downfall. On the positive side, P&G acknowledges that Durk Jager´s “visionary leadership … accelerated the pace of product innovation…He has left a legacy of innovation, not only in new brands, but also in areas such as use of the internet…His emphasis on a...
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