More power for P&G’s innovator

Coca-Cola and Pepsi, Vodafone and Orange, General Motors and Toyotaâ¦mostly we have no trouble in identifying the key competition of the world’s biggest brand owners. But what of Procter & Gamble, now unquestionably the world’s largest packaged

Coca-Cola and Pepsi, Vodafone and Orange, General Motors and Toyota…mostly we have no trouble in identifying the key competition of the world’s biggest brand owners. But what of Procter & Gamble, now unquestionably the world’s largest packaged goods company?

Until recently, the unhesitating answer would have been ‘Unilever’. The fact that answer is no longer true is due not to the travails of the Anglo-Dutch food and detergents combine but rather to a massive corporate transformation that has taken place at P&G under the stewardship of chief executive AG Lafley. These days, a more accurate approximation of its competitive matrix would probably be ‘L’Oréal’.

The route to this metamorphosis has been amply signposted with a series of ever-bigger corporate deals: Tambrands, Clairol, Wella and – most arresting and the biggest by far – last week’s $57bn (&£30bn) acquisition of Gillette (razors, Duracell batteries, Oral-B and Braun). But evidence that Lafley was a lot more than a steady hand at the tiller after the turmoil created by his predecessor, Durk Jager, in fact emerged much earlier on. Look, for example, at what P&G has disposed of as well as acquired: whole categories of food and low-grade household products.

One of Lafley’s key strategic strengths has been his determination to escape commoditisation, an ugly word for an increasingly ugly phenomenon where packaged goods manufacturers are concerned. Briefly, the Lafley doctrine can be summarised as follows. There can be no merit in chasing sales of low-margin, easily imitated products in a world where retailers like Wal-Mart and Tesco increasingly call the shots. Far better to concentrate on goods that have what he calls ‘structural attractions’. What he means is that they require high degrees of technological innovation; that they cannot easily be copycatted by retailers; and that they therefore attract and protect substantially higher profit margins. Health and beauty is a perfect example of this sort of category, but the definition could be equally well applied to Gillette’s world-leading razor-system technology.

Acquiring the corporate scale to achieve these objectives is, of course, crucially important. And there is no doubt that, on this level, the Gillette deal ticks a number of boxes. For instance, it adds another five $1bn brands to P&G’s existing 16; it is geographically complementary (Gillette has strengths in India and Brazil, P&G in China and Japan); it gives a male dimension to P&G’s overwhelmingly feminine portfolio of brands; it hands P&G considerably enhanced promotional firepower at a time of increasing media fragmentation and decreasing advertising effectiveness.

But scale, according to Lafley, is nothing if it does not produce the dividends to invest in more consumer-oriented innovation. Indeed, a determination to liberate P&G’s well-attested capacity for product innovation may ultimately be judged his biggest single contribution to the company. He has turned P&G’s research and development culture, once Kremlin-like, into Connect & Develop, something open to ideas in the world outside.

What we need to know now is: will this corporate transformation continue to work as spectacularly as it has in the past few years? The only thing we can be certain of is that it will precipitate radical change among the ‘also-rans’ of the packaged goods world.

Stuart Smith, Editor

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