The Game-Changer: How Every Leader Can Drive Everyday Innovation
15 October 2008 AG Lafley
In an exclusive extract from his new book co-authored with Ram Charan, The Game-changer: How Every Leader Can Drive Everyday Innovation, Procter & Gamble CEO AG Lafley details the huge and compelling challenges that he faced eight years ago when taking over the corner office of one of the world’s most famous brands.
My job at Procter & Gamble (P&G) is focused on integrating innovation into everything we do. Every business has some central organising principle that people use as the basis for making decisions, meeting challenges, and creating opportunities. For P&G, it is innovation.
Innovation must be the central driving force for any business that wants to grow and succeed in both the short and long terms. We live in a time when the rate of change is such that today’s unique product or service becomes tomorrow’s commodity. Winning—playing the game better than your competitors and changing the game when necessary— requires finding a new way to sustain organic revenue and profit growth and consistently improve margins.
This means seeing innovation not as something left to the R&D department, but as the central foundation in the way you run your business, driving key decisions, be they choice of goals, strategy, organisation structure, resource allocation, commitment to budgets, or development of leadership.
All too often, managers decide on a business strategy—what markets to pursue and what products to make—then turn to innovation to support it. This is the wrong way around. Innovation needs to be put at the centre of the business in order to choose the right goals and business strategy and make how-to-win choices. It is central to the job of every leader—business unit managers, functional leaders, and the CEO.
The CEO, in fact, must also be the CIO. While we will both hone our definition of innovation and fully develop the practical tools for becoming an innovation-centred business, let’s simply say that innovation is the foundation for controlling your destiny. It was for P&G (in my experience) the real ‘game-changer’—the real source of sustainable competitive advantage and the most reliable engine of sustainable growth. Innovation is the answer. That’s what I learned in the weeks and years after I received an unexpected phone call.
Are you ready?
It came on 6 June 2000, a few minutes before a business meeting in California. On the line was John Pepper, former chairman and CEO of P&G. John got right to the point: "Are you prepared to accept the CEO job at P&G?" I was stunned. Just the afternoon before, I had been speaking with chairman and CEO Durk Jager about our plans for the final month of the fiscal year.
"What’s happened to Durk?" I asked.
"Why? What happened?"
"I don’t have time to go into that now. I just need to know whether you’re prepared to do the CEO job for P&G."
"Of course I am."
"Then get on a plane as soon as you can and come directly to my office when you arrive back in Cincinnati."
I turned to my colleagues and told them something had come up. I had to leave. On the plane, I considered this sudden and totally surprising turn of events.
I tried to put first things first: What would I need to do in the next 24, 48, 72 hours? And what would I need to do in the first week, first month? No question. P&G was struggling. We’d issued a big earnings profit warning in March, and the business was still coming in below expectations.
While one of my areas of responsibility, North America, was delivering, my other business, Global Beauty Care, was not going to make its numbers. Other businesses were in even worse shape.
Stepping back, I reflected on P&G’s recent history. We’d moved to a new global-business-unit-led strategy. We’d totally changed the organisation structure—moving from local country to global category profit centres.
We were adjusting to more global competition, a faster-changing industry landscape, and the challenges of the internet and the so-called new economy. Most of our managers were in new roles. I’d worked in P&G’s beauty business for exactly 11 months.
In the midst of all this, we’d raised the company’s goals to unprecedented levels—7% to 8% growth in net stretch, innovation, and speed were the orders of the day. Stretch for higher goals. Innovate in all we do. Go fast. Take more risk. All of these are good things in and of themselves.
In hindsight, though, we were trying to change too much too fast. Many of our businesses were in no shape to stretch. Too many new products, businesses, and organisation initiatives were being pushed into the market before they were ready. Execution suffered, as we too often fired before aiming. We had to come to grips with reality, to see things as they were, not as we wanted them to be.
Job one was to determine the state of P&G’s business. At 6am on 7 June I began digging into the numbers—business by business, region by region, customer by customer. Unfortunately, we were in worse shape than I suspected. We were 23 days from year-end and there was no way we were going to make the month, the April–June quarter, or the 1999–2000 fiscal year.
After briefing the board on Thursday 8 June, we issued another profit warning. P&G’s stock opened more than $3.00 lower on the morning I was announced as CEO. By the end of the week, P&G’s stock price was down more than $7.00 from Monday’s close. It was not exactly an early confidence booster for me (all told, our stock had dropped more than 50% over six months since January, a loss of more than $50bn in market capitalisation). I knew it would take three to six months to know whether the business bottomed out. In the meantime, I had to retain the people at P&G who would be critical for future success. I talked one-on-one with each leader about my expectations.
We needed to come to a clear and common understanding of the business challenges and opportunities, and to get the fundamentals back in place quickly to get P&G growing consistently again. I shared with the leaders what was expected of them and what we needed to do together. I encouraged them to compete like hell externally but to collaborate like family internally. Just about everyone signed on to this vision.
What follows below is a disciplined crystallisation of what was accomplished and how we did it. While I had the fundamentals, cultivated over a long period of time, in my mind, the reality is their sequencing and actual execution evolved by ‘muddling through.’
While I now have more clarity, I certainly did not have all the answers when I started.
What we had to do
Proud P&Gers, we were embarrassed by recent results. We wanted to turn this ship around. To do so, we focused on a few simple but powerful things.
We put the consumer at the centre of everything we do
Three billion times a day, P&G brands touch the lives of people around the world. In our company, the consumer—not the CEO—is boss. Regardless of the original source of innovation—an idea, a technology, a social trend— the consumer must be at the centre of the innovation process from beginning to end. In ways large and small, P&G was not living up to the ‘consumer-is-boss’ standard; that is why we were losing market share in core categories like disposable diapers and toothpaste. Now we spend much more time with consumers, in stores and in their homes and in consumer-testing centres of all kind—to watch them use our products, to listen to them, and to learn from them what they want from us.
Our goal at P&G is to delight our consumers at two ‘moments of truth’: first, when they buy a product, and second, when they use it. To achieve that, we live with our consumers and see the world and opportunities for new-product initiatives through their eyes. We do this because we win when more consumers purchase and use our brands— and do so repeatedly. We win when consumers use our brands more loyally. We win when consumers trade up to higher-priced, higher margin brands. Consumers are now at the centre of every key decision we make in a routine and disciplined, not episodic way.
We opened up
Long known for a preference to do everything inhouse, we began to seek out innovation from any and all sources, inside and outside the company. Innovation is all about connections, so we get everyone we can involved: P&Gers past and present; consumers and customers; suppliers; a wide range of ‘connect-and-develop’ partners; even competitors.
The more connections, the more ideas; the more ideas, the more solutions. And because what gets measured gets managed, I established a goal that half of new product and technology innovations come from outside P&G. We are already beyond that figure, compared to 15% in 2000.
We made sustainable organic growth the priority
Innovation enables expansion into new categories, allows us to reframe businesses considered mature and transform them into platforms for profitable growth, and creates bridges into adjacent segments. So we changed our emphasis to organic growth, which is less risky than acquired growth and more highly valued by investors. In the second half of the 1990s, top-line growth had slowed, and some of P&G’s most venerable brands were weakening—a vulnerability that competitors were quick to attack. I felt
P&G could do—had to do—better. That, of course, is easier said than done. P&G is now an $80bn company; increasing revenues 5% a year means adding the equivalent of a brand like Tide or a market like China—year in, year out—against world-class competitors like Colgate-Palmolive, Henkel, Johnson & Johnson, Kao, Kimberly-Clark, Unilever, and L’Oréal, as well as retailer private labels and popular low-cost local brands in developing markets like Brazil, China, and India.
Innovation now drives virtually all of P&G’s per annum organic sales growth. We now only count on 1% of our 5% to 7% sales growth to come from acquisition activity; the balance must be innovation-driven organic growth. From fiscal 2001 through 2007, even against a background of rising energy and commodity costs, we have improved operating margins by more than 4 percentage points (i.e., 400 basis points).
Profits have more than tripled to $10bn while free cash flow has totaled $50bn over the same period. Innovation driven value creation and incremental sales growth from innovation have nearly doubled since 2001. That has helped us average 12% earnings per share growth and increase our market cap by $100bn, making us one of the ten most valuable companies in the US.
Since fiscal 2000 through November 2007, P&G’s share price has increased nearly threefold, reaching a record high on 12 December 2007.
We organised around innovation to drive sustained organic growth
To get organic growth, we needed to innovate. We had to become a more consistent operator, and a much more consistent and reliable innovator. I consciously set out to restore innovation to the heart of P&G. My goal was and is to create an organisation of sustainable innovation, which, in turn, drives sustainable organic growth through:
- Thinking about innovation as a strategy—a capability we wanted to build and to strengthen and to turn eventually into sustainable competitive advantage
- Regular business strategy and brand equity reviews that focus on innovation as the competitive advantage and game-changer
- Regular innovation reviews for every global business unit that focus on growth goals, innovation strategies, plans, and major initiatives
- The careful selection and use of the right metrics, recognition, and rewards to encourage innovation
- The process of evaluating, developing, and promoting outstanding business leaders who are also outstanding innovation leaders
- The allocation of resources—financial and human—to drive the successful commercialisation of outstanding innovation
By running a disciplined development, qualification, and commercialisation process, we have proved we can manage a large portfolio of innovations in various stages of development. Innovation is now P&G’s lifeblood and is at the core of our business model. Every day, more P&Gers are involved in innovation. Consumers expect P&G brands to improve their lives with new innovations. Retail customers count on P&G innovation to grow their business and create value. P&G investors and shareowners look to innovation as an indicator of overall future financial performance.
We began thinking about innovation in new ways
We started from the premise that it is possible to run an innovation programme in much the same way we run a factory. There are inputs; these go through a series of transformative processes, creating outputs. It is possible to measure the yield of each process, including the quality, the end product, and the financial and market results. The necessary dynamics to talk about innovation this way—opening the innovation process, focusing more on the consumer, and building teamwork and processes—cannot be done in isolation. To work at all, they have to work together and be integrated into the main decision making of the business.
Second, we broadened the way we thought about innovation to include not just products, technologies, and services, but also business models, supply chains, and conceptual and cost innovations. We also saw innovation not just as disruptive—the proverbial home run—but also incremental, the less glamorous but highly lucrative and profitable ‘singles and doubles.’
And, third, while everyone knows that innovation is risky, we have learned how to pinpoint the sources of those risks and have developed the tools and know-how for managing them. We’ve made learning from failure a regular practice to improve our ability to manage risk.
How we did it ... First things first
That is what we did. What you want to know is how we did it. The first step was to improve our execution so we could then focus more resources on innovation. In June 2000, it was crystal clear that we were not executing very well—and in the fast-moving consumer goods industry, execution is often decisive. As a result, we were not delivering on business and financial commitments to our shareholders, customers, suppliers, and employees. The obvious question was "Why?" The answer: We were trying to do too much, too fast, and nothing was being done well. P&G needed clarity and focus. What were the critical choices to make? What would be the key priorities?
What was the right balance? Our first choice was growing the core—categories like fabric care, feminine care, and hair care. We had been harvesting or milking these businesses to invest in new brands and products, and/or in new geographic expansion. We would obviously like to do both to maximise short-, medium-, and long-term growth, but we had swung the pendulum too far. We had to get these core businesses and leading brands growing more consistently and more profitably as soon as possible.
In doing so, we placed a laser-sharp focus on current consumers, who at least occasionally bought and used our brands and products, and current retailers, wholesalers, and distributors we worked with.
We also needed to improve the discipline with which we managed the operating fundamentals of P&G businesses. For example, in June 2000, we were able to ship only about 97% of the cases ordered by customers. That meant we were leaving up to 3% in potential sales ‘on the table.’
Every Monday morning, my leadership team was asked to report on missed cases and what actions were taken to fill orders. We continued the practice until missed cases were in much better control. Today, missed cases run less than 0.4%, and they are no longer a major cause of lost sales and profits.
Pricing was another area of focus. On too many brands and product lines, in too many countries, P&G prices were too high. We needed to find the pricing ‘sweet spot’ that represented a better value for consumers, gave retailers a fair profit, and would drive P&G to improved market share, net sales, and margin performance.
This was incredibly important because P&G’s business model is driven by well-differentiated brands and superior-performing products that can command modest price premiums and more loyal-consumer purchase and usage. We worked the issue hard and took about two points per year out of net pricing between 2000 and 2002 to ensure better consumer value for P&G brands.
While missed cases and winning the consumer value equation were important areas to work on, we knew that innovation would be the key to winning over the medium and long term. Why? Fundamentally, P&G had been built on a strategy of differentiation—of differentiated, branded consumer household and personal-care products. Brands are promises of something different and better in terms of performance, quality, and value. Brands are guarantees of consistent quality, performance, and value.
But the critical questions were, how could we put innovation at the centre of everything we do? How could we turn innovation into more consistent, more decisive, and more sustainable competitive advantage? And, how could we manage the risks associated with our all-in and full-on commitment to innovation? Could we identify and take advantage of the opportunities innovation might offer us? With this in mind, we looked at what we believed would be the key enablers or drivers of an innovation strategy; the drivers that would create an innovation-led operation and build an innovation culture; the drivers that would result in game-changing innovation that would touch more consumers and improve more lives.
© AG Lafley and Ram Charan from The Game-Changer published by Profile Books, price £15 paperback.