Sunday, June 09, 2002

How A. G. Lafley turned Procter around

Two years later, his first crucial days are paying off

By Cliff Peale,
The Cincinnati Enquirer

        His cell phone was ringing early as A.G. Lafley stepped into a business meeting in San Francisco. It was 7:45 a.m. on Tuesday, June 6, 2000.

        “Can you get back to Cincinnati?” asked John Pepper, chairman of the executive committee at Procter & Gamble Co.

        Mr. Lafley already had a flight back on a company jet at 1 p.m., but that wasn't good enough.

 A.G. Lafley
A.G. Lafley
        “No, you don't understand,” Mr. Pepper insisted. “Can you get back to Cincinnati right now?”

        “What is wrong?” Mr. Lafley responded.

        “Are you prepared to accept the job of president and chief executive of Procter & Gamble Co., if offered?”

        “What is wrong?”

        “Do I have to repeat myself? Are you prepared?”

        “Yes, but what is wrong?”

        “We'll talk about it when you get back. Get to the airport.”

        Cincinnati-based P&G, the only employer the two men had ever known, was in crisis.

        Just hours earlier, chairman and chief executive Durk Jager had retired under pressure. Most of the consumer products giant's major brands were losing market share. The stock price had plummeted to alarming lows.

        Mr. Lafley returned to P&G's central office building on Sixth Street at 5 p.m. that day. The company's board would officially elect him president and CEO the next morning and publicly announce his new job early on Thursday, June 8.

        Those 48 hours saw Mr. Lafley and Mr. Pepper, who would take back the P&G chairman's title he had relinquished to Mr. Jager a year before, lay the foundation for P&G's rescue.

        Two years later, the turnaround has restored $40 billion in market value and reinvigorated the maker of Tide, Crest and Pampers in the Tristate and around the world.

        At P&G's Health Care Research Center in Mason, some employees didn't recognize Mr. Lafley's name when his new job was announced. But at beauty care headquarters on the third floor of central offices downtown — a unit he had been running for a year — the announcement was greeted with cheering and high-fives.

        “I'm surprised you didn't hear the cheers at your office,” says Gina Drosos, general manager of global skin care.

        Other than a 30th anniversary dinner at the Maisonette that Tuesday with his wife, and his son's eighth-grade graduation ceremony that Thursday, Mr. Lafley focused on breaking Procter's alarming slide.

        “I didn't really know what was going on,” he said in a recent interview. “I was only thinking about the next three weeks.”

"Something had to happen'

        In a region where P&G employs 13,500 people and has a vast community influence, the impact of Procter's recovery has spread well outside its headquarters, stoking the Greater Cincinnati economy and its psyche.

        To investors, P&G still needs to prove that it can increase sales and earnings.

        But with big brands growing and new powerhouses like Whitestrips teeth whitener and the Actonel osteoporosis drug piling up numbers, things definitely are looking brighter than they were on the day of Mr. Lafley's hurried journey east.

        “Almost every one of our major brands was in a position where some strengthening was needed,” says Bob Wehling, Procter's now-retired global marketing officer, who was with Mr. Lafley during those first few days.

The rise and fall of P&G stock
Procter & Gamble Global Leadership Council
        To one P&G employee who was working at the company's Winton Hill Technical Center that week, “Something had to happen.”

        “The morale of the company was so far down.”

        The problems were most apparent in P&G's stock price, as investors lost faith in Mr. Jager and his business plans. After reaching a high of $117 a share in January 2000, the stock had fallen past $90 a share in February after a bungled deal to merge with two drug superpowers.

        In March 2000, the stock price had plunged once again, to less than $60 a share — ripping out $40 billion in market value in one day — when P&G said it would miss third-quarter expectations. With the numbers in early June already showing another shortfall in the period that would end June 30, employee morale — and retirement plans — would soon reach their lowest point in years.

        The discontent had shown itself within the company as well. Managers were openly critical of Mr. Jager's confrontational style, and some on P&G's 11th floor — where the company's highest executives work — already were predicting his departure.

        The Enquirer interviewed Mr. Lafley, Mr. Pepper and more than 20 other current and former P&G executives, including many who were with Mr. Lafley during those first two days. It reviewed his investor presentations and other speeches.

        The interviews make clear that by the time Mr. Lafley met with P&G's board of directors on June 7, the morning after his return, and was announced publicly as the new CEO early June 8, the recovery plan already was in action.

        “That essence of focus, of choices, of getting our established brands going, that was really there on the 6th and 7th,” Mr. Pepper says.

A big surprise

        Before Mr. Lafley flew to San Francisco from Cincinnati late Monday, June 5, his last meeting was 60 minutes alone with Durk Jager.

        There was no mention of any shake-up, board pressure or resignation, so Mr. Lafley woke up in California on Tuesday with no inkling of any change.

        When Mr. Pepper called Tuesday morning, the P&G group was walking into a board meeting of, P&G's experiment in selling custom cosmetics over the Internet.

        Mr. Pepper wanted him back in Cincinnati right away, Mr. Lafley told the group, but he would stay at the board meeting if they wanted.

        They encouraged him to go, so Mr. Lafley, P&G chief financial officer Clayton Daley, and director of interactive ventures Mark Schar headed for an “awkward” plane ride home.

        “I couldn't say anything, obviously,” Mr. Lafley recalled. “I just said I had some work to do and thought about what was coming.”

        Back in Cincinnati, Mr. Pepper was talking with more board members. Mr. Jager's decision to leave had not been a surprise; the Dutch-born executive was convinced that board members had lost faith in him.

        Mr. Pepper wasn't authorized to offer the CEO job, but Mr. Lafley was his first and only candidate phone call.

        In individual phone calls with Mr. Pepper, the board reaffirmed a decision that P&G CEOs, going back a dozen years, had held: that Mr. Lafley someday would run the company.

        The grooming had started early in Mr. Lafley's career, and in 1994, he was sent to run Asian operations in what former CEO Ed Artzt called “training for the big job.”

        On that Tuesday in June, by the time Mr. Lafley walked off the elevator and headed for Mr. Pepper's corner office here, things were more certain. Mr. Pepper had decided to return as board chairman, a position he had relinquished to Mr. Jager only a year before.

        “If you hadn't already agreed to do that, I would have asked you to,” Mr. Lafley said.

        The Lafley-Pepper combination worked from the start. While Mr. Lafley dug into the business, Mr. Pepper would handle P&G's external responsibilities.

        Other members of P&G's Global Leadership Council — the 30 top executives who run worldwide businesses, geographic units and corporate functions — already were in Cincinnati that Tuesday afternoon. Mr. Daley was briefed once he returned from San Francisco, and he and comptroller David Walker presented the numbers to Mr. Lafley and Mr. Pepper that evening.

        Mr. Jager was gone. He left the building shortly after his conversation with Mr. Pepper that morning and has not returned to P&G's headquarters since.

        Elsewhere in the company, the rumor was spreading that Mr. Jager was out.

        At Winton Hill, one mid-level boss pulled employees aside and told them that there could be an announcement later that week. But employees at P&G's pharmaceutical unit in Mason had no inkling that a change was imminent.

The bad news

        Mr. Lafley's and Mr. Pepper's immediate priority that Tuesday night was to prepare for a telephone conference call with the board of directors scheduled for 7 a.m. Wednesday.

        They would present the bad news that P&G would miss its fourth-quarter Wall Street expectations, news that would hit the company's already battered stock hard when P&G announced it the next day.

        They looked at the May 31 numbers on P&G's biggest businesses, figures that showed a clear gap between shipments and expenses. The men considered several scenarios, but even the most optimistic showed them not meeting projections of 15 percent profit growth.

        Mr. Lafley was surprised by the numbers. He had been running the $7 billion global beauty care business and had responsibilities for all categories in North America. But he didn't know how far some of the other businesses had slipped.

        Mr. Pepper worried how to notify all of P&G's employees, almost 110,000 in more than 70 countries, about the leadership change.

        About 8:45 p.m., Mr. Lafley faced another challenge. He had a 9 p.m. reservation at the Maisonette for a 30th-anniversary dinner with his wife, Margaret.

        He had sent two dozen red roses, but told Mr. Pepper, “If I don't make this dinner, I'm not going to be here tomorrow morning.” He promised to return at 5 a.m. the next day to prepare for the meeting.

        “I thought it was terrific,” Mr. Pepper recalled in a recent interview.

        Mr. Lafley describes the Wednesday board meeting as a “fairly interesting, painful and long” discussion by conference call.

        The board officially elected Mr. Pepper chairman and Mr. Lafley president and chief executive.

        By then, Mr. Lafley's basic strategy was clear, honed during the flight back home and meetings since. P&G would concentrate on four of its biggest businesses — laundry, baby care, hair care and feminine care — all of which had been losing market share.

        Trouble spots around the world, like Japan and Western Europe, would receive special attention.

        Mr. Lafley “drove a stake in the ground” early with a decree that managers couldn't spend more than they brought in.

        It was a big change from Mr. Jager, who had encouraged P&G managers to “stretch” their sales forecasts and spend accordingly.

        To limit spending immediately, P&G pulled back on some of its shipments in June, which hurt the overall numbers for the quarter but firmly established the message: Big brands, big countries, big customers. The phrase had been in P&G's lingo for years, but Mr. Lafley put it up front within hours of taking the job.

        Mr. Lafley had been arguing the strategy for several months, “but I have to say, with limited success.”

        Once he took over, the strategy took center stage.

        “As soon as he assembled the management team after he became the CEO, that was the first thing that came out of his mouth,” then-marketing boss Mr. Wehling says.

        Even during the first few days, it was obvious that Mr. Jager's Organization 2005 restructuring had not gone far enough to cut costs. That would lead to a March 2001 expansion of the program that would eliminate another 9,600 jobs, including 1,900 in Greater Cincinnati.

        At 6 a.m. on June 8, Mr. Lafley talked by conference call with about 240 P&G business leaders around the world. A couple of hours later, a press release announced the leadership change publicly.

        Mr. Lafley did a few brief local media appearances and spoke with Wall Street analysts by phone. That evening, he was at WCET-TV on Central Parkway to sit for interviews on CNN and CNBC.

        The turnaround had started.

"A very deep dive'

        That weekend launched for Mr. Lafley what global beverage chief Steve Donovan calls “a very deep dive into all aspects of the business.”

        On Sunday, June 11, he took time to attend Mass at St. Xavier Church around the corner from P&G's headquarters. During the next week, he talked to former Procter CEOs John Smale and Ed Artzt, who maintained offices on the 11th floor, just down the hall from Mr. Lafley and Mr. Pepper.

        Mr. Artzt advised him to refocus on core businesses, restore P&G's disciplined budgeting process and find his own team of people to lead Procter.

        On Tuesday, June 13, Mr. Lafley met with the board as CEO for the first time in person, in the boardroom on Procter's 11th floor. That Thursday night, he flew to Chicago to visit with Procter alumni who had asked him to come.

        Less than a week later, on Sunday, June 19, Mr. Lafley and Mr. Pepper left for a “whistle-stop tour” of Western Europe, where slowing economies and tough competitors had P&G's business lagging badly.

        They visited London, Paris, Frankfurt and Rome, each time meeting with groups of Procter employees.

        On the return trip, Mr. Pepper wrote in his journal: “A.G. is going to be a great CEO. He is very quick, realistic, principled. Not too abstract. ... Decisive without being careless.”

        About a month into his new job, Mr. Lafley asked Mr. Wehling to postpone his retirement for a year and try to revitalize P&G's marketing training department, which had been neglected by Mr. Jager.

        During the second week in July, Mr. Lafley convened his first meeting of the Global Leadership Council in Geneva.

        With basic rescue strategies in place, he started a review of the “I-Fund,” P&G's corporate innovation fund that included most of its new ventures. He also started reviewing every one of P&G's big brands and every category in which the company competed.

        Three questions were asked of every P&G product: Could it climb to No. 1 in its market? Could it be taken global? Does it fit the emphasis on big brands?

        If not, P&G would consider selling the product. A dozen or so brands were shaved, including Clearasil, the world's leading acne treatment.

        P&G skin-care executives decided to concentrate on products targeted to adult women and recommended selling teen-targeted Clearasil. Mr. Lafley accepted the recommendation, and P&G announced Clearasil was for sale Aug. 23. Within two months, it was sold for $340 million.

        Ms. Drosos, the general manager of global skin care, says the sale helped P&G focus on faster-growing brands. Less than two years later, the company has replaced every dollar of Clearasil sales with more sales from brands such as Olay and Noxzema, she says.

        “A.G. really pushed us to move on it very quickly,” she says.

        Mr. Lafley also encouraged P&G workers to focus on consumers and customers, instead of the organization's internal problems.

        “The organization loved it when they heard him speak like a real P&G person,” one 11th-floor P&Ger says.

Stop the bleeding

        P&G's 11th floor is almost a museum, with dozens of original paintings by Cincinnati artists on the wood-paneled walls.

        There are no loud noises, and most office doors — operated by switches under the occupants' desks — remain closed.

        That held to form in the weeks after Mr. Lafley's appointment, as the soft-spoken New England native started his methodical study.

        One executive remembers showing up at the office before dawn and seeing Mr. Lafley already there, talking to P&G executives in Asia about operations there.

        Mark Collar, president of P&G Pharmaceuticals in Mason, says he had several exchanges with Mr. Lafley, some in person and some by e-mail. But there was no dramatic meeting to decide whether to sell the division, he says.

        “Our lives were not turned upside down to do something with him,” beverage chief Mr. Donovan says.

        Kerry Clark, a key lieutenant and one of P&G's new vice chairmen, says Mr. Lafley's emerging “Consumer is boss” theme helped Proctoids forget the company's internal problems.

        “It was a rallying cry for us,” says Mr. Clark, head of global market development and business operations. “It was like, "Forget the problems we have inside the structure. Get focused on the consumer.' ”

        In late September, Mr. Lafley and P&G's management team headed to New York for his first visit to Wall Street. The new CEO rehearsed with aides for the answers to investors' questions, hoping to make a good impression that would give P&G's stock — still mired at about $61 a share — a bump.

        Inside P&G, the visit was, in the words of one headquarters employee involved in the preparation, “a slam dunk.”

        Mr. Lafley answered questions from analysts and then from CNBC's Ron Insana, handling them all with the equanimity that was fast becoming his trademark.

        By the end of the day, P&G's stock had jumped more than $5 a share, topping $66.

        “We knew the board had picked him and all, but now, we really knew that A.G. was the guy,” one employee said.

Get the giants growing

        Today, the four biggest brands Mr. Lafley targeted in his first 48 hours continue to grow.

        In baby care, Pampers has rolled out its Baby Stages line in Europe and North America. In laundry, Tide and Downy have new scents on store shelves.

        In feminine care, a new innovation at Tampax is on the way. And with a restaging of Pantene and Head & Shoulders, and the Clairol brands now in the fold, hair care suddenly is a P&G strength.

        In the quarter that ended March 31, Procter finally started to meet its sales and earnings targets, the first time in more than two years.

        P&G stock also has topped its pre-Lafley levels, reaching close to $93 a share and hovering around $90 for most of May. That has led some to declare the P&G turnaround complete.

        As Mr. Lafley passes his two-year anniversary as CEO, associates say they never had any doubts, starting June 8 two years ago.

        “A.G. never seems overwhelmed,” says Gordon Brunner, who retired as Procter's chief technology officer and a director in mid-2000.

        “He was working his bloody tail off.”


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