Last night, P&G unexpectedly announced that current CEO Bob McDonald was retiring, and that his predecessor, A.G. Lafley, would replace him.
Though the company’s CFO said the decision was just about Robert McDonald deciding to retire (at 59) and that there won’t be any dramatic strategic shifts, there’s a reason activist investor Bill Ackman pushed for a change.
Ackman argued at a presentation at the Ira Sohn Conference, that the company was “vastly under-earning” due to an inability to win in emerging markets, a poor organizational structure, marketing problems, and bloated overhead. Lafley, an in-house legend who increased company value by $100 billion during his past tenure, has his work cut out for him.
We spoke to Lafley a few months ago after the release of his book, “Playing To Win,” about why some executives and companies fail at strategy.
He argues that business fail when they don’t make difficult choices about where and how they can win particular markets and put the full weight of the business behind them.
P&G’s current restructuring and cost cutting program is not going quick enough for investors. During his time at P&G, Lafley cut more jobs than any previous CEO, sold off the company’s hugely valuable food brands, and carried out a $57 billion acquisition of Gillette. With Lafley, strategy isn’t about small choices.
Here are some of his key insights:
On when things go wrong
“When we made mistakes, when we had our failures, when we weren’t delivering results that we were capable, almost there was almost always one of two problems. Either we had lost our connection with our consumer and what they wanted, needed, and valued, or our strategy needed to be changed because something had changed in the marketplace and we hadn’t responded.”
Companies go halfway and don’t fully develop a strategy
“This is probably most common at Fortune 500 companies. They do part of the strategy job, but they don’t do the whole thing. What do I mean by that? They have a vision or a mission, they might go out and do industry, company and competitor analysis, they might even put together an annual plan and budget. Those are parts of strategy, or they’re the output of strategy but they’re not strategy.”
So what’s the solution? According to Lafley, it’s about making difficult and specific choices, and putting the entire weight of a business behind them.
“Strategy is five choices,” Lafley said. “What is winning; where am I going to play to win; how am I going to win where I play; where are my core competencies that are going to enable me to win where I play; and what management systems and measures are going to help me execute my strategies?”
Making tough decisions is essential
“A lot of human beings, don’t like to make choices. Choices are difficult, we want to keep our options open, choices involve taking risks, and not only risk to the business but personal risk. So I think there’s this sort of human resistance to making choices, and choices are the core of strategy.”
People don’t like thinking strategy, and focus on execution
“The second thing that goes on is I think that some people, maybe too many people ust don’t like thinking strategy. They think that they know what their product and service is, they think that it’s all about execution. ‘If I execute better than the next guy, I’m going to win.’ But the problem is that execution without the direction of a strategy is all over the place. You might win occasionally but you’re probably not going to win consistently, reliably or sustainably.”
When you need to, cut even successful brands
“One of the toughest choices we had to make was to abandon and eventually divest all of our food and beverage businesses, Lafley said. “We divested 7 or 8 billion dollars worth of leading food and beverage brands, the Folgers coffee brand, number one in America and Canada, the Pringles chips brand number 2 to Frito-Lay, the Jif peanut butter brand, the Crisco brand, number one.”
They did it because though they were profitable businesses, they weren’t ones Lafley saw as winners in the long term, or where the business could continue to grow and win.
“We chose for good strategic reasons to abandon and get out of those businesses so we could invest our resources,” Lafley said, “primarily our people but also our cash, in businesses like home care, personal care, beauty care and health care, all of which looked strategically more attractive.”
All of the above questions played a role in the decision to divest; these were areas in which P&G could win, Lafley said. “They were demographically more attractive, they were structurally more attractive, lower capital, higher margin, and frankly they were better fit with our core competencies, deep understanding of consumers, the creation of known brands, and innovation.”
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