Facing mounting pressure to boost sliding sales and recalibrate his company, P&G CEO Robert McDonald is stepping up the hunt for acquisition and divestiture candidates, people close to the company said.
Since assuming the chief executive role in July, Mr. McDonald has been trying to shake-up P&G's slow, process-heavy culture. He has increased scrutiny of P&G brands including Braun small appliances, Iams pet food, Duracell batteries and Pringles potato snacks. While those businesses have long been considered extraneous to P&G's focus on beauty, health and nonfood household staples, Mr. McDonald now is presenting an ultimatum: The leaders of those businesses are on heightened notice to prove their brands' prospects or face a sale.
The division heads have been "pushed to perform better and make the case for more investment," according to one of these people, who said the implication was that those divisions could be divested "if they don't improve results soon."
Meanwhile, P&G has looked at the consumer-products portfolio of Schering-Plough, which is merging with Merck & Co., as well as that of Wyeth, which was just acquired by Pfizer Inc. Another possibility: Beauty-products maker Alberto-Culver Co. It's unclear, however, whether those companies would choose to sell.
P&G is getting closer to a deal to acquire Sara Lee Corp.'s international household-products unit, particularly its Ambi Pur air fresheners, which are popular in Europe, people familiar with the matter said.
Pfizer, Alberto-Culver and Sara Lee all declined to comment.
A P&G spokesman said, "We will continue to closely monitor our brand portfolio."
A deal with Sara Lee could be just the first of many acquisitions under consideration as Mr. McDonald seeks to "aggressively recalibrate and enhance" a company he knows is under-performing, said one of these people.
The world's biggest consumer-products company has struggled more than many of its competitors during this recession. Penny-pinching shoppers increasingly have forgone P&G's premium-priced staples, which can cost more than twice as much as competing brands, especially retailers' private-label goods. Many of P&G's high-end brands, including Tide detergent, Downy fabric softener and Dawn dish soap, have lost market share, pulling down P&G's overall sales and profits.
The Cincinnati-based company is expected to report another quarter of disappointing results on Thursday. Year-to-date, Procter shares are off 7.4%, compared to an 11% gain for the Dow Jones Industrial Average.
Acquiring faster-growing businesses, especially for its household-cleaning and beauty divisions, would allow P&G to buy its way back to sales gains, people close to the company say.
Some analysts insist that improving P&G's mega brands is the only way to turn around overall results. The company has 23 brands that each garner more than $1 billion in annual sales. They account for 69% of P&G's total sales and about 75% of profits, according to estimates by Deutsche Bank analyst Bill Schmitz.
"The health of these brands is crucial to the success of the company overall," hewrote
Last month, Mr. McDonald assured investors that the company was "in touch with reality," and detailed for investors his plans to reignite growth, including price cuts, overseas expansion and creating more low-cost products.
"We know that in fact you punish us for size," Mr. McDonald told investors at a presentation last month. "We're focused on turning that scale into a growth and cost advantage."
Instead of spending several months evaluating where to make changes, as would be the norm at P&G, Mr. McDonald aims to "get more aggressive and do deals that will enhance what the company has," said one person familiar with the matter.
A more aggressive deal-making stance from P&G could shake up the entire consumer-products segment, which is grasping for ways to improve profitability beyond cost cutting. With consumers pulling back on spending, a growing number of these companies are contemplating mergers, say consumer-product bankers.
Duracell—which P&G acquired when it bought Gillette in 2005—has been considered a questionable fit in P&G's cupboard because of its exposure to cheap private-label batteries and fluctuating commodity costs.
P&G has shopped Duracell to potential buyers, but so far no deal has emerged, according to a person close to the matter. Duracell will post about $2.5 billion in sales for the fiscal year ending June 30, according to Sanford Bernstein analyst Ali Dibadj.
Iams, with an estimated $1.8 billion in sales according to Mr. Dibadj, has struggled to improve its profit margins amid fluctuating commodity costs. As one of the most expensive brands in the pet-food aisle, Iams has been a tougher sell in the recession and its market share has slipped.
Braun, with annual sales estimated at $1.3 billion, is also deemed outside of P&G's core businesses. Like Duracell, the brand came along with the acquisition of Gillette.
P&G executives have been examining Braun's small-appliance technologies used in its electric shavers and power toothbrushes to determine whether they can be applied to other products like beauty devices, such as facial cleansers or depilatories.
Cocktails and exotically flavored drinks with functional properties will be key beverage category influences in the years ahead, as consumers' love affair with nutritional offerings that can satisfy their demand for taste combined with health and wellness benefits continues, according to a new Culinary Trend Mapping Report from the Center for Culinary Development (CCD) and Packaged Facts.
Cocktails will continue to experience a renaissance as interest in artisan liquors, as well as retro drinks, gathers momentum. "The same consumers who value local foods, artisan products and traditional food preparation methods are finding those values expressed in the new cocktail movement, with its glorification of pre-Prohibition libations, micro-batch spirits and culinary inspiration," sum up CCD's analysts.
CCD expects cocktails to inspire a wave of ready-to-drink, non-alcoholic beverages as this trend continues to mature.
On the exotic functionals front, pomegranate and blueberry have been overshadowed by goji berry, mangosteen and açaí, and these, in turn, will be overshadowed by aronia, yumberry and other next-wave flavors within the next year or two, according to the beverage trends report, which notes that 53% of U.S. consumers said that they purchased a product specifically for its antioxidant content last year.
Other RTD beverage trends identified and examined in the report include RTD drinks offering a convenient way to ingest traditional ingredients from Eastern cuisines believed to contribute to health and longevity; coconut water (rich in potassium, calcium, magnesium and electrolytes, as well as refreshing); "21st Century sodas" offering sugar cane sugar, natural ingredients and exotic flavors as replacements for high-fructose corn syrup and artificial ingredients; kids' functionals that make ingesting probiotics, antioxidants and vitamins fun; and stevia-sweetened drinks.
CCD believes that major beverage manufacturers betting on stevia's ability to revive the soft drink category will be far from alone in launching beverages that take advantage of stevia's versatility.
In her new book Supercorp, Rosabeth Moss Kanter argues that capitalism is near a crossroads. The old ways of doing business no longer work. Traditional leadership roles are breaking down. And the public is fed up with greedy executives and their institutions that feast on their surrounding communities like leeches.
The time is ripe for a new corporate model, driven by a new type of business leader, where creating business value also means creating value for society.
Surprisingly, Kanter finds models for these so-called vanguard companies in very established, very large corporate titans including IBM, Procter & Gamble, Banco Real, Omrom, and Cemex. "I could have included Cisco, Avon products, Novartis, Toyota, and others," she says in her Harvard Business School office on a recent rainy afternoon.
Rosabeth Moss Kanter: Vanguard means ahead of the pack, the leaders, the ones who show the way. In this case they are leading the parade toward being values-based, led by principles and a sense of purpose at the heart of the enterprise. They are dealing with the crisis of capitalism by offering a new and different model.
Q: Why do we need a new corporate model?
A: There have been signs for the last 10 or more years that the companies that were going to succeed and prosper needed to manage risks better, have a stronger sense of purpose to motivate their employees, and satisfy a public already agitated about scandals such as Enron in the corporate world.
What I didn't see until I did the research was how companies with a very strong sense of purpose could use that to guide innovation. One of the exciting parts of Supercorp and the rise of this company model is that it's actually a way to develop products and services faster, to get more innovation, and to showcase innovation to the world in a faster way. So it should be at the heart of the enterprise.
And that's what I found. For companies like IBM and Procter & Gamble, this is definitely at the heart of the enterprise. The Japanese company Omron has sustained itself since its founding on principles and on a mission about sensing society: What does society need? They ask: Can we use our capabilities in the electronic sensor business to deal with these problems and issues? For example, one of the things they are working on is biosensors that can be attached to the food chain, so that the freshness of food can be immediately identified. That's potentially a big market as well as something with enormous social value because a lot of food goes to waste.
Q: Can you give us other examples of how this works in practice?
A: In Brazil, Banco Real has grown in 10 years from a small behind-the-pack bank to the second largest and probably the most highly admired bank. They differentiated themseves in the marketplace by centering their strategy around social and environmental responsibility. They said, they don't want to be a "green" bank—they are a for-profit endeavor—but they want to do the right things right. That was their strategy and it brought in customers even though they screened out clients with environmentaly shaky projects.
So despite having stringent standards for potential borrowers to meet, and stringent standards for employees, Banco Real has flourished. Its competitors are now adopting that strategy and advertising themselves as banks that are more responsible socially and environmentally.
Q: How prevalent are vanguard companies? A small parade?
A: It's a growing parade, but it's not clear yet whether they are the exception or the rule—that's true of every change. And of course I was looking at certain very large companies. But here's what makes me think the parade is growing: Companies that do not operate this way will not only lose the advantages of innovation, motivation, and public support, they will also have trouble being coherent and finding business opportunities.
So Banco Real definitely led a parade. Banco Real has created change, and that's why I think the parade will grow. As companies gain marketplace benefits by doing the right thing right, others will follow.
Q: It's interesting that Supercorp was published on the first-year anniversary of the fall of Lehman Brothers. How have the companies you profiled performed during the recession?
A: All the companies I studied, with one exception, outperformed their peers. Their share price declined less at a time when everyone else's declined greatly, and now they're prospering again. They outperformed their markets often, and in some cases they stunningly outperformed the market. The one exception was a company that got caught with a lot of debt because of acquisitions, as well as being in an industry, construction, that was the first to be hit.
Now, there are critics of each of these companies, and the companies must still make a lot of changes. IBM has moved many jobs to other countries. They are not perfect. But they aspire to meet higher standards, and in their operations around the world they also try to raise the standards.
Q: A critical point for you is that a company needs an underlying set of core principles out of which strategy develops. But how do companies embed these principles throughout the organization such that decisions are based upon them?
A: It's not the words; it's the conversations. Leaders must engage employees broadly in discussions of what these principles should be and how they apply.
Sam Palmisano, as a fairly new CEO at IBM, led a conversation in which all 400,000 employees could participate on a Web chat over three days about what the company's values should be for the 21st century, a "values jam." People were in a conversation. That doesn't mean there is total consensus, that doesn't mean that they've eliminated cynicism, but it means employees know "Top management thinks this is important, so I better think so, too."
A.G. Laffley, the chairman of Procter & Gamble, and Bob McDonald, now the CEO, would go around the world and talk about P&G's "PVP," or Purpose, Values, and Principles. Bob McDonald announced in August that P&G's growth strategy for the future is "purpose-inspired growth." So P&G makes it a conversation. Decisions get made in the company that can be tied back to the purpose—that is, you can see that the company makes decisions that would not have made been made on purely financial grounds.
It's like P&G's Children's Safe Drinking Water program. When P&G could not make a commercial market out of water purification powder, it created a nonprofit and gave it away. That told P&G employees that their company is serious about serving society.
Q: How important are mission statements or guiding principles in helping a company focus on core values?
A: Many companies have a mission statement or statement of principles. The words sound pretty much the same. They have something about customers. Something about employees. Something about shareholders. But the words (in vanguard companies) are a little different; they don't just talk about creating great value.
The statement of values will address looking broadly outside the company to the needs of society. One of IBM's values from its Values Jam chat was "Innovation that matters for our company and the world." The addition of those words "and the world" opened the walls of the company. There are IBM employees I've interviewed all over the world who actually invoke that phrase in conversations. They say, "I look at what my community or state or country needs, and ask how the capabilities of the company can contribute to that."
P&G's statement of purpose says they "improve the lives of the world's consumers." More recently they added "now and for generations to come." Adding these words focused people on the long-term impact, so disposable products need to be more environmentally friendly.
Again, it's not the words, it's the conversation. It's the actions of top leaders and the fact that they get successes out of innovations that are tied to the principles and that people are able to make that connection. And then it's part of the selection of people. People who do not really want to live by these values may not want to come to work for the company. It's also a conversation that is often held with companies being acquired, which makes them feel they are in good hands.
Q: What are the roles of CEOs and leadership in vanguard companies?
A: Leadership matters even more when you have to symbolize purpose and values as well as look to the future. People look at what leaders do, not just what they say. So leaders have to model the values. They have to put their investments behind the sense of purpose. If P&G had let the Children's Safe Water program wither just on financial grounds, employees would have looked at top management and said, "You don't mean those words."
Leaders also need two additional characteristics beyond the things we've always said they need. They need to be great systems thinkers. They've always needed that, but they need it even more as they look beyond the walls of the company. They manage their purpose through networks of partners. In fact, one of the values of these companies is end-to-end responsibility, the idea that you are responsible for your supplier's supplier and your customer's customer.
We also need leaders who are relationship-oriented, willing to have partners sit at the table, willing to sometimes put their own ego in check. Leaders need to feel they are safeguarding the future of the institution, not just managing a current portfolio of assets. These leaders have a sense of now and of generations to come.
Sam Palmisano said in one of the quotes I like best in the book: "Managers come and go, the business portfolio changes, so the only thing that endures is our culture."
Q: From the perspective of a worker bee, what's it like to show up to work each day in one of these companies?
A: Here is what I think characterizes these workplaces. They are much more dynamic and flexible, and people exercise much more control about when and where they work. Now, there are still factory jobs and sit-at-the-desk jobs where the hours matter, but an increasing number of jobs are run by self-managed work teams, in essence, where employees join virtual teams working from anywhere. IBM has done surveys that show that on any given day 40 percent of the work force is not working in an IBM office.
That's very striking. It shows the trust and respect these companies have for their people. By giving staff certain goals they need to meet, as well as work on teams that may cut across many parts of the business, employees are motivated very strongly to do the work because they care about achieving the goal, not because their boss is telling them to do it.
This is a new way of working that is very promising, but also very difficult to do. That's where leadership matters. Goals have to be very clear. People have to be coached in collaboration. The networks have to be strong. But if you can do that the benefits in speed of execution are remarkable.
Q: What do you mean by bringing society in the organization?
A: "Bringing society in" is the thinking of people who say, "We have a purpose beyond today's markets and products, and we should think about that. How is society changing? What are the big problem areas? What are our capabilities so that maybe we can find a commercial opportunity that also does good?"
That's a way of thinking that is part of the purpose guiding everyday life. They're always thinking about an opportunity to serve. At the same time their customers get very inspired by this work, so they are solidifying their partner networks and motivating their employees.
People like going to work every day with the idea that they have two jobs. One job is "do my job" and the second is "change the world." That motivation has driven a lot of entrepreneurs.
That's what "bringing society in" means. It's more than thinking that the organization should be customer oriented. It means, "Let's think about our community."
Q: President Obama: vanguard leader?
A: President Obama is subject to Kanter's Law, which says everything can look like a failure in the middle. President Obama has been in office less than a year, has tackled big problems—big problems are always controversial—and yet he is strong, steady, and focused on purpose. Therefore I bet that despite the controversy he will get a health-care bill passed and make progress on these issues.
One reason is that he keeps reminding Americans of our higher moral purpose. He doesn't get dragged down into the mud when people attack him on all sides. That kind of leadership is necessary to deal with volatility. If you don't stay centered in a set of moral principles, a sense of purpose, then it is very difficult to see beyond today's controversy. CEOs of vanguard companies know this sense of purpose helps them even when the stock price is down. They have a longer-term vision that keeps them focused and helps them weather storms.
A leader who has a strong sense of purpose and is willing to seek collaboration is likely to solve problems.
Q: What are you working on now?
A: My colleagues and I are "bringing society in" to Harvard by continuing to develop the Harvard Advanced Leadership Initiative, a workforce of experienced leaders who now have time and want to make a difference on some of the world's big problems. We're close to finishing the first year and getting ready for the second year of fellows.
I'm also working on "Smarter Cities, Smarter Communities," a project about how people build the connections and networks that reach beyond a single building. Education is bigger than schools; health is bigger than hospitals. Communities need to provide the context and the interconnections across parts of the system so that all institutions of a city see the role they play in improving the quality of life and the quality of the environment, in having better health outcomes, and in having a more educated population, all of which attracts jobs.
All of this new work is a continuation of what I learned from SuperCorp. It is important to channel the clout of successful companies and successful universities like Harvard to see problems ripe for innovations that can make a difference in the world. It is a privilege to work with enlightened SuperCorps to create partnerships across sectors combining capabilities for the greater good. That has the potential to solve enormous social and environmental problems and, as a by-product, restore confidence in business. I hope that is the 21st-century model for the future of capitalism.
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