Ravi Dhar Interviews Bob McDonald, Former CEO of P&G

While Bob McDonald, chairman, president, and CEO of Procter & Gamble, was recently at SOM for a Leader's Forum Lecture, CCI Director Ravi Dhar interviewed him, capturing marketing insights from the leader of a company that houses some of the world's biggest brands.

Transcript

Ravi Dhar: I’m Ravi Dhar, Professor of Marketing at Yale as well as the Director of the Yale Center for Customer Insights. I’m really pleased to have Bob McDonald here, CEO of Procter and Gamble.  He gave a wonder talk in leadership this morning to the students and now I’m going to ask him a few questions related to the business and marketing strategy.

Ravi Dhar: Bob, I want to start with the general broad strategy you mentioned that, if it can be nicely summed up, in touching more consumers in more parts of the world more completely. Can you elaborate a little more on that on those three key pieces, on those three components?

Bob McDonald: Sure.  It all starts with our purpose which is touching and improving lives. And then from that we diverge to our strategies, as you said Ravi. When you talk about touching and improving more lives, more parts of the world, more completely.  The more lives is about getting to as many consumers as we possibly can with as many products as we possibly can. Right now the average consumer in the world, the average man, woman, and child in the world, spends $12 per year on Procter and Gamble products. We’d like that to be $14 per year in five years. Talk about more parts of the world the idea there is about filling out our product portfolios around the world. We’re in about 25 categories in the US, the average American spends $110 per year on Procter and Gamble products. In China even though we are the leading consumer goods company and we do about 4 billion dollars a year in business the average Chinese spends less than $3 a year on Procter and Gamble products and we’re only in about 14 categories.

We have to get all of our categories around the world in all geographies. That doesn’t necessarily mean though taking the US product or the European product and putting it in the developing market. We have to design for the consumers in those markets. And then the more completely part is just about getting people to buy more Procter and Gamble products and really that’s about things like extending our distribution in the rural areas. There are still many areas of the world where there are not economies in villages and we know that through our distributors, through our subdistributors, we can get into those areas and create economies. So the way we are measuring this is in five years we want to go from 4 billion consumers touched to 5 billion and from $12 per capita per year to $14. And then, of course, the appropriate financial measures.

Ravi Dhar: You mentioned designing products for China and India a little bit differently, maybe the price points, maybe even the benefits. And Jeff  Immelt at GE has talked about innovation can be command and control sitting in Fairfield and then spreads to remove certain features in southern China and India. So one of the interesting things is that it’s scholar academic for me is that each year we innovate both at top end if you like, sort of more for the US or developed markets, and at the bottom of the pyramid if you count the markets in developing countries. What kind of challenges does it face in innovation, or do you think it’s the same way you do it-- just slightly differently?

Bob McDonald: Well it’s a huge challenge. What we believe is our mantra, “Delight, don’t dilute.” What many companies do is they take a top-tier product and they dilute it for the bottom of the economic pyramid. Now, in our experience, that doesn’t work. We have to innovate discretely for every consumer no matter where they are on the economic pyramid based on their needs. Being in the consumer goods business creates a great discipline but a great opportunity because consumers are so different.

I’ll give you an example:  I led the hair care business for Procter and Gamble in Asia in the 1990’s and Asian hair is twice the diameter of a Caucasian hair. Well you remember your geometry, that means there’s six times the surface area. So the Pantene that a Japanese consumer would buy would have a lot more conditioning than the Pantene that an American or a Western European would buy. And if we got that mixed up or if we tried to give them the same product they both would be dissatisfied. You can’t titrate toward the middle. You have got to allow those differences. Another example is in the Philippines, people do their laundry by hand. Water is very expensive. I lived there for four years. Water came by my house only a half hour each day. I had a pump on the street. We would pump it into a tank on our property and then from that tank to the house but it was very expensive because you only had it a half hour a day at most. Filipino consumers are very cleanliness conscious so they really soap their clothes. They do their laundry by hand. They really soap them, and they judge their soap solution based on the amount of suds. Well the problem is because they create so many suds to get their clothes clean it takes them 5 rinses to rinse their clothes from the suds. We developed a product called Downy, you are familiar with it here in the United States, but it’s a very different product.  Where it provides a little bit of freshness, a little bit of softness, but importantly, it has cations that sequester those anions of the soap and allow one rinse. So it’s called Downy single rinse, saves money because you eliminate the four other rinses. So the product virtually pays for itself because you save money in water.

Those products are discretely designed for those consumers. And frankly, I think that’s the future of the world if you think about marketing, your discipline, the ultimate is a one on one relationship with every consumer in the world. That’s going to be possible with digitalization. The first company who achieves that will win.  Because the brands you know, the brands you love, are the ones you are extremely loyal about and you have a relationship with that brand. Now it may not be possible today to create that one on one relationship but we have to get as close as we can get with that and eventually we have to create that one-on-one relationship to create indispensible brands.

Ravi Dhar: It’s interesting you mentioned about the different countries and how they might be, whether it’s how they wash or the infrastructure on washing might impact what insights you can leverage to create better products. And of course you have this challenge at Gillette, one of your acquisitions, a little bit more command and control based in Boston and that sort of generalized. It seems to vary a lot by the type of product category where these things become a lot more important and costly to develop also.

Bob McDonald: It does. It varies by product category and it varies by what I like would call maturation of that category. When I started with Procter & Gamble I was the Tide brand manager in 1984 in the United States. At that time Tide had about a 20% market share. The number two laundry detergent was Wisk, run by Unilever at the time, had a 12% market share.  And Tide only came in one form, which was powder Tide regular scent. Today Tide had doubled that share, over 40%, but Tide comes in many forms. You can get liquid Tide, you can get Tide with bleach, and you can get Tide with Febreeze. We just launched a Tide for fitness clothes and what you find is if you are the one who has the consumer insight, you can segment the category. And if you segment the category, you’re going to create better loyalty, more indispensability, and as a result of that you will have a higher market share. So it always behooves the marketer to get close to the consumer and get that insight that creates the segmentation. And we are doing that on Gillette products now.

Ravi Dhar: So I heard that you mentioned earlier about the purpose, and I might have it wrong, but I heard that it used to be for a long time “it improves the lives of consumers,” and when you came along you added “now and for a generation to come.” And I find that interesting because it’s obviously a lot of emphasis on both sustainability but environment is part of a business strategy as well, whether it’s Ecomagination at GE. And a question I have for you is how do you manage the tension? So on one hand “now and for generations to come” seems like there is no tension here but there’s a little bit, like in the leadership thing you talked earlier about, if it’s easy or if it’s difficult, and so  often times there is a tension between what’s good now and what’s good for the generations to come.

Bob McDonald: Yes

Ravi Dhar: So I was wondering if you can, given this is a challenge managers face all the time, what are some ways you guide your teams to think about these tradeoffs, or if you don’t see them as tradeoffs. And secondly could you give an example of in any of the business lines how this tension was handled between what’s good “now and for generations to come” kind of idea.

Bob McDonald: We added that collection of world “now and for generations to come” a couple years ago and we did that to recognize the fact that if we are going to succeed as a company in the next 172 year, we have been around for 172 years now, we are going to have to take care of the environment in which we live and work. This has always been part of the company. But we thought calling it out in the purpose would even strengthen it. So we have a sustainability strategy where we want to introduce 50 billion dollars of sales of products that are better for the environment. We want to reduce our carbon footprint. And we want our employees involved in service activities, philanthropic activities, externally. We think that it’s not good enough for companies to just to do well financially, they also have to do good. Consumers now are concerned about the products they are buying and the companies they are buying into. So we are trying to do a better job.

In terms of tradeoffs, we talk a lot about having an “and” culture at Procter and Gamble. Many times leaders look at opposing points of view and think that it’s not possible to do “and.” They think of it as an “or”, short term versus long term, productivity versus innovation, you could go on and on. We don’t believe that, we believe you can find another way, an “and” way. And we actually teach our leaders how to deal with those dilemmas. We do it through our formal college training, we call it P&G College, we also do it for our informal training. In order to get at the fact that you don’t have to have those tradeoffs, that you can often time find another way. At times where we have done that, well there was a time not too long ago where we had to come to terms with the fact that we had been underperforming our competition in terms of top line growth since December 2006. That was a painful thing to realize and many people in the company were wondering “do I put priority in profit or do I put priority on top line growth?” And we developed a strategy that said we have got to prioritize top line growth right now because we are not getting our profit in the right way. We are getting our profit through margin increase, and that margin increase is not helping top line growth. There was some paralysis in the organization. But the beautiful thing about the culture at P&G is you identify an issue like that, we call it “the moose”, you identify “the moose”, you put “the moose” on the table and then people solve it. And as a result, we identified that, we promised we would get back to top line growth. We did it a quarter earlier, we did it July through September rather than October through December. As a result of that we are now earning a profit in the right way by delivering top line growth. I don’t think it has to be an “or.”

Ravi Dhar: I totally agree with that. Going somewhat personal at our school you saw our mission as leaders for business and society.  But a lot of the outside world tells us there’s an impression that if you care about society you might be a touchy feely place and it can’t be good for business. So it’s really something that resonates in the marketplace with us also were people often feel how can you do “and,” it’s usually “or.”

Bob McDonald: I think you are right because I don’t understand how a human being can have incongruence in their life. Human beings are not that way.  So we [P&G] believe if we are going to touch and improve lives just like your statement at the School of Management. If you’re going to touch and improve lives you have to have that pervasive in everything that you do, in your brands, in your philanthropy, in your free time. I think that human beings are wired a certain way. I don’t think it [“or”] has to be. I don’t know how you can compartmentalize it and say that you should touch and improve lives here but destroy lives here. Human beings can’t deal with that incongruence I believe.

Ravi Dhar: Interesting. You mention also in your talk that P&G has around 20 brands with sort of a billion dollars or more of revenue and another 20 around half a billion dollars. Any examples which you think are more purpose-driven and purpose-inspired, benefit-driven in your business portfolio or outside that you admire in terms of the broader branch.

Bob McDonald: You are asking me to tell you which of my children I love more so that’s hard to do. But let me give you an example. An example I like to use is Pampers because Pampers is our largest brand, it’s about 8 billion dollars in global sales a year. Pampers for years struggled in our company and frankly it struggled because we were too internally focused. We were focused on the diaper, the tapes, the backsheet, all the product technical features. A few years ago our leadership group on Pampers decided they would focus on a purpose, and the purpose would be caring for babies’ development. And that took the focus and put it where it belonged, on the baby, on the mother, on the development of the child, not on the diaper. As a result of that we became much more innovative because that freed degrees of innovation.

We also were able to discover insights that we would not have discovered previously. When we were in India, for example, we couldn’t get mothers to use the diaper. Disposable diapers tend to get used for an occasional event before they get used every day. An occasional event in many developing markets is when the baby sleeps because the mother wants to get a full night of sleep and the disposable diaper is better than no diaper at all which is the way most children sleep around the world is no diaper at all and the baby wakes up. In India the mothers told us “Well I’m not going to buy that diaper if it’s about me, if it’s about convenience for me because I care about my baby.” So what we did was we did some clinical studies and we discovered, not surprisingly, that the baby who sleeps through the night develops better than the baby who wakes up every 4 hours because they urinate.   We then talked to Indian mothers about that and they loved it. They loved the idea that they were caring for the development of their baby by giving them a diaper that allowed them to sleep all night. The other thing we did is we found partners to help us. We have a partnership with UNICEF where for every pack of diapers bought we work with UNICEF to donate a neonatal tetanus vaccine for a mother somewhere in Africa. That’s where the disease kills mothers and kills babies.   We now believe through the sale of Pampers around the world, we are going to be able to eradicate neonatal tetanus from the face of the earth by 2012. If we had not had that originally broadening of the purpose, beyond just the technical features of the diaper, I don’t think we would have had the innovation that resulted in this UNICEF relationship or in the insights that are driving the business around the world.

Ravi Dhar: I think it is a great example of what we call being too product-focused and then you have, as you actually put it very well, the degrees of freedom are constrained to the meds and bits and other specifications on which the diapers or computers vary but if you focus on the problem you are trying to solve like better child sleep, better brain development it suddenly broadens the link between a product like diapers to the well being of the child, so it certainly opens up a lot of different ways so I think it’s really nice.

Bob McDonald: We’ve done the same thing on Always, which is our feminine hygiene napkin, in many cultures around the world when women menstruate that’s thought to be a bad thing. There are some religions where menstruating women cannot go into the temple during the time they are menstruating. There are many cultures in sub-Saharan Africa where, for example, school girls can’t go to school while they are menstruating, they are not allowed in the school. Well you can imagine, Ravi, if you are a student and you don’t go to school one week every month you’re going to quickly drop out of school and the girls don’t get educated. So we go into those societies, we teach them about menstruation, we teach them it’s a good thing. In fact, the selling line we use on Always is “have a happy period” it’s natural it’s a good thing and we provide our products to take care of the condition. So again, it is an example of defining the purpose broadly and dealing with the societal challenges and using our products to do that.

Ravi Dhar: It’s a great example. Let me ask you a question I get often asked by some of the senior executives in the consumer goods space which is the consolidation that’s happening in retail, not just in the US, but certainly in Europe and other countries. So one issue is obviously they are your customers and you are competing at some level for profits with them. How do you think it’s changed? Do you think it’s becoming how you operate your business marketing, [and] sales? Traditionally Procter and others have had a separate sales team, a separate marketing team, doing what they have to do. And some of the things I hear people say that this will have to change as more and more consolidation happens. What do you see as some of the challenges for the way the business is conducted? Obviously you have to innovate more to stay ahead. What are some of the important issues you see as consolidation happens?

Bob McDonald: We’re not seeing as much consolidation as you would think.   Our largest customer globally is what we call high frequency stores. These are stores in places like India, China, Indonesia, which literally are the windows in somebody’s home, and people selling the products out of those windows. Those kinds of stores represent just less than 20% of our business and they are growing much faster than the global customers we deal with around the world. Our largest customers, as we have disclosed in our annual report is Walmart, at 16-17% of our business. That stayed relatively constant.

Ravi Dhar: In the last 5 years?

Bob McDonald: In the last 5 years or so. Even though Walmart is continuing to grow globally the growth of these small stores is so great, particularly when there is macroeconomic growth in the world. And there are so many consumers who are not being served today that I think that will continue to be the force to reckoned with. In that case we work through distributors in order to get to those consumers in those rural areas where there’s virtually very little economy. And in the case of Walmart we have a large team of people in Bentonville that calls on Walmart. Walmart is our partner.  Mike Duke is a personal friend of mine, I admire him a lot, just like I do the other CEO’s I deal with.  And we’re working with them [Walmart] as partners to enhance their business.  At the same time we are also cognizant that retailers have private label brands, which are our competition, and we believe there’s no reason that consumers should have to buy any other brand than the P&G brand. So the challenge for us, as you framed it, it’s an “and” again. We simultaneously have to deal with large global customers who are expanding throughout the world and high frequency stores which are very local inherently by their nature. It’s an “and.” We have to deal with partnering with retailers like Walmart and others. They rely on us for our consumer knowledge and insights to set their stores. But they also have a private label that’s a competitor of ours. Again, it’s an “and.”

Ravi Dhar: So I want to pick up on the private label aspect you mentioned because some consumer package goods (CPG) companies do make private labels and if you are an economist, which I’m not, an economist would say “Well you already have the factory, you might have the excess capacity, the marginal cost is not there, you know how to make this, you know how to ship this.” As a marketer I feel like obviously I want to encourage a conflict between the idea of there is a differentiation and there’s another manager sitting in Cincinnati whose job is to minimize that if they are doing private label. But what some other CPG companies do, I think, is they go in an adjacent category and try to avoid the conflict which is “I’m a ketchup, I won’t make private label ketchup but I’ll make tomato juice and I can make soup.”   I don’t know if Procter [and Gamble] makes any private labels at all or not, if it doesn’t  I’m sure this question must have come up over the years and strategically and also as a business, what is the thinking why this doesn’t make sense for us to do?

Bob McDonald: We are involved in some private label manufacturer, it’s in our Duracell business and it’s more a legacy of the Gillette acquisition. We do not want to make private label. One of our five strengths as a company is consumer knowledge. A second one of those five strengths is innovation. We spend 2 billion dollars on R&D. We spent 3 billion dollars since 2001 on consumer knowledge. We’re a company where innovation is our lifeblood. We simply have to innovate and we have to bring new innovations to market to touch and improve lives. I would find it very difficult to create innovations and then hold them back from retailers.  And I think retailers, if I have a private label, would find it part of their negotiation to ask me for the latest innovation. Which really wouldn’t make much sense for our company. So we won’t be a private label producer.

Ravi Dhar: So it’s almost the ones who do it, you don’t want to say in so many words but it’s probably the ones who have not been able to innovate in their categories.

Bob McDonald: Yeah. I think innovation is a differentiator.

Ravi Dhar: I want to ask you something, just a very general question. Suppose you were giving advice to students going into marketing in the states, what are some of the exciting aspects, areas of how marketing has been changing, what skills are required to succeed in this compared to say 10 years ago? Is it the same skills or do you see any changes in the area?

Bob McDonald: I think marketing is exciting today because it’s so much broader then when I studied it in my MBA program. When you look at all the media that are available for marketers today, again if you go back to what I said earlier, if you think of the ideal as being that one on one relationship that creates an indispensable brand or an indispensable relationship. There’s so many ways to accomplish that today, social media like Facebook, digital, still in store, just like it used to be. The small homes that are stores in developing markets, there’s just a plethora of opportunity. Being able to be selective and choose how to do it and then have a rate of return that will help you differential or discriminate between the different methods. I think it’s incredibly exciting today. In the end it also comes back to do you have the consumer insight. You got to have the insight. That’s why when I travel I go in homes, I watch people use our products, I go shopping with consumers, I look for tension in their lives, and if can find the tension then I can come up with an idea that might help make their lives better. Then I have to turn that into a new product or service or a new approach to marketing. But I think it’s very exciting to be in the marketing field today and I think marketing is defined more broadly today, has more potential today than ever before.

Ravi Dhar: I want to end by asking, you spent almost half a day here, giving your talk, having lunch with the students. Any impressions that you took away about this place with the students or anything else?

Bob McDonald: Well, I love the School of Management at Yale because it’s not just about taking care of the business or making the business successful but it’s about the individual contribution to society. And that is very consistent with the Procter & Gamble purpose of touching and improving lives. Not just via our brands, we have to do that. And we have to deliver profit and we have to deliver shareholder return. But also about contributing back with our philanthropy or with our community service and I just think there’s a great congruence there between what Yale is trying to achieve and what we’re trying to achieve at P&G. And I think that’s the future. I think what you are going to find is it’s no longer going to be acceptable. Consumers won’t buy the brands of companies that don’t take care of the philanthropy, don’t take care of the environment, and don’t provide community service.

Ravi Dhar: Thank you so much for doing this.

Bob McDonald: Thank you, Ravi. It’s great to be with you.