P&G sees innovation, productivity as drivers to company’s success

CINCINNATI —Energy costs are on the rise and consumer confidence continues to wane amid a bleak housing market and growing credit crunch but Procter & Gamble executives are confident that the company is positioned for growth, and that a continued focus on innovation and productivity will be key to future growth.

“My message today is pretty simple and straightforward: We believe that P&G is designed to grow in good times and challenging times, alike. We have a proven track record in leading industry innovation and we have a long heritage of disciplined productivity improvement,” A.G. Lafley, P&G chairman and chief executive officer, told attendees at the Consumer Analyst Group of New York Conference in February. “This is important because innovation and productivity are the key drivers of profitable organic sales growth.”

According to Lafley, the company’s productivity has increased “significantly and consistently” over time. In fact, since 1980, the company’s productivity has increased nearly 5 percent every year, more than twice the rate of the U.S. economy.

In the last five years, P&G’s productivity has grown 6 percent despite a shift in the portfolio to more beauty, health and personal care, as well as the acquisition of Clairol, Wella and Gillette. Looking to the next three to five years, Lafley said the company can excel productivity 7 percent to 8 percent a year.

Going forward, P&G will increase its focus on its leading 41 brands—those brands with sales of $500 million or more that represent 80-plus percent of sales and 90-plus percent of profits.

However, Lafley said, the bigger challenge is managing the remaining 250 or so brands, which can be broken up into three categories: future stars (those with potential to become blockbusters), local jewels (those important to particular geographies) and underperformers.

“We will nurture future stars with the investment they need to reach their full potential. We will preserve local jewels as long as they have a meaningful role to play, and will consolidate, divest or discontinue the underperformers,” Lafley said.

Trial and marketing return on investment are additional examples of how greater productivity can drive top-line growth.

Trial, meaning new purchasers of P&G brands and products, is undoubtedly a great opportunity, but Lafley acknowledged that the company has, at times, fallen short of targets. No longer.

“More than half of first-year incremental volume on a new product comes from trial, and trial drives more than one-third of volume in the years following a launch,” he said. “P&G trial rates, fortunately, are among the highest in our industry. But we still too often fall short of internal targets.”

The company is working to close the gap, as achieving trial targets on the largest P&G initiatives in the market today is worth up to $2 billion in incremental sales, Lafley said. Knowing this, P&G has made trial a “key priority” and has developed tools to create a robust trial-building plan.

Lafley also told attendees that the company will continue to bring “disruptive innovation” to market, as it did with the blade and razor segment with Fusion and Venus—a strategy designed to keep a brand growing year after year. It also is accelerating the combined power of Gillette brand names and P&G technology, as evidenced by the launch of the new Oral B CrossAction Pro-Health toothbrush.

“Our choice is to lead innovation in every category where we compete. Our discipline is to manage cash and costs, and grow sales well ahead of head count. Our commitment is to strengthen our capability in both innovation and productivity. This is the basis of my confidence that P&G will continue to meet or exceed growth targets,” Lafley said.