P&G AND UNILEVER'S GIANT HEADACHES: SMALLER, NIMBLER MARKETING RIVALS ARE GNAWING AT THE DOMINANCE OF THE GLOBAL PACKAGE-GOODS BEHEMOTHS. WHAT'S GOING ON?

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The goliaths were all set to square off.

In 1995, Procter & Gamble Co. slapped the name of its category-leading detergent, Tide, on a new laundry pre-treatment product. Unilever was not about to be outfoxed by its archrival. Within months, it launched a competing product under the Wisk name.

As the companies battled over stain deposits, a more nimble foe. cleaned up. Shout -- from S.C. Johnson & Son, a company one-tenth their size -- thrashed the start-ups with a better product and sharper marketing.

The debacle points up a surprising, underlying flaw in marketing execution by two consumer products giants that rank among the largest and most respected in the world. Although bitter global rivals, they share a problem in the U.S.: Both have watched sales slow and market share slip away, often to smaller, less global players.

"They are getting beaten by companies that do better, experiment more, try different things and ultimately end up with more compelling selling propositions," said Gary Stibel, a principal with New England Consulting Group and a former P&G executive.

In a report last year from PaineWebber covering market share across a wide spectrum of household and personal care categories totaling more than $38 billion annual in retail sales, P&G's dollar share declined 2.4% to 26.6%. Unilever's share was down 0.8% to 8.2%.

DECLINING SHARE IN U.S.

Instead of dominating the package-goods business, the two biggest players have each shed roughly 10% of their market share in the past five years, while rivals such as Bristol-Myers Squibb Co., Clorox Co., Colgate-Palmolive Co., S.C. Johnson, L'Oreal and Revlon gained ground.

"We're not meeting our stated share leadership goals on enough brands and enough categories in enough markets," admits A.G. Lafley, P&G president-North America and head of P&G's global beauty care business. He said that's a central reason P&G accelerated a major reorganization.

Although taking different paths, both P&G and Unilever are trying to fix their marketing processes and solve long-simmering problems with agencies. Among the solutions: A swifter, more accurate product development process, and a more holistic, less TV-centric media approach that forces both marketer and agency to respond to the realities of an evolving retail environment.

The success of their new efforts ultimately will decide whether they remain leaders, stumble or turn to acquisitions to provide the growth they can't seem to generate internally.

Industry-watchers point to several factors that have caused the consumer products giants to lose steam to smaller rivals. Some maintain their track records actually work against them, generating complacency and making it difficult to rock the corporate culture. These observers cite slow-moving bureaucracies at the marketers as a factor, as well as fear of failure among managers, which leads to doing things the same old way.

In the case of Unilever, less focus on a North American market that's relatively insubstantial in its global picture may be responsible for the company's overall decline in share, said PaineWebber analyst Andrew Shore.

"With Procter, it's harder to say," Mr. Shore said. "Maybe they're so focused on product development that they've forgotten about just selling stuff."

'LACK OF PRODUCT INNOVATION'

Independent analyst William Steele boils the core problem for both marketers down to five words: "Lack of real product innovation."

Analysts point to a dearth of new category-making brands from both companies, which built their reputations on such innovations as Tide synthetic detergents and Pampers disposable diapers (P&G) or Dove synthetic bar soap (Unilever).

In trying to reinvent their new-products processes, consultants and alumni said both companies may meet resistance from entrenched corporate cultures. So entrenched, in fact, that former executives now working for competitors sometimes slip into using "we" when referring to their alma maters.

Despite their many differences, both P&G and Unilever recruit graduates of top universities and MBA programs, promote from within and often inspire tremendous loyalty even among ex-employees.

STRENGTHS ARE ALSO WEAKNESSES

"These are still two of the finest marketing organizations in the world, but that's their problem," Mr. Stibel said. "They do what they do so well that they tend to keep doing the same thing over and over again, and it's starting to wear fairly ragged. Their greatest strength, their past success, is turning into their greatest weakness."

Mr. Stibel points to P&G's historical reliance on roster shops Leo Burnett Co., D'Arcy Masius Benton & Bowles, Grey Advertising, Jordan McGrath Case & Partners/Euro RSCG and Saatchi & Saatchi. Unilever also remains loyal to its "club" agencies: Ammirati Puris Lintas, BBDO Worldwide, DDB Worldwide, McCann-Erickson Worldwide, Ogilvy & Mather Worldwide and J. Walter Thompson Co.

P&G's relationship with Saatchi & Saatchi dates to 1922, and the JWT/Unilever alliance is one of the longest in the industry, going back to 1902.

To an extent, each has toyed with reaching beyond its roster shops in recent years. Unilever, choosing from within the same holding companies as its club agencies, has parceled out some relatively small assignments to new shops. McCann-Erickson Worldwide's Gotham, New York, has a Mentadent product, and Goodby, Silverstein & Partners, San Francisco, is working on an undisclosed project.

In what was a seismic shift, P&G recently loosened its conflict policy. That allows roster shops to join holding companies with agencies that also work for key competitors, and opens the field for P&G with a broader range of agencies.

STRONG COMMITMENTS TO AGENCIES

Even so, both marketers remain strongly committed to their current agencies and are looking for ways to fix the process, not change the players. They are also searching for methods to work better with those players.

One way sits on Mr. Lafley's desk in Cincinnati. There sits a computer terminal with a digital camera that permits videoconferencing with beauty care executives around the world and with Grey in New York.

"We have virtual innovation teams [linked via category intranets], so we can work on a project literally 24 hours a day, seven days a week if we have to around the world; and work just keeps getting passed on at the end of the day to the next region in the world," Mr. Lafley said.

Internal processes, too, are being upended. Starting in July, five years early, Organization 2005 will make global business managers for the first time responsible for the performance of brands and categories globally. Previously, profit and loss responsibility was handled on a category basis and parceled out among four geographic regions.

AGENCY RENEWAL PROGRAM

Organization 2005 will operate at the same time as another program, Agency Renewal, aims at making marketing decisions better and faster.

P&G executives insist neither initiative was inspired by lagging sales, but admit both of them have been given new impetus because of company concerns over volume and share growth.

Organization 2005 traces its roots to spring 1996, when P&G Chairman John Pepper brought several top P&G executives together with outside consultants to discuss how the company would have to change to thrive in the 21st century. Mr. Lafley was among the participants in the first retreat.

Although Organization 2005 is designed to reshape P&G as a more global company, it should lead to positive results in North America, Mr. Lafley said.

Traditionally, P&G exported products and concepts from the U.S., but an increasing number of marketing ideas and new products now are born overseas. For example, P&G's U.S. test of a tablet form of Cascade dishwashing detergent was imported from Europe.

LOCAL STORE-LEVEL MARKETING

Domestically, the retail environment also will play a bigger marketing role. As head of P&G's North American market development organization, Mr. Lafley is leading P&G's increasing focus on local, store-level marketing, with more brand managers and marketing directors working with P&G's field sales organization.

He pointed to a comment by Lee Scott, Wal-Mart Stores' chief operating officer, in a recent private dinner meeting, that 70 million to 90 million Americans walk through Wal-Mart stores weekly.

Mr. Lafley contrasts that to the increasing fragmentation of measured media.

"If you want to reach a lot of people in a short amount of time, you've got to get into the store," he said. "We're spending a lot of time and effort on understanding and influencing the store environment."

One example of how P&G is trying to accomplish this is through co-marketing, allocating an estimated $100 million of its marketing budget to equity-building programs with retailers on the local level.

HOLISTIC MARKETING

Working in parallel, one goal of P&G's Agency Renewal will be encouraging and rewarding P&G roster shops to create holistic marketing plans that include store-level marketing and a host of other media and relying less automatically on 30-second TV spots, said Bob Wehling, the marketer's global marketing officer.

Like Organization 2005, Agency Renewal is not a reaction to sluggish sales, Mr. Wehling insists. Instead it's a reaction to a changing media environment and a copy development process that produced flow charts that "looked like a wiring diagram of some kind."

But, he adds, "We were also cognizant of the fact that . . . only slightly more than half of our brands were building market share, and we don't think there's any good reason why more than 80% of our brands shouldn't be building market share."

Agency Renewal, actually a compensation experiment, could produce a new system any time this year if the right model clearly emerges, or it could lead to a second round of testing, according to Denis Beausejour, VP-marketing. Single-point accountability, P&G's answer to the copy development maze, is already is in place although it could take time to catch on fully, Mr. Beausejour said (see related story on Page 28).

Unilever, which declined to be interviewed for this story, already has launched some initiatives similar to P&G's, with varying degrees of success.

Though its U.S. operating companies remain independent, they've come under increasing global control in recent years. The marketer consolidated most of its food businesses into a single unit, Lipton, and its non-foods businesses into Unilever Personal Care division -- down from four units separate units previously.

PERFORMANCE=INDEPENDENCE

The legendary independence of Unilever's 500-odd operating companies is contingent on performance, former executives said, and headquarters in London and Rotterdam have been unimpressed by U.S. results.

In the first quarter of 1999 worldwide sales fell 1% to $10.8 billion, while North American results fell more steeply, by 3% to $2.2 billion.

Globally, Unilever -- under Niall Fitzgerald, chairman of the British arm of the company, and Antony Burgmans, chairman of the Dutch arm -- also has moved in the direction P&G is experimenting with in compensation. In 1996, it began combining lower negotiated commissions, well below 15%, for its agencies, with performance incentives. The goal, like P&G's, was less reliance on TV and more holistic marketing.

FOCUS ON INTERNET ADS

The focus, for example, grew to include Internet advertising with its landmark deal with America Online, estimated by one industry-watcher at $100 million.

But Unilever agency executives privately have grumbled about the lower commissions and impossibility of finding a formula to fairly link brand performance to agency pay. Unilever's media mix remains just as heavily weighted toward network TV and magazines as it did five years ago.

So, in a more radical attempt to change how marketing executives and agencies work together, in February the marketer instituted a new global process in which media planning plays a more prominent role. Instead of Unilever marketing executives determining a brand strategy, taking it to a brand agency for copy development and then developing a media plan with media agencies, all three will be involved at the outset.

REVAMPED PATH TO CREATIVE

In the first stage, Unilever marketing executives will work with both creative and media agencies to set brand strategies; media and other communication channels will then be chosen after input from all sides, before agency creatives begin work on copy.

Like the compensation change, the new marketing development process sounds good on paper but may not make much difference in practice, former Unilever executives maintain.

"It's very difficult for that brand manager, category director or even vice president of marketing to say all of a sudden that they're going shift a significant portion of their media dollars," a former Unilever executive said. "The risks associated with that are pretty great. . . . I don't see it happening."

An equally big hurdle could be overcoming the hold TV's glamour has on agency creatives, said Harvey Chimoff, a former senior brand manager for Unilever's Lipton tea business and now a consultant.

The glitz, combined with TV's long track record of success, ultimately will make it hard for either P&G or Unilever to move decisively into other media, said Jim Van Cleave, former VP-media and programming for P&G and now an independent media consultant.

"The reality of the thing is that most brand managers want to do what worked last year," he said. A bigger change for Unilever would be a long-term commitment to any one media plan, Mr. Van Cleave added.

"My impression has been that, with the exception of big brands like Dove, they have been in-and-out advertisers," he said. "They've been in when the copy was right."

Whether moving media planning up in the process will change things remains to be seen, he said, especially when pressures emerge to hit quarterly profit numbers.

OBSERVERS QUESTION CHANGES

More broadly, industry observers differ on whether any of the structural or marketing changes under consideration will make a difference for P&G and Unilever.

Burt Flickinger, managing director of Reach Marketing, Westport, Conn., and another former P&G executive, sees hope for turnarounds for both companies in the U.S. Unilever's increased research and development spending in recent years and more consistent ad support should help, he said.

Even so, P&G far outspends them on research. P&G committed $1.54 billion, or 4.2% of sales, to R&D last year, up from 4.1% in 1997 and well more than Unilever's $921 million, or 2% of worldwide sales. Still, Unilever's total is up from 1.8% of worldwide sales spent in 1997.

Mr. Flickinger also expects P&G's new CEO, Durk Jager -- a noted changemaker -- to usher in a new golden era at P&G.

'A TRUE MERITOCRACY'

Mr. Flickinger said P&G will be "a true meritocracy" that will put strong-performing women, minorities and global executives on the fast track to shake up an entrenched culture.

"The next 10 years under [Mr. Jager's] leadership will clearly eclipse anything that [former CEOs John] Smale and [Ed] Harness or the recent leadership team has done," he said, "and clearly equal the great achievement of doubling unit growth every five years," which occurred under earlier regimes.

But Mr. Stibel doesn't believe any of the current steps at either company will make a big difference.

"I suspect both companies will change," he said. "But if the past is any indication of the future, neither will change as much as they claim they will or want to, and that will be because of inertia. It's hard to change a successful

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