P&G CEO Bob McDonald on Why Size Doesn't Matter

BATAVIA, Ohio (AdAge.com) -- The last decade at the world's biggest marketing spender belonged to A.G. Lafley, but this one belongs to Bob McDonald. In an interview with Advertising Age, the Procter & Gamble Chairman-CEO explains how he's different from his longtime mentor -- and it's more than being an Army guy trained in jungle and desert warfare vs. a Navy guy who operated a store. Ad Age: How are you different from A.G.? Mr. McDonald: We're very different. He studied the liberal arts. I studied engineering. He went in the Navy and worked in retail stores. I'm an airborne infantry ranger -- desert warfare, jungle warfare. Military experience may be common, as it is for many people in our generation, but I would argue those two are very different. If you look at the number of countries I've lived in around the world, it's very different from A.G., who lived in Japan for three or four years with P&G [Mr. McDonald has spent 15 years stationed outside the U.S., and his children had most of their primary and secondary education overseas.] The company was more deliberate about getting me ready, which is why I had more of those international experiences. Ad Age: A lot of the things you've been talking about -- touching more lives in more places more often, increasing business in developing markets -- started under A.G. Mr. McDonald: As we talked about succession, we talked about continuity with change. We want to preserve the things A.G. started, which are valuable to the company and which in his time led to doubling the business and quintupling the profit. But we also, given the deliberateness of the succession plan, did a lot of work on what was missing and what could take it to the next level. And of course A.G. was part of that. As I did that work , I led it; I discovered our purpose of touching and improving lives was incredibly powerful but underexploited. When I would go to campuses to recruit, and I typically am on a college campus once a quarter, Bear Stearns didn't exist anymore. Lehman didn't exist anymore. I'd have the largest audience I ever had at Harvard Business School. And as I talked to the students, I discovered they were looking for professions that would provide meaning for their lives. I think all of us as human beings need meaning. And it got me to realize that most people joined this company because of that purpose. Our agency partners also felt our purpose was meaningful but under-exploited. ... So I had a number of inputs telling me that what we needed to do was get us back to our purpose. And from that we developed this idea of purpose-inspired growth. We also discovered we were under-exploiting the scale of this company. ... Many analysts covering our company think size is a detriment. They believe in the law of big numbers -- the larger you get, the harder it is to deliver the same percentage growth. Size doesn't matter. What matters is turning size into scale and turning that scale into accelerated growth. So you'll see more multi-brand commercial innovation. We've created a new team, which we call the Vice Chair Team, which includes myself, [Chief Financial Officer] Jon Moeller and the vice chairmen, who get together weekly, plan personnel moves, look at our programs focused on various competitors and countries, and work to make sure we're showing up as one company and our scale is having an impact. [Another strategy is] simplification. The natural tendency of a company is to become bureaucratic, hierarchical and slow-moving. We're trying to [combat] that through the removal of layers and hierarchy and the use of technology, which frankly fits my engineering background and the fact that I studied computer science. ... We're going to use technology to make this company operate like a $10 billion company rather than an $80 billion one. Ad Age: Some people see you as more operations-focused than brand-focused. Mr. McDonald: Over a 29-year career, I was head of global operations from 2004 to 2009. The last five years tended to define me, but like everyone else, I spent a lot of time in marketing. I was the Cascade brand manager in 1983 here in the U.S. The Tide brand manager in 1984. And brand building is what I love doing. Ad Age: You led the integration of Gillette, and P&G had never acquired a company considered a competitor for leadership in industry best practice. Did that make a difference? Mr. McDonald: I think a lot of people have lost that story. I don't know of any other case where a company that did the financial acquisition also made a deliberate attempt to allow the acquired company to in many ways contribute to the new culture. Ad Age: Was it disappointing you didn't keep more of the senior people from Gillette, or was it just inevitable because of the incentive structure for the Gillette people? Mr. McDonald: Are we disappointed? Yes. Was it inevitable? Yes. I could go name by name and tell you of my disappointment but also of their personal plans that led to it. ... But I'm thrilled [Vice Chairman Global Beauty] Ed Shirley is here. I'm thrilled about Paul Fox [who heads the corporate external relations team]. ... 40% of P&G leaders now started their careers somewhere other than P&G, and that's probably the largest percentage in my career and probably ever. Ad Age: The financial markets responded favorably to you talking about taking market share again. How would you assess the impact of making that a focus? Mr. McDonald: In August, when A.G. and I did the [earnings] call, I made the statement that losing market share was no longer acceptable. It was never acceptable. But we had a different goal in the prior 12 months. That was to get the financial structure of our business right. We faced $4 billion of currency revalutation, $2 billion of incremental commodity costs on top of $1 billion the previous year. Last year was not one we're proud of. It was the most difficult one we've been through. But thank goodness we did what we did, because now we're in a position to invest in the strongest innovation program we've had in my career. And that's paying off. We promised we'd return to [organic sales] growth in the October-December quarter. We brought that forward one quarter. We only grew 2%, which isn't great, but we did grow. ... It's going to be a good year. Ad Age: Your goal to add a billion consumers in five years is a lot of people, and it seems like most would have to come from the poorest countries or poorest tiers of developing countries. Mr. McDonald: Not necessarily. You're one of them. Ad Age: I'm already there. Mr. McDonald: We've got 25 product categories in the U.S., and you're not using all 25. Ad Age: That's true, though I did buy diapers this week. Mr. McDonald: You could shave a little more. Ad Age: That's true. Mr. McDonald: In fact, you could shave your head. You use more blades that way. Certainly, developing markets is a big part of it. We've got a $25 billion business in developing markets now. That's larger than a lot of our large competitors. Again we've got to turn that size into scale and scale into growth. ... A lot of the opportunities in these markets [aren't] about switching people from a competitor. It's about getting them to use a product at all, whether it be disposable diapers, feminine care products. Or if you get into some parts of the world, you find people using the same soap to wash their hair, their bodies, their clothes, their dishes, their walls. It's a huge opportunity. But I don't want you to take away from that that we're not serious about growing our business in developed markets, because we are. We need more new categories, more new Swiffers, more new Febrezes, more discontinuous innovation, and we're working on that ... And that's the kind of thing that will provide important step change in developed markets, as well as we need better loyalty to all of our brands in all of our categories, and we're working on those things as well. Multi-brand commercial innovation is one example. If you look at our Olympic sponsorship or NFL sponsorship, it's about scale, multiple brands and increasing the size of the market basket for American consumers. Ad Age: There are people who think, in the age of social and digital media, scale isn't going to matter as much. Do you think that's true? Mr. McDonald: I actually think the reverse. I would argue social networks and digital media are scale at play. One of the things that came out of Cannes for [Global Brand-Building Officer] Marc Pritchard and me both was the scale impact of social media. The Cannes idea is a bit outdated. ... The way I see it, the awards now should all be titaniums -- you start with the idea now before you even think about a medium, and you take the idea, which is rooted in consumer insight, and only then do you figure out how to use the media, and you use every medium. And then what the marketer needs to be able to do is be able to let go ... And the best ideas were like this warden of the Great Australian Reef, where, rather than running a tourism campaign, the government decided to put a want ad in several papers around the world for a warden for the Australian reef. And they asked for videos, which is another example of what we're doing. And they let it go. So you had this guy in an icebreaker in Greenland talking about how he was the best guy. Another [takeaway] was the ubiquity of social media and how an idea can take off and you don't have to pay for it. What I worry about is that it democratizes scale. It allows the little guy to get scale almost instantaneously. And we've got to make sure we don't give up that opportunity. That's why we're talking about transforming the company through digitization, visualization, virtualization. And that's my job, which is to change the way we work by digitizing the entire company end to end. Ad Age: It looks like the battles will be particularly heated this year. How do you win in that environment? Mr. McDonald: We have more runway. We have $25 billion of business in developing and emerging markets, but it's only about 30% of our business. For Colgate and Unilever, it's a much higher percentage. We have a much broader footprint than many of our competitors, who have a footprint that looks like the colonization of the countries they came from. We can also take advantage of our scale. We don't want to go head to head in a battle with a competitor and lose value in a category. But we have enough categories to choose from that we can build infrastructure in a country in a category that might not be competitive to begin with. I think that augurs well. I think it helps that I've lived and worked in those markets. Go through the lists of CEOs for those other companies and see how many have lived and worked in the Philippines. Ad Age: You've worked in just about all regions of the world, haven't you? Mr. McDonald: [Counting] my military life, too, when I lived and worked in the jungles of Panama. That's where the Army has its jungle-warfare school. I was joking with president Martinelli of Panama -- he's also the largest retailer in Panama, so we've known him for some time -- I was joking with him that I probably know every black palm tree in Panama, but I hadn't been in his office before. Black palms have these needles, and as you're moving through the jungle at night, often you can trip and fall. Your immediate human reaction is to put your hands out. Well, these needles have poison on them, so I made sure all my soldiers were wearing gloves to deflect the needles. You learn a lot of things. We were in the Philippines almost an entire year without electricity. They had built a nuclear power plant on top of an earthquake fault. Cory Aquino built it, and President Ramos never started it up, for good reason. There was also some graft involved, and some other things. Literally we were day to day on power. ... When you live in a place like that, and you only have running water in the house a half hour a day ... it creates a sensitivity that resonates with you the rest of your life, and your family. So I don't offer flippantly that it makes a difference. Ad Age: When you consider the shift of focus to developing markets, the need to build margins in developed markets to compensate for lower margins in developing ones, the fact that digital marketing is different and often less expensive than traditional marketing, have we already seen the all-time record level of marketing spending for P&G in the U.S.? Mr. McDonald: Oh, no. We have to get in touch with our consumers. You said the spending. I don't know that I want to deal with spending. But I'm happy to talk about reach, awareness, because we're looking for the most efficient ways possible to reach consumers. But for any company that prides itself on innovation, that wants to create not just new brands but new categories of products, we're going to have to communicate with people. While people increasingly will do it digitally, there's no question that everybody won't be ready for digital communications until deep in the future. It's a fallacious connection that developing markets have lower margins and as a result you have to raise margins in developed markets. ... Our after-tax margins in developing markets are consistent with our margins in developed markets. We are not a company that doesn't challenge our organization. We don't tell people you're going into a developing market and your margin goal is half that of a developed market. Ad Age: P&G's done a very good job of fostering diversity over the years, and probably better than most of your global competitors. But over the past couple of years the senior leadership has become a bit more male, American and white, and there have been some losses of diversity at the [marketing] director level. Is that a concern? Mr. McDonald: Diversity journey is never done. And because diversity can sometimes boil down to one or two individuals, you end up having moments in time where you may not be as proud of where you are as before. For example, [former P&G President-Global Business Units Susan Arnold's] departure, while all of us knew it was coming, while she had said from the very beginning she was going to retire when she was 55, is a loss of diversity. We've made progress. Over half of our leadership team is non-American. We have Mel Healey now leading North America. I'm becoming personally responsible now. I'm the diversity leader of the company. But I will partner with Moheet Nagrath, who's our global human resources officer, and we are going to promote Linda Clement-Holmes, one of our top talents in global business services, and she's from the same hometown as me in Gary, Indiana, to head our diversity efforts. I am absolutely committed and focused on that, and you're about to see that in a raft of announcements. It will be something that will occur during my tenure, because I know without it we can't be innovative. And I know it's the right thing to do. And I do the right thing, or I try to. Ad Age: Will the next CEO of P&G be a woman? Mr. McDonald: It's possible. We have a lot of talented women. It could be a man. ... It's my job to make sure there's a choice. Ad Age: There's been some movement to reshape the marketing organization and administration around consumer cohorts rather than product categories [such as organizing around male and female consumers in beauty care]. How far will that go? Mr. McDonald: The first thing we did was create an integrated brand-building organization [encompassing marketing, design and public relations]. That was my thing. And getting a guy like Marc Pritchard to lead it ... [and] also getting a very talented team of experts like [Global External Relations Officer] Christopher Hassall, Joan Lewis in market research, Phil Duncan who's a master of design. One of the things I've challenged Marc [Pritchard] on is that country boundaries are becoming less important. I'm a big believer in Sam Huntington's book "Clash of Civilizations," written in the 1980s. In essence, you could argue Huntington predicted 9/11, or at least what might happen. But what I challenged Marc is, in a digital world, what stops us from marketing to consumer cohorts without regard to country boundaries? When I was in Asia, most of the economies are run by people of Chinese descent, whether it's the Chinese who emigrated years ago from China to the Philippines, or the other Chinese groups who run the economy in Indonesia. So why, if we develop a good product that works well in China, couldn't we expand to all the Chinese in Asia, rather than think about the Chinese in Indonesia as being different from the Chinese elsewhere? The Chinese in Indonesia still speak Chinese. They still read Chinese newspapers. They still have Chinese street signs. The ultimate in marketing is marketing to the individual and customizing products to the individual. But then you have a continuum from the post-World War II mass marketing to the individual marketing of the digital age. And anything that helps us generalize or group or simplify the marketing to people over time we will do that until we get to the ultimate, which is one on one. And I think marketing civilizations, as I call it, or cohorts, is one of those routes. Ad Age: Is there another Swiffer or Febreze in the pipeline for P&G? Mr. McDonald: Well, there'd better be. I talked about the importance of discontinuous innovation. And we're working on a lot of discontinuous innovation. Each one of our vice chair organizations has a new business development organization that's charged with developing new categories or brands. The periods of time historically of growth for the company were when we acquired or launched new categories and new brands, so it's not rocket science. I was talking with John Smale recently, and you could just see it in the history of his time as CEO. I had lunch with Durk Jager last week, and we were talking about the discontinuous innovation he brought to the company. We've got to do it. We have the strongest innovation program now that I can ever remember. And a lot of it will be revealed over the next six months. ... Remember the strategy of touch more lives more completely in more parts of the world. When I talk to business units, it's to ask why isn't Febreze in every part of the world. What's it going to take to get oral care into every part of the world? How long is it going to take? And I'm impatient. Ad Age: What keeps you awake at night? Mr. McDonald: The biggest thing is the parable of the frog in the boiling water. That's why today, of the Fortune 50 from 1955, only nine of those companies still exist. P&G is one of them. I want P&G to be on that list 172 years from now, because that means we're touching and improving more lives. The only thing that can kick us off that list is complacency or inability to learn new things or unwillingness to change.

P&G CEO Bob McDonald on Why Size Doesn't Matter

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