Procter & Gamble in 2004: Managing Product Innovation

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Introduction

When Alan Lafley became CEO in the summer of 2000, things had not been looking good for Procter & Gamble (P&G). Under his predecessor, Dirk Jager, costs had gone up, volumes stagnated and profit margins shrunk on P&G's biggest brands like Pampers, Tide, and Crest. But in 2004, many analysts believed the situation seemed to have improved significantly with Lafley having done a great job of turning the company around. Lafley had focused on building the core brands even as he commenced a restructuring that involved $1.7 billion in cost cuts. He had also cut prices on many P&G products. As a result, over the past three years, core volume (units sold in P&G's existing businesses) rose on an average by 7% annually. The stock price had nearly doubled.

Lafley had attempted to introduce more creativity into P&G's innovation process, a major challenge for a company with a rule-bound culture. Since 2002, P&G had raised its new-product hit rate (the percentage of new entries that delivered a return above the cost of capital) from 70% to 90%.

In the first quarter of 2004, 19 of P&G's 20 largest brands improved their market shares. Overall core volume also rose by 12%, due to new product launches such as Olay Regenerist anti-aging creams, Prilosec heartburn pills, Swiffer dusters, and Mr. Clean AutoDry, a power gun spray that cleaned cars.

Though Lafley had made a few targeted acquisitions, P&G’s transformation was largely driven by organic growth...

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