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Saturday, March 13, 2010

The Ultimate Dye Job

A.G. Lafley prefers khakis over Armani and systems over charisma. But despite his soft-spoken style, Lafley’s transformation of Procter & Gamble made him a star in business circles, as he earned a reputation as one of the country’s most effective CEOs. Chief Executive magazine named him CEO of the Year in 2006, and during his tenure P&G made enormous strides in innovation and financial performance.

That is somewhat ironic because business was not Lafley’s first love. A graduate of Hamilton College, he was studying for a doctorate in European medieval and renaissance history at the University of Virginia when he joined the Navy. He spent much of his five-year military career running retail operations at a large military base in Japan. The experience intrigued him enough that he forsook renaissance history for Harvard Business School.

Joining P&G in 1977, Lafley started as a brand manager for Joy dishwashing liquid; he went on to posts in the laundry, cleaning products and advertising divisions. A stint in Asia proved particularly influential, instilling a love for design that he brought back to Cincinnati in 1998, when he became president of the North American business unit. In 1999, Lafley added global beauty care to his portfolio; and in 2000, he became president and CEO. Though he stepped down as CEO in June 2009, he is still chairman of the board.

In this interview with BNET, Lafley describes the decisions that went into buying Clairol, the first major acquisition of his tenure.

To dye or not to dye? We spent a long time in purgatory on this. Beginning in the 1990s, we started working on hair colorants, looking at everything from the chemistry to the product formulation to understanding the consumer experience. We saw this as a sleepy category; there hadn’t been much product change for decades. Also, we did a lot of in-home, one-on-one research. What we found, by spending entire days with women, was that hair coloring was inconvenient, messy and, frankly, a little bit scary. You were dealing with things that bleached your hair, and then things that dyed it. P&G already had superior conditioning and safer bleach; if we could just nail the dye part of the coloring, we would be in.

When I came back from Asia in 1998, we were still working on this and brought what we had into consumer testing. It didn’t deliver — the brand, the concepts, none of it was very exciting. It became quite clear we were not creating anything new that was as strong as what L’Oreal and Clairol already had. That was a real blow. The stark reality is that you learn more from failure than you ever do from success. The key is to learn from that failure and to fail early and cheaply. And we did learn from that exercise, and everyone understood why we had not succeeded. It laid the path to our success in this category later on. In 1999, I picked up the global beauty business unit as part of my portfolio. The question I faced was whether to bury the whole [hair color] thing. I knew we had learned a lot, and I thought we had a good lead on the product and technology side. But I also realized that a new brand had a low probability of success. The category was a walled city, with L’Oreal the biggest wall. It came down to two things. First, we knew that there were unmet consumer needs in terms of performance, convenience and the overall experience; and second, we had a coloring technology that looked promising. With that in mind, I made the first major decision — not to give up on the category. The question was how to enter it.

Making the case for Clairol Then in early 2001 Bristol-Myers Squibb put Clairol on the block. Should we buy it? At the time, our technology was not ready to go, but we couldn’t affect the timing of the auction; the business was for sale when it was for sale. I thought we should go for it. The board, though, was a little skittish and plenty skeptical. I had to sell them. We met in the boardroom at P&G’s headquarters in Cincinnati. I went in with one or two overheads. I wanted to have a discussion, not a slideshow, and we did. The members of the board challenged me on my market assumptions, the investment situation, and our assessment of consumer opportunity. I was also probed on the technology and product and pushed real hard on what we had that was proprietary. Could we do what we said we could do? I made the case that hair care was a core business. P&G was then the leader in shampoo and on the verge of becoming the leader in conditioning and treatment. The next two big segments, as I saw it, were styling and colorants. I told them we had been working on colorants for years and that we were close to a superior, proprietary product. Then I laid out the consumer behavior. There were more women coloring, and they were starting to color younger. And because women were living longer, they were going to color longer — once you start to color, you color to the end. The market was growing faster than other hair markets. All the trends looked good. We also knew a lot about the consumer — things the competitors were not acting on. Then I had to deal with the brand issue. Clairol was a good No. 2 — behind L’Oreal —that we could build on. Nice n’ Easy [Clairol’s major coloring brand] still had a lot of brand equity, but it had been neglected. It sort of had become your grandmother’s brand. I thought that with our marketing expertise, we could do something with it. At the end of about three hours, a majority of the board agreed with me that there was enough equity in the Clairol brand, and that we had enough equity on the consumer side, to make it worth bidding for. They bought the argument and we agreed on a price to offer. It was an incredible vote of confidence in the small team working on this — and in me.

Convincing the board, round II
On Friday around 6 pm, I got a phone call: We had lost. I asked Peter Dolan, who was running Bristol-Myers Squibb at the time, “Will you give us 48 hours for a best and final offer?” He said, no, he had a good offer. I argued that he had nothing to lose; if our bid comes in lower, you have the other offer in hand. If it’s higher, you’re going to get more money, and look like a hero. He said, OK, you have until 8 on Monday morning.

We worked all day Saturday; on Sunday, we had a board meeting. This one was by phone, and no, people were not happy to have to give up a Sunday afternoon. For another three hours, we debated and discussed how high we could go. The questions were even tougher this time, about the competitive situation and the market. Those who were skeptical were even more skeptical. Finally, we agreed to increase the offer.

We got the revised offer to Peter Dolan the next morning; he called me back in an hour or two to accept; we ended up paying $4.95 billion. Then we had to do the contract in something like 24 hours.

On Tuesday morning, when we signed the contract in New York, one of our best attorneys was asleep in her chair in a corner, and one of the finance guys was asleep on the floor. And of course, that was just the beginning. Then we had to deal with the regulatory agencies, and integration, and making it work.