Procter & Gamble and Unilever are in the doldrums. With investors grumbling, how do they engineer reinvention wonders Alan Mitchell Which is more painful? A headline grabbing crisis which ousts the CEO and sees the share price sink almost overnight? Or a long slow leaking of water into the hull? Procter & Gamble and Unilever ­ the Tweedledum and Tweedledee of fast moving consumer goods ­ have found different routes to their current plight, but now they're both in the same boat of investor disfavour. Both have raised investor expectations only to dash them, most recently with a profits warning from Unilever. Both have watched their share prices decline by 30% or more. The question is ­ Why? And what are they going to do about it? Dot.com fever and temporary shifts have little to do with it. Back in 1998, Unilever co-chairman Niall FitzGerald was telling a global detergent industry conference that "companies that believe they can prosper in the next millennium without radically rethinking the way they do business will get left behind and disappear". A year earlier, John Pepper, P&G's then CEO (and now chairman, called back from retirement) was commenting: "Companies like P&G are literally redefining the way we go to market ­ from the introduction of new products to the way those products are promoted, shipped and sold. I'm usually reluctant to talk about anything in terms of revolution' but in this case that's a fair description of what's happening." Alan AG' Lafley, P&G's new CEO, recalls that around that time, "John Pepper sent a few of us off for a week to think about one single question around that time. "It was: What would P&G have to become, what would P&G have to do to become the worldwide leader it wanted to become in the 21st century?" Item number one on the resulting list: "It was going to have to be a transformational change, not just dial turning." In fact, since then, the two industry icons have been struggling to reinvent themselves: to reinvent their marketing models, their channel strategies, their sources of growth and profit, their cultures and ways of working, their organisational structures. What they come up ­ and how their shareholders respond ­ will affect the future of the entire industry. Take marketing. Lafley explains the challenge with brutal simplicity: P&G needs to "reinvent branding and reinvent marketing to the customer [retailer]". Over at Unilever, FitzGerald underlined the scale of the operational challenge when he noted "we're spending $40bn getting the product to the gate and another $40bn getting it to the consumer". This is "crackers", he declared in an interview with the Marketing Society. If you were starting from scratch "you wouldn't do it the way we are doing it today. You would do it a lot better and a lot cheaper." One lifeboat is to focus critical resource on fewer, key brands to boost their critical mass in terms of marketing spend and clout with retailers, while helping to streamline overheads and supply chain costs. Unilever has a long brand tail of 1,200 brands that account for just 9% of its consumer sales revenues, while 400 brands deliver the other 91%. Likewise, even with a dozen brands accounting for over half of P&G's profits "we want to have more of our portfolio in global brands", says Lafley. Another lifeboat is to overhaul relationships with retailers through category management, ECR and what P&G calls Customer Business Development. Explains Lafley: "We try to operate with our major customers in our major markets with multidisciplinary, multifunctional teams. We want to do more than sell them products. We want to help them build their business." The downside of increasing retailer power, notes FitzGerald, is that it cramps Unilever's "ability to move up prices". The plus side is that it creates new opportunities for growth ­ "for those with leading brands". Lifeboat number three is finding new avenues to growth. Unilever's recent buying spree includes the acquisition of Bestfoods (and its basket of prize brands such as Knorr and Hellmann's); of functional food opportunities with SlimFast; and ice cream makers such as Ben & Jerry's. These acquisitions have done much to change the nature of Unilever's business. P&G's recent buys include Tampax, Iams (petfood) and Recovery Engineering (water filters). If its deal with Warner Lambert had gone through it, too, would have been transformed. But both P&G and Unilever know that consolidation is not enough. They have to ignite organic growth too. They have their innovation successes. Just look at Persil Tablets. But compared to the scale of what's needed, more needs to be done. Unilever is betting on a network of 68 regional innovation centres charged with developing "winning concepts" on a regional basis. P&G wants to emulate the category creating magic of global success stories such as Pampers. Recent launches such as Swiffer, Febreze, and Dryel are part of this attempt to create "entirely new product categories with innovative technologies". The key, it believes, lies in technology transfer. One example: the same core knowhow in metal ion control can be used to tackle water hardness in laundry, tartar removal in toothpastes, provide increased bone mass in pharmaceuticals, and calcium in fruit beverages. Says Lafley: "The winner will be the one who leads innovation". Both companies are also trying to innovate how they go to market, as well as what they bring to market. E-commerce (both b2b and b2c) represents a massive opportunity. P&G is experimenting, for example, with mass customisation via reflect.com, which lets customers specify exactly what sort of product and packaging configuration they want via the internet. Says Lafley: "I think there is tremendous promise for customised products and services in a number of areas." Unilever is, meanwhile, launching new services such as MyHome, its home and clothes cleaning initiative. But without far reaching changes to both culture and organisational structure, none of these initiatives will reap their hoped for harvests. Big companies tend to be slow and bureaucratic, as both Unilever and P&G know only too well. "Unilever's unique skill is being able to complicate the simplest problem," FitzGerald complained recently. "We want to move away from a culture of interference." Many of P&G's recent reforms ­ from the introduction of casual dressing to far reaching changes in budgeting and reporting procedures ­ are designed to encourage staff to take more risks, to stop thinking in straight lines, to learn (and act) faster. "We need to think in a more discontinuous, breakthrough way," says Lafley. At the same time, new organisational structures are needed to square the circle of global branding and local market flexibility, while encouraging rather than stifling speed, risk taking and innovation. Pride of place for P&G is Organisation 2005, with its emphasis on category based global business units supplemented by local Market Development Organisations. These, explains Chris de Lapuente, head of P&G's UK MDO, are designed to "deliver to our customers by knowing the market better than anybody else and creating new market programmes". At Unilever, the need, says FitzGerald, is for a "renewed emphasis on local consumer activated marketing ­ putting the emphasis back on the local marketing group to find imaginative and creative ways to execute locally the global or regional concept". Trouble is, none of these projects are yet complete. And not all of them are running smoothly. Reinventing marketing isn't easy. Lafley talks about finding "different business models, different launch models, different branding and marketing models". But so far, he admits, "we don't have the answers". Rationalising brand portfolios is also easier said than done. Most of Unilever's brand tail consists of food brands in local markets. Selling them, or letting them wither on the vine, isn't easy when local competitors are snapping at your heels. Constructing richer relationships with retailers is also fraught with difficulty. One of the reasons for P&G's recent performance stall, admits Lafley, is uneven development of its Customer Business Development programme. "We ended up with more variability than we would have liked in terms of capabilities, competence and readiness to go to market as one company with all the capabilities in place." The jury is also out on both companies' attempts to accelerate and deepen their innovation. One problem: cost cutting and rationalising do not create a good atmosphere for experimentation. Both companies "have got themselves into a mode of behaviour which is very very cost driven and very operational," comments Andrew Seth, former md of Lever Brothers UK, and now chairman of the Added Value Company. Their ability to come up with brilliant innovations seems to have "gone west". On the other hand, as Lafley admits, Procter & Gamble's recent focus on new businesses led it to take its eye off its core brands ­ with an immediate hit to the bottom line. P&G's attempt to forcemarch radical changes to its culture and organisational structure have, meanwhile, created confusion, and hit sales and profits. Lapuente admits: "If you change your organisational structure, you need a lot of clarity about what you do and what you don't do." But the clarity wasn't always there. "Western Europe was a very strong, independent local geographic operation," adds Lafley: "We put poor Western Europe through more change than the rest of the world." One competitor smirks: "Quite simply, they lost control." Yet, if anything, Unilever's challenge is even greater. With its multi-local' approach based on regional operating units, it hasn't even grasped the nettle represented by Organisation 2005. The mismatch between regional business units and global category strategy formulation is making Unilever "schizophrenic", comments one insider. "That's the big issue." Work in progress is never neat. And both P&G and Unilever are only half way through their particular metamorphoses. P&G's focus on 2005 is no accident, insists Lafley. "This is really a journey and we knew it was a journey." Similarly, Unilever's recently announced Path to Growth sets the key milestone as 2004. The big question, however, is whether investors are prepared to wait that long. While both companies have tremendous resource and momentum, and have shown great courage and vision, an awkward, nagging question has started lurking in the background. Are there really meaningful synergies between Pringles and Ariel; or Magnum and Dove? Or is the cost and hassle of organising and aligning thousands of different people across the globe ­ diseconomies of scale ­ beginning to outweigh the benefits of bigness, while stifling creativity and speed? The two companies' common answer is that size matters. Economies of scale in marketing, distribution, sourcing and production are vital. So is the ability to share best practice. FitzGerald said recently: "Simply picking the best from everywhere in Unilever and applying it across the board would double our profits in a year." So are the fruits of technology transfer. "Breadth can be a liability if you are not focused," Durk Jager told his last annual shareholder meeting, but "our unique ability [is] to connect expertise from one area of the business to create new ideas in another. We call this scale of knowledge'." But investors are getting impatient. FitzGerald recently admitted CEOs nowadays have to "start with the premise that unless large firms continue to find ways to reinvent, reenergise, and redirect themselves, they won't be around long". Before his ousting, Jager warned that "unless a company grows at an acceptable rate, year in year out, it can't sustain its organisation". In other words, FitzGerald and Lafley not only have to prove their brands and innovation add value, they also have to prove their companies, as organisations, add value. P&G and Unilever are great companies. They're proving their greatness by their current attempts to transform themselves. They'll probably succeed, showing the way for their many peers. But if not, they risk degenerating into mere non-value-adding conglomerates, ripe for break up. If they fail to reinvent themselves as promised, they could face a very different kind of transformation. {{COVER FEATURE }}