What A.G. Lafley's Return Means for P&G

With former CEO A.G. Lafley returning to the helm of Procter & Gamble, I asked Rosabeth Moss Kanter for her analysis. She holds the Ernest L. Arbuckle Professorship at Harvard Business School. She's an expert on strategy, innovation, and leading change. She is also Chair and Director of the Harvard University Advanced Leadership Initiative. She is a regular contributor to HBR and HBR.org. She's on twitter @RosabethKanter.

In her latest book,

SuperCorp: How Vanguard Companies Create Innovation, Profits, Growth, and Social Good, she analyzed how P&G (among other companies) achieved long-term performance. She wrote the HBS cases on the P&G/Gillette merger, and when she teaches those cases, frequently invites P&G executives to her class.

Why is P&G making this move, now? P&G is in the midst of a major restructuring, and has laid off thousands of people. Why switch horses midstream?

P&G's board has been under a great deal of pressure from an activist investor who has made his views on the pace of the restructuring clear and vocal. Regardless of the merits, that begins to wear everyone down. If the current CEO is under attack, that becomes a distraction for the company and makes it harder to execute or gain credibility with certain stakeholders. Even if the performance improvement plan is on a good path, that noise becomes a distraction (and psychologically, it leads to dreams of escape or wishes for a bold dramatic move). Appointing a new CEO buys everyone time, and thus quiets the noise for a while. But note how P&G did it. Asking A.G. Lafley to return is a sign of how much the company values continuity and company knowledge.

Any time a former CEO returns to run the company after a brief absence, you have to ask about succession planning. Does this move suggest that P&G needs a better succession strategy?

The absence wasn't so brief. Lafley has been out of P&G for 4 years, which in this age of rapid change can include several waves of volatile external change — economic, geopolitcal, technological (social media) etc. But it's also important to note that A.G. Lafley and Bob McDonald worked as a team during the 2000s; when Lafley scored his major successes, McDonald was by his side as vice chairman and then COO. McDonald was intimately involved with the Gillette acquisition and oversaw a model merger integration process. The P&G culture was also important to Lafley's success, and he emphasized the PVP (purpose, values, and principles) as a management guide at the same time that he pushed product innovation, accelerated growth in emerging markets, and used the Gillette merger (with McDonald's full involvement and leadership) as a change catalyst, to adopt some faster Gillette processes. But with the culture still a bedrock of P&G's success and endurance, it always seemed inevitable back then that the CEO successor would be an insider.

Lafley won't just be the CEO, he'll be the President and the Chairman of the Board. That's been a hot topic this week. Will having one person in those three roles make P&G more agile? Or run the risk of them not having independent board oversight?

Among other things, if a turnaround is needed, then the new CEO also needs full support and authority — and probably wouldn't take the job without it. It wouldn't send a great signal if Lafley returned but had one hand tied behind his back. Since he previously held all three roles successfully, why restrict him now? Also, I would hazard a guess that the Lafley return is an effort to accelerate progress on things already underway in McDonald's plan, although Lafley could certainly add creative twists, and that Lafley won't stay very long, just long enough to ensure investor and customer confidence, strategic priorities, and a good succession plan.

McDonald became CEO in the 2009 recession, a time when the middle class continued to shrink. That proved challenging to all the major consumer goods companies, but some (like Unilever) adapted by introducing lower-priced products. How should P&G adapt to a shrinking middle class in the US?

P&G began a portfolio of lower-priced but high-quality products in emerging markets and brought some of the concepts to the U.S., e.g., a laundry variety. It might have been slower than Unilever but wasn't asleep at the switch. The challenge has been not in brand extensions, whether lower price points or additional features. The challenge has been creating new categories entirely. Under Lafley, there were category innovations such as Swiffer and Febreeze, and the addition of men's shaving via the Gillette acquisition. McDonald did shift the portfolio, e.g., sell Pringles and emphasize beauty which is a growth category that is less price-sensitive. But new products or categories that might be in the pipeline don't spring up overnight. The categories introduced under Lafley built on earlier R&D. I wouldn't be surprised if Lafley again gets credit for products underway under McDonald. Also, social media have come on strong since Lafley handed the reins to McDonald, causing shifts in marketing strategies from TV to other media; Lafley will need to be on top of that.

There's also the issue of emerging markets — some have accused McDonald of being overly aggressive in expanding there. Do you think Lafley will need to alter their approach?

It's ironic. Lafley was credited with opening emerging markets as a virtue, but when McDonald built on this, he has been accused of expanding too aggressively. Of course a company should never neglect its largest developed markets. But with Europe as a drag, it seemed wise at the time to invest where there was still growth potential. Brazil has been a major success.

There are clearly no shortage of challenges on Lafley's plate. How can he get people to take creative risks in a climate of turbulence and uncertainty? And what's the number one priority for him right now?

Lafley will have to explain this to the executive team and the company in a way that ensures them that the path they've been on can be productive, especially if they accelerate innovation. He should scrutinize the entire portfolio and product/country mix to identify the most and least profitable and promising for growth, and then to make any needed people changes or adjust investments, such as marketing or product extensions. That's immediate, along with any financial quick fixes. It's not a bad idea to stress accountability. Maybe some of the improvement plan underway was happening too slowly because one area or unit or part of the world dragged their feet and made changes too slowly.

If Lafley accelerates progress on the operational and financial improvements underway, and people see success as reflected in profitability and stock price, then he can look for the creative ideas for innovation, large and small. Also, he can then look at the balance between Cincinnati-centricity and the recent distribution of brand global functions out to the regions, such as beauty in Singapore.

A strategic challenge is not only getting the product and category mix right, but also attracting talent (one reason for moving these brand HQs out of Cincinnati) while also integrating people across the portfolio as "one enterprise" that can find synergies and leverage learning, resources, and talent mobility. When Lafley first became CEO, P&G was struggling with how to become a more global and globally-integrated company; that is still a challenge.

This blog first appeared on Harvard Business Review on 05/24/2013.

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