Lafley Revamps the Org Chart to Save P&G

by Susan J. Aluise | June 7, 2013 8:40 am

Dow Leaderboard[1]Procter & Gamble’s (NYSE:PG[2]) former-and-current Chairman and CEO A.G. Lafley unveiled his new organizational structure and four new group presidents Wednesday.

Employees and shareholders can only hope the new strategy will be a game-changer for the 176-year-old global consumer-products giant.

Lafley, the innovator and turnaround king who righted P&G’s badly listing ship back in 2000, reclaimed the top job last month from Bob McDonald, the successor he had groomed for the top job before his retirement in 2009. The shake-up is a significant undertaking for the iconic company, whose 26 billion-dollar brands include Tide, Crest and Charmin.

The new corporate reorganization expands the company from two global business units — household products, and beauty and grooming — into four more focused units. The new sector units are: Fabric and Home Care, Health and Grooming, Feminine and Family Care, and Global Beauty. A group president that reports to Lafley will head each unit effective July 1:

Two key goals are driving Lafley’s organizational shake-up. First, the more tightly focused sector groups are intended to strengthen P&G’s developed market businesses, maintain developing market momentum, build a strong innovation pipeline, and drive improvements in productivity.

Second, tapping four well-qualified executives to head the sector-focused units gives Lafley a deep bench from which to groom a successor. This is especially important given the near-certainty that the 65-year-old Lafley likely will hand off the baton within the next couple of years.

Investors can be pardoned for warily raising an eyebrow over the news of yet another P&G reorganization — after all, McDonald has had the company in full restructuring mode for the past couple of years. McDonald’s “purpose-inspired” growth strategy — which aimed to aggressively manage costs through downsizing and technology-driven efficiency while investing big in innovation — has been underwhelming at best.

McDonald has been battling a “perfect storm” of sorts of late — including high commodity prices, frugal consumers in developed markets and lagging sales growth — and the plan hasn’t delivered punch investors were expecting. Once again, it’s Lafley to the rescue — with an innovation-driven agenda that aims to boost brand value, global manufacturing capacity, and market share.

Although P&G’s cost-cutting initiatives helped boost profit in its most recent quarter, flagging sales growth, struggles in the company’s beauty care division and a subdued fourth-quarter earnings outlook turned up the heat on McDonald and the P&G board. The company’s new fiscal year starts on July 1, making this a good time for such sweeping changes.

Bottom Line

Lafley has been here before. He stepped into the top job in 2000 at the end of Durk Jager’s bruising 18-month reign. Jager’s “Organization 2005” launched a slash-and-burn restructuring that widely missed the mark, eventually costing the company $2 billion and a whopping $75 billion in market value. That’s a good reason the “Organization 2005” mission — and Jager’s job — ended five years early.

The entrepreneurial Lafley stepped in and refocused the company on two priorities: “The customer is first” and “innovation is everyone’s job.” His passion for connecting with shoppers and seeking out undiscovered opportunities in consumer products lifted the company, growing P&G’s number of billion-dollar brands from 10 to 24.

However, in today’s tough global consumer products market, it would be naïve to simply assume Lafley can make lightning strike twice for P&G. The company remains vulnerable to the global economy, commodity prices and foreign currency risks — not to mention tough competitors and pricing pressure.

Considering P&G’s valuation is about right for a mature consumer staples conglomerate — its forward P/E of about 18 is in line with competitors Unilever (NYSE:UL[3]) and Colgate-Palmolive (NYSE:CL[4]) — you won’t be overpaying to take a chance on Lafley’s plan, though you wouldn’t be getting a deal for doing so, either.

Still, I think chances are better than not that the more agile organization and Lafley’s refocus on innovation have a good chance of paying off for investors in P&G.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

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