Procter & Gamble sells soap brands to Unilever

by
John Kell

@FortuneMagazine

December 22, 2014, 1:00 PM EST

Procter & Gamble PG has agreed to sell some of its soap brands to Unilever, the latest move by the consumer-products giant to slim down its product slate.

Unilever is buying all of Camay, and the Zest brand outside of the North America and Caribbean markets. The Anglo-Dutch company is also buying a manufacturing facility in Mexico that employs about 170 people. Terms of the deal, which is expected to close in the first half of next year, were not disclosed.

P&G in August unveiled plans to shed up to 100 brands, as the company aims to focus on 70 to 80 brands that are responsible for a vast majority of sales and profit. P&G said the other businesses would either be discontinued, or divested. Camay — and most of Zest — now join Duracell to make up the growing list of assets P&G is casting aside.

Unilever said the brands generated about $225 million in revenue in the latest fiscal year. The company added that the brands would benefit from Unilever’s “innovation and R&D capabilities.”

“They will make us one of the market leaders in skin cleansing in Mexico, a priority market for Unilever,” said Alan Jope, president of Unilever’s personal care unit.

Finding innovative ideas in unexpected places

@FortuneMagazine

November 19, 2014, 3:39 PM EST

A few years ago, executives at PepsiCo gave the R&D department a challenge: Find a way to cut the sodium content of snack foods, while still keeping the salty taste consumers crave.

After toiling away in their own labs and searching across the packaged-foods industry for ideas, the scientists found what they were looking for — in a global research lab that was studying osteoporosis.

What do salty snacks and bone disease have to do with each other? Nothing, except when it comes to so-called open innovation. The osteoporosis researchers had developed a way to create nanoparticles of a low-sodium, salt-like substance by “smashing calcium into tiny particles and re-growing it,” says Andy Zynga, CEO of innovation firm NineSigma. That gave PepsiCo’s food scientists a whole new perspective on the task, so “the company went on to solve its problem in a truly innovative way.”

PepsiCo isn’t the only one to have based a big innovation on an idea that originated in a totally different business, for a different purpose altogether. Procter & Gamble, for instance, found a way to reduce the wrinkles in shirts fresh out of the dryer by starting with a polymer invented by a computer chip expert at a European university.

Zynga, whose firm counts Xerox, Pfizer, Kraft, Siemens, and many other heavy hitters among its clients, says any company can make profitable use of ideas from other, seemingly unrelated fields. The first step in what’s commonly called open innovation, he says, is to reframe the question of what you’re looking for.

“State the problem in its most basic form,” he suggests. In P&G’s case, instead of looking for ideas on, say, “how to make fabrics less wrinkly,” the company put the word out that it sought proposals on “relaxing surface tension of an organic material.” Expanding the definition of the goal “lets you cast a very wide net, so you can find workable solutions in places you might never have thought of looking,” Zynga says.

NineSigma has built a database of more than 2 million companies, nonprofits, and university labs worldwide, where its teams of consultants search for useful technologies on clients’ behalf, but Zynga maintains that anyone with a tricky problem to solve can do something similar.

“Start with a basic problem statement that doesn’t limit you to your own industry,” he suggests. “Then, go and talk to suppliers, customers, and universities. Some of our clients have technology scouts who are constantly going to conferences to talk with experts in other fields, to see what they can apply to improving their own products.” The more varied technologies you have to choose from, he adds, the better your chances of “advancing above and beyond what your competition is doing.”

That’s not to say that an innovation from elsewhere will always be welcome in-house. One obstacle to open innovation is a cognitive bias that psychologists call “functional fixedness,” meaning that a company’s own R&D experts “can’t get past the way they have always looked, and where they have always looked, for solutions,” Zynga says. “Ironically, the more success they’ve had with their usual approach to a problem, the harder it is to imagine a totally different one.”

To change that, Zynga suggests appointing what he calls “a functional fixedness SWAT team — a group of innovators who embrace the idea of collaborating with others outside industry walls.” He’s seen such teams unearth enough helpful ideas from surprising sources that they’ve inspired their colleagues to “evolve from a closed loop to an open one.”

Warren Buffett to buy Duracell from Procter & Gamble

by
John Kell

@FortuneMagazine

November 13, 2014, 8:55 AM EST

Warren Buffett’s Berkshire Hathaway has agreed to buy the Duracell battery business from Procter & Gamble PG , a deal that comes less than a month after the consumer-products giant said it would shed the asset.

Berkshire Hathaway, a conglomerate that owns insurance, railroad, retailers and other businesses, said it expects the deal to close by the end of the second half of next year. The deal terms are a bit complex: P&G has agreed to pump about $1.7 billion in cash into the Duracell company at closing, and in exchange, will receive about $4.7 billion in P&G stock currently held by Berkshire Hathaway.

Berkshire Hathaway is one of P&G’s top investors, owning 52.8 million in shares, or just under 2% of the total P&G stock outstanding according to Morningstar data.

“I have always been impressed by Duracell, as a consumer and as a long-term investor in P&G and Gillette,” Warren Buffett said in a prepared statement.

P&G late last month had indicated it would shed its Duracell brand, part of the company’s plan to slim down its product slate. P&G’s exit from Duracell began with an agreement to sell its interest in a China-battery joint venture, a deal that occurred in late August. Terms of that transaction weren’t disclosed, though P&G said it booked a charge of $932 million, which was related to that deal.

At the time, the second step hadn’t been finalized. P&G said it hoped to split off Duracell into a stand-alone business, but also said it would consider a sale or other alternatives if they “generated equal or better value.”

“I’m confident this new ownership structure will provide strong support for Duracell’s future growth plans,” said P&G Chief Executive A.G. Lafley.

Editor’s note: An earlier version of the story incorrectly stated that Duracell would put $1.7 billion of cash into the Duracell company.

P&G’s Mel Healey on why not having it all is liberating

by
John Kell

@FortuneMagazine

October 30, 2014, 7:13 AM EST

On October 22, Melanie Healey, Procter & Gamble’s PG group president for North America and No. 18 on Fortune‘s 2014 ranking of the Most Powerful Women in Business, announced her retirement from the company, effective next June. The news, which came as part of an overall restructuring announcement by CEO A.G. Lafley, surprised many, who thought that Healey had a good shot at succeeding Lafley one day.

But the company is undergoing dramatic change, and Healey, who has struggled to get the once-dynamic North America region back on track, has decided to do something different (retirement, at P&G, is allowed after 25 years at the company, which Healey has completed. But she’s only 53, so don’t expect to see her in a rocking chair anytime soon).

In an email exchange with Fortune, the Brazilian executive mused on what that might be. “I firmly believe that happiness and success is not just about reaching a dream destination, but more importantly, it’s about enjoying the journey,” she says. “The past 25 years at P&G have been an amazing journey. Now, it’s time for something different.”

She says she’s considering everything from writing a book to working in a startup, but notes that it is impossible to figure out what’s next when you’re in such an intense job. “There is virtually no time to step back, reflect and consider what else you could choose to do.”

I asked Healey to offer some advice for professional women based on her long career. She directed me to a speech she gave to her alma mater, the University of Richmond, in late October, entitled “Choose to Live a Life that Matters.” There were two aspects that seemed particularly relevant.

First was the notion that authentic leadership comes from within. “Looking at yourself in the mirror and knowing you are accountable first and foremost to yourself is a choice,” she said. “And when you get really clear about who you are, this understanding will make you a more authentic leader.” For women in particular, who often feel pressured to act like leaders they see around them rather than finding their own path, this is very good advice. And as someone who has watched Healey in action for years, I can vouch for her own authenticity.

The second bit of advice surprised me. “The choice not to have it all, far from being defeatist, is extremely liberating,” she said. “Slugging through a decade of work but losing touch with your family and friends or with your community creates its own sense of failure,” she wrote.

This from a woman with a $32 billion P&L, who spends months a year on the road and yet has managed to maintain a longterm marriage and raise two kids (both currently in college)?

But when I thought about it for a while, I realized that what she was saying was profound enough to turn the whole “Lean In” debate on its head. You can have all of what YOU want, she is saying. You just can’t have everything that anyone wants—or you can try, but you won’t be happy.

Here’s hoping Healey’s next chapter gives her what she wants (but not all).

“From the MPW Co-chairs” is a series where the editors who oversee the Fortune Most Powerful Women brand share their insights about women leaders.

Procter & Gamble to shed Duracell brand

by
John Kell

@FortuneMagazine

October 24, 2014, 7:58 AM EST

Consumer-products giant Procter & Gamble PG on Friday reported their fiscal first quarter earnings and indicated that it intends to shed its Duracell brand. P&G also posted a 34% decline in fiscal first-quarter net income, mostly due to a charge to write down the value of the battery business to be more reflective of the value it will receive from the sale of a China-based joint venture.

What you need to know: The maker of Gillette razors and Crest toothpaste is delivering on its promise to slim down its product slate. The company’s exit from the Duracell business will occur in two steps. First, it finalized an agreement to sell its interest in a China-battery joint venture, a deal that occurred in late August. Terms of that transaction weren’t disclosed, though P&G on Friday said it booked a charge of $932 million, which was related to that deal.

The second step hasn’t been finalized, though P&G is hoping to split off the Duracell business into a stand-alone company. In a split off, P&G shareholders would be given the option of exchanging some, none or all of their P&G shares for stock in the newly formed Duracell company. P&G will consider alternatives, including a spin-off, divestiture or other offer, if they generated equal or better value. The timeline for the proposed spin-off is still unclear.

The big number: P&G reported overall net sales of $20.79 billion for the quarter ended September 30, a tad lower than last year’s total but slightly above the $20.76 billion projected by analysts. The company’s core profit, which excludes charges, was $1.07 per share and matched Wall Street’s expectations.

The company’s sales performance was fairly choppy. Health care sales jumped 6% while baby, feminine and family care sales rose 1%. Sales declined for grooming, fabric care and home care, and the beauty, hair and personal care business segments.

What you might have missed: Diving back into the Duracell divestiture news, P&G this summer told investors that it would shed up to 100 brands, saying it preferred to focus on 70 to 80 brands that were responsible for 90% of the company’s recent sales and 95% of profit. P&G has owned Duracell since 2005, when it bought Gillette in a blockbuster $57 billion deal. Duracell’s sales aren’t broken out in P&G’s financial reports, though it is considered a “billion dollar brand” in P&G’s fabric care and home care segment. That segment, which also includes Dawn, Gain, Tide and other brands, makes up about 32% of P&G’s total sales.

Head of Procter & Gamble North America out in reshuffle

by
John Kell

@FortuneMagazine

October 22, 2014, 5:13 PM EST

Melanie Healey, the current head of Procter & Gamble’s North America business, is leaving the brand giant next year, according to an internal memo released to employees on Wednesday.

Healey, No. 18 on Fortune’s Most Powerful Women list, was once considered a likely successor to CEO A.G. Lafley. The Brazilian-born exec runs P&G’s largest division, the $32.1 billion North America unit. Although her division has been struggling as of late, it has shown signs of tepid growth.

“These changes simplify the way we organize and manage the company,” Lafley wrote in the memo. “As a result, we will have the same or fewer presidents and function leaders as we had in 2001 when sales were $39 billion—less than half our sales today.”

P&G PG is in the middle of a huge slim down with the hopes of boosting struggling sales. The company plans to shed as many as 100 brands to bring more attention to those producing strong profits.

Healey will be replaced on January 1 by current P&G Global Customer Business Development Officer Carolyn Tastad.

To subscribe to Caroline Fairchild’s daily newsletter on the world’s most powerful women, go to www.getbroadsheet.com.

For companies to grow, why bigger is not always better

by
John Kell

@FortuneMagazine

September 15, 2014, 8:31 AM EST

Growth has long been the imperative in economics and business. As the world’s population tops 7 billion, and soon 8 and 9, it’s becoming clear that the best performing organizations, and perhaps countries, will be less defined by absolute size and more defined by the speed and agility that comes from clarity of purpose, strategic insight and decisive action. As the scale of human organizing expands to unprecedented levels, the winners will be those people, organizations, and countries that can: focus on what matters most to their core stakeholders; rapidly process new information, learn from it, and then thoughtfully and deliberately act amid the complexity.

Think Airbnb. They’ve experienced explosive growth – and not by the traditional means of buying or building more properties. They did it by understanding what really mattered to those booking hotel rooms. They did it by studying the emergence of the “sharing economy.” And, absent a vast footprint of physical assets, they did it by acting decisively to create a whole new model for meeting this traditional need – a model that delivers competitive advantage through scale but not in a traditional sense of physically controlled properties. Indeed, Airbnb not only created a new model, it created a new market.

In today’s global marketplace that operates 24/7, the traditional barriers to entry are falling, and traditional conceptualizations of growth as increasing in size and span of control are losing their potency. Market and customer access have become easier; product and idea life cycles are shrinking as ideas, data, and knowledge travel fast and openly across the Internet. Competitive advantage gained from expensive product innovations is shorter-lived. And brands are losing their stickiness amid an onslaught of data, ideas and emotional triggers that compete for human attention, loyalty and spending.

In light of these changes, it’s not surprising that we’re seeing new approaches to driving growth throughout the Fortune 500. One example is the recent spate of mammoth splits at traditional powerhouse firms including Motorola MSI , Kraft KRFT and Abbott. In each case, powerful CEOs chose to divide the size of their companies (and spans of control) in half in order to increase focus and speed growth. For the same reasons, portfolio rationalizations are now commonplace; e.g., Procter & Gamble PG , ITW and Unilever UN . And even more recently, expensive inversions have become in vogue, including firms like Eaton and Abbvie.

CEOs of traditional mega-conglomerates are literally slicing up and uprooting their organizations in order to fuel growth. And they have to because the successes of companies like Airbnb and Uber have shown that smaller firms with simpler and more nimble infrastructures can win – just look at the market caps being attached to these asset-lite firms. This is not to suggest that building scale and pursuing acquisitions are no longer important drivers of growth. It does mean however that these strategies will be held to greater scrutiny as the idea that “bigger is always better” becomes quaint.

And who is going to lead these firms of the future? We’ll need leaders with deep insight into their organizations’ markets, customers and capabilities; leaders who create and leverage more flexible architectures for connecting and collaborating; leaders who foster cultures based on constant self-scrutiny, innovation and an ability to forge unexpected partnerships; leaders who can keep pace with new market opportunities and ever-more-aggressive investor herds; leaders who can inspire new kinds of growth.

Sally Blount is dean of the Kellogg School of Management at Northwestern University.

Could Duracell, Braun and Ivory be on P&G’s chopping block?

by
John Kell

@FortuneMagazine

August 18, 2014, 11:15 AM EST

Procter & Gamble recently announced plans to shed up to 100 brands, and it appears some well-known names — including Duracell batteries, Braun shavers and Ivory soap — could soon find new homes.

Reuters and The Wall Street Journal have both speculated which brands could be on the chopping block. P&G PG , the maker of Gillette razors and Crest toothpaste, is planning to streamline its business and focus on 70 to 80 brands, which are responsible for about 90% of the company’s recent sales and 95% for profit.

Reuters, citing people familiar with the matter, said Duracell and Braun are two of the largest assets likely to be divested. The Journal, meanwhile, floated the underperforming Ivory soap brand as a possible brand that could be shed, although the Journal report is more speculative.

In any case, top brands such as Pampers diapers and Gillette appear safe based on their size and scale. Other likely keeps because of their size include Pantene, Olay, Oral-B and Bounty. At the time of the P&G divestiture announcement, Sanford Bernstein analyst Ali Dibadj issued a list of P&G’s global brands tracked by the firm and Euromonitor, and those brands were all among the top sellers last year.

Of the brands listed by Euromonitor-Bernstein, Ivory ranked 69th with $112 million in 2013 sales. Duracell notably wasn’t on that list, and only Braun’s Oral-B business unit was included (ranked 108th with $34 million in sales last year).

P&G hasn’t unveiled too many divestitures of late, so this action is pretty notable for the company. It sold off Pringles in 2012 and in 2011, unloaded Zest soap and PUR Water Purification Products in separate transactions. Rival Unilever has acted more aggressively on divestitures of late, agreeing to shed the Slim-Fast, Ragu and Bertolli brands this year.

How Bob McDonald can (really) fix the VA’s health care system

by
John Kell

@FortuneMagazine

August 8, 2014, 10:57 AM EST

On Thursday, President Obama signed into law a $16.3 billion measure to help overhaul the Department of Veterans Affairs, an agency that in recent months has been plagued with criticisms for long wait times for health care and manipulation of records. While the extra funds are substantial and may be necessary for a system that serves some 8.5 million veterans each year, it won’t be enough to fix the problems at one of the nation’s largest health providers.

Newly-confirmed Veterans Secretary Bob McDonald, a former CEO of Procter & Gamble PG , must create a new dynamic if the reforms are to succeed; he has to go beyond Congresses’ prescriptions and change the agency’s internal dynamics by focusing on what is measured, why it is measured, and what is done in response to the results.

One of the reasons for the VA’s current crop of problems has to do with the way the VA measures performance. The metrics that former administrators focused on pushed people in the direction of highlighting (sometimes exaggerating) what was going right and playing down what was going wrong.

Consequently, systemic problems — which might have been addressed early on before they caused harm — built up until they caused a crisis. It didn’t help that many of the metrics, such as wait times, were beyond the control and influence of the managers being evaluated, so there was even more incentive to game the system.

To set things right, McDonald has to repurpose the VA’s metrics — using them to call out problems in their very earliest incarnation, so they can be addressed sooner and faster — before they have a chance to cause disruption. If this is done, then problematic situations can be swarmed rapidly and contained, with immediate investigation and diagnosis of what is going wrong and why, leading to better approaches that can be applied systemically.

It might seem counterintuitive for people to be encouraged, even required, to call out problems, such as rising wait times, worrisome complications and infection rates, confusion with medications and referrals. But it really isn’t, since this models exactly the best behavior of healthcare clinicians. When a patient’s condition worsens, they execute a high-speed cycle of examination, diagnosis and treatment planning, so therapy can be immediately delivered.

The same approach for managing the system through which care is delivered would have a profound effect. At early signs of something going wrong, a similar dynamic of experts — IT, HR, training, systems engineering — could do for the system what cardiologists, intensivists, nurses, and pharmacists do for patients: Swarm the situation, investigate the difficulty, identify causes for the problems, develop appropriate responses, and support staff in implementing new approaches.

This advice is based on the long experience my colleagues and I have had helping organizations improve significantly their level of performance —large, technically complex organizations, many in healthcare including leading academic medical centers, and several VA sites already. Organizations that lack a constant and energetic concern for aberrations that impede staff and impact patients, customers and clients are precisely those who struggle endlessly. Those that display a borderline paranoia about seeing and solving small issues when and where they arise are those that are most successful at creating enormous value relative to the resources they consume and efforts they expend.

In Pittsburgh, for example, healthcare providers mastered this dynamic of relentless betterment. The region as a whole cut the rate of a terrible complication — central line associated blood stream infections — by 70% with some hospitals driving the problem to zero.

The Pittsburgh VA site was able to drive down the rate of surgical site infections in its nursing units to near zero. And this is not just a Pittsburgh phenomenon. In one initiative, a diverse set of VA sites increased quality, capacity and timeliness of care across the spectrum of screening, treatment, and follow-up for colorectal cancer. And other care providers around the country, such as Virginia Mason in Seattle, Thedacare in Appleton, WI and Beth Israel Medical Center in Boston, have improved care considerably by seeking out and responding to system difficulty quickly and often.

McDonald is charged with moving a large system a long way so it can better serve the needs of those who depend on it. That is possible — it has been done elsewhere, elsewhere in healthcare, and elsewhere inside the VA. For this to happen on a large scale, McDonald needs to start by measuring what needs to be fixed and acting on those measures so the resources trusted to the VA are put to good and ever better use.

Steven Spear is a senior lecturer at MIT Sloan School of Management and at the Engineering Systems Division at MIT. He is author of The High Velocity Edge.

The wisdom of less: How Procter & Gamble can grow by shrinking

by
John Kell

@FortuneMagazine

August 7, 2014, 10:28 AM EST

After more than a decade of widespread expansion, picking up everything from beauty products to razors to batteries, Procter & Gamble announced last week that it was going to prune more than half its brands in an effort to grow. CEO A.G. Lafley said the company would divest up to 100 brands and focus on the 70 or 80 in its portfolio that produce the highest revenue. The world’s largest consumer products company wants to slim down to get bigger.

P&G’s announcement illustrates a contradictory pattern we have seen in companies both big and small and across industries as businesses pursue growth—the seduction of more and the wisdom of less.

Every business is expected to grow to create shareholder value. Too often, this results in growth by any means possible. Extend product lines. Expand existing brands. Acquire more customers. Venture into new markets. Every expansion opportunity seems attractive because it brings in revenues. But not all growth dollars are equally green. The mindless pursuit of growth opportunities is the seduction of more. If companies aren’t disciplined in how they grow, the complexity of their business increases at a faster rate than revenues do. The result: unwieldy operations, dilution of focus, higher costs and lower profitability.

So why do smart companies like P&G let things get so far before they act? Why did P&G hang on to its marginal brands so long? Sometimes, the problem doesn’t make itself apparent until it’s too late. It’s like overeating—just as it takes 15 minutes for the message that you are full to get from your stomach to your head, companies suffer a delay in recognizing what is happening. By then, the corporate calories have piled up.

P&G’s experience isn’t unique. And like P&G PG , Kraft Foods KRFT , another big consumer products company, came to see what we call, the “Wisdom of Less.”

A few years ago, Kraft’s developing markets business carried a sprawling portfolio featuring dozens of categories of products – more than 150 brands in over 60 countries. The business was sputtering—it lacked cohesion and direction. Starting in 2007, the division kicked off a strategy to bring focus to the organization. Labeled 5-10-10, the strategy called for concentrating on five strong categories, 10 power brands and 10 key markets. The new approach narrowed attention and targeted resources, allowing the company to make a few big bets. Within six years, the developing markets business for Kraft Foods soared from $5 billion in revenues to $16 billion, with double-digit organic growth, while profitability shot up 50%.

More recently, Microsoft MSFT , perhaps the world’s most sprawling technology company, seems to be going through a similar transformation. After a multi-year binge of product expansion and acquisitions, Microsoft’s new CEO, Satya Nadella, is slimming the company down. Microsoft is cutting back on its Nokia devices business and focusing on becoming a mobile-first and cloud-first company.

Prioritizing is the key—finding what really works and focusing on that. Doing fewer things, but doing them bigger and better. That’s what we call, “the Wisdom of Less.”

Some of the most successful companies of our time practice this principle. Apple AAPL offers only a handful of products and brands. Enterprise Rent-A-Car emphasizes the replacement market for consumers who don’t have access to a car. Even startup companies that focus have been handsomely rewarded. DocuSign concentrates solely on document signing. Uber only does cab services. The lesson: No market is too narrow if you go deep enough. In fact, to broaden your revenues, you should narrow your markets!

For P&G, the hard chore now will be managing the process of slimming down.

Recklessly shedding products and brands can be disastrous if the growth in the priority brands does not compensate for revenues lost from the brands being divested. Some non-priority brands may even be worth holding onto, at least, for a while, if they throw off profits and can be managed without much senior leadership effort. As for those being divested, price is only one factor—the separation has to be as swift and as simple as possible to avoid disruption.

Concentrating on the core helps weed the underbrush of complexity. Strategy gets simplified. That allows managers top to bottom to work on execution. That’s the advantage of a focused operation and the Wisdom of Less. P&G faces a trying period as it executes its new strategy. But if it gets to the other side, it will become a leaner, smarter operation, one that produces growth that is both profitable and sustainable.

Sanjay Khosla is a senior fellow at Kellogg School of Management at Northwestern University. Previously, he was president of developing markets of Kraft Foods (now Mondelez International) from 2007 to 2013. Mohanbir Sawhney directs the Center for Research in Technology & Innovation at the Kellogg School of Management. They are the co-authors of Fewer, Bigger, Bolder: From Mindless Expansion to Focused Growth (Portfolio, 2014).

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