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Having bought Gillette and focused on big brands, the world‟s largest consumer-goods company is betting that scale is the way to success.

In the corner of a meeting room next to the bosses‟ office at the headquarters of Procter & Gamble (P&G), a large sculpture of a woman in a hat watches over proceedings with a serene smile. “She is at the centre of all our decisions,” says Richard Antoine, head of human resources and confidant of Alan Lafley, the company‟s chief executive.

Founded in 1837 by William Procter, a candlemaker, and James Gamble, who made soap. P&G is the world‟s biggest consumer-goods company. It sold $76.5 billion-worth of them in the year to June 30th. And it probably knows more about consumer marketing than any other firm on the planet. Interestingly, many people at P&G do not use the word “consumer”. Nor might they ask if a “customer” or “shopper” would buy a putative new produce. They are more likely to ask : “Would „she‟ buy it?”

Women have long accounted for four-fifths of P&G‟s customers. Over the years, the way P&G sells to them has changed dramatically. In the 1930s it sponsored radio shows—the original soap operas—to encourage women (usually housewives) to buy its detergent. Now radio has been surpassed by television and the internet as a means of promotion; and “she” has become ever more independent, demanding and fickle. The variety of products on offer has exploded, not just from makers of brands goods, like P&G, but also from the big supermarket chains that now dominate the retail end of the business and sell their own labels alongside the big brands.

“She is in control now,” says Mr. Antoine. The consumer-goods giant is spending lots to find out what she actually wants. Staff from its Consumer and Market Knowledge Department tour the world and spend entire days with women to observe how they shop, clean, eat, apply their make-up or put nappies on their babies. They try to understand how a woman reacts in the first three to seven seconds after she sees an item in a shop (the “First Moment of Truth”, in P&G-speak) and when she tries it at home (the “Second Moment of Truth”).

At first P&G struggled in the new world of empowered she-consumers. In 2000, after a big drop in profits, its share price took a tumble. Mr. Lafley, a company veteran, took over that year (P&G is a great believer in promoting from within). The company he leads has such a reputation for insularity that employees are known as “proctoids”, but Mr. Lafley has been trying to open up more to the outside world and to streamline P&G‟s notorious bureaucracy. He also needed a clear strategy for the company‟s growth. That, he concluded, lay in investing more in the power of brands: the strongest brands, he reasoned, would be sought out by consumers everywhere.

Mr. Lafley began with the acquisition of Clairol, a hair-dye company, in November 2001, Two years later he paid $6.9 billion for a family-owned German beauty firm. But the biggest deal, in January 2005, was the $57 billion purchase of a company known for serving men rather than women: Gillette, which controls three-quarters of the world market for razors and shaving foam.

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Has the huge Gillette purchase paid off? Mr. Lafley admits that he took a big risk. Four out of five mergers don‟t work out, he says, and big deals fail more often than small ones. But he has a list of five reasons why mergers fail. On all accounts he says P&G is now doing fine.

Strategy is first on Mr. Lafley‟s list. Mergers of companies that are either not at all complementary or pursue completely different strategies tend to fail. But both P&G and Gillette are strong companies, and their brands and international coverage match each other well. P&G is good at innovation, understands consumers and knows how to nurture brands. Gillette‟s strengths are technology and the ability to roll out new products within a few weeks. And of course there is the chance to learn about marketing to the other sex. This year Gillette launched Pure Divine, a body wash for women. P&G is working harder to sell High Endurance, which it claims is America‟s first body wash for men. New Gillette products for women and new P&G products for men are on the way.

Next comes company culture. Though they had their similarities, these two old American companies also had important differences in style. Management at P&G is consensus-driven whereas Gillette‟s was hierarchical. To ease unification Mr. Lafley set up a special team to work out how to take the best from the two cultures. The chief of P&G North America is a Gillette man. Mr. Lafley managed to keep around 95% of Gillette staff who were asked to stay. Still, many top Gillette people chose to go, their decision eased by the large pay-offs specified in their employment contracts should the firm be taken over.

Bosses are third, Gillette and P&G made such an obvious strategic fit that their chiefs had already talked a couple of times in the 1990s. In the end James Kilts, the head of Gillette, made the first move because he wanted to avoid a takeover by Colgate-Palmolive, run by Reuben Mark, his arch-rival. Mr. Kilts stayed on for a year after the merger to ease the transition. He and Mr. Lafley seemed to get along well.

Fourth, mergers often fail to produce the cost savings that companies promise. P&G and Gillette said that their union would yield efficiencies in manufacturing, marketing and distribution of some $1.2 billion annually by the end of the third fiscal year after the merger (i. e. June 2008)

Fifth, what about revenues? Clayt Daley, P&G.‟s chief financial officer, admits that a merger can truly be called a success only when the new entity hits its revenue targets, too. P&G and Gillette promised about $750m annually by the end of the third year. Mr. Daley says the merged company is on track to meet both cost and revenue targets, but is not there yet.

On August 3rd the company said that net sales were 8% higher in the fourth quarter (April to June) than a year before, and rose by 12% in the whole year. Organic growth—i. e., stripping out the effects of acquisitions—was only 5%in 2006—2007, compared with 8%—9% in the couple of years before the Gillette deal. The pre-merger figure was atypical, insists Mr. Daley. The company‟s long-term goal is organic growth of 4%—6% a year.

(Source:From The Economist .Aug. 9th, 2007.)

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