The Optimization Imperative: Understanding Procter & Gamble's New Strategy

P&G's new strategy could genuinely transform the consumer goods industry. They might pull it off.

The story of how Procter & Gamble became one of the most profitable consumer goods companies is a perfect case of business strategy aligned with execution:

• Conduct extensive market research to determine consumer problems

• Use the research to develop everyday products that solve the problems

• Manufacture the products at scale

• Support the new products with significant marketing and brand investments

• Command a premium price

There's more detail, like how P&G engineers leveraged existing technologies to extend into adjacent categories (most notably paper towels into said diapers), or how salespeople pioneered joint business planning with Walmart, or how its brand teams took market share by partnering with advertising companies to build iconic brands.

This article won't focus on those stories.

Instead, it's going to look at the path ahead.

In November of 2022, Procter & Gamble unveiled a new corporate strategy. Officially it's unnamed. Unofficially, I'm calling it the Optimization Imperative because, at its core, it's about using information technology to optimize all aspects of an already best-in-class organization.

But let's back up a bit. Let's quickly talk about how P&G got to where it is.

A Refocused Procter & Gamble

In 2007 P&G was successful but bloated. It manufactured and sold everything from its iconic Tide Detergent and Head and Shoulders Shampoo to Folgers Coffee and Duracell Batteries. The company owned 170 different brands in 16 separate categories. The grab bag assortment generated around $76 billion a year in sales. That was great, except the lack of specialization meant it earned middle-of-the-road profit margins.

At 2007's Investor Presentation, Procter & Gamble announced a new strategy. Management wanted to refocus. Instead of selling a whole bunch of everything, it would concentrate only on premium everyday categories. The company sold off over 100 brands in the next decade.

Equally important was the decision to redesign the organization. Management closed manufacturing sites and reduced the platforms it had to maintain. Operationally, the company overhauled what executives called the “thicket.”

Today, P&G owns 65 brands across ten categories. It commands top market share in most of them. The ten categories develop business plans that the regions execute—with limited interference. The company owns 20% fewer manufacturing locations while maintaining 50% fewer manufacturing platforms. The operational changes reduced the internal headcount by 20%.

Running parallel, the company made significant investments in information technology, including a 7 petabyte (7 million gigabytes) data lake. Now, all company data- manufacturing, demand, etc.- is processed and formatted at a central location. End-users can pull that information in near real-time.

The financial results speak for themselves.

In 2022, Procter & Gamble sold more than $80 billion worth of shampoo, diapers, toilet paper, soap, and other everyday products. That's an increase of just 5 percent from the previous era. Only now, it did so while earning some of the highest margins in the industry.

During the early 2000s, P&G's net profit margins were more or less around the current industry average.

Enter the Optimization Imperative

Because of the changes made a decade ago, P&G is strategically and organizationally efficient. But it could be more operationally efficient.

Let me explain.

Every manager dreams of analyzing last week's Nielsen data, identifying a competitor's inventory issue in Iowa, and calling a customer to push a promotional plan back a few weeks. The competitor's inventory issue means their sales will increase without any financial investment because consumers have no choice but to substitute. This agility creates a defacto-free promotion for the region.

For most organizations, even best-in-class ones, this scenario isn't possible. Even if a company has a hundred million dollar IT budget, it could take months before relevant consumer data is cleansed and shared across the organization. Add another week before a person analyzes the data and a few more days until the change is sold-in to a retailer.

That's a 5-week lag right there. By that time, the competitor's inventory issue could be solved. It's an opportunity missed.

There's significant revenue in optimizing, but I'd estimate that maybe 1% of companies have the flexibility to pull that off. Many face technology constraints. Others lack a properly trained workforce to analyze the data and communicate the plan to retail partners. Procter & Gamble is one of the few companies that could execute a similar scenario some of the time.

Why do I believe that? They're doing similar things right now.

The Optimization Imperative aims to make it standard practice, and management is starting with Supply Chain, Digital, Environmental Sustainability, and Employees.

Procter & Gamble and Supply Chain 3.0

P&G's supply chain is already legendary. The company topped Advantage Group's supplier rankings from 2015-2021. Gartner named the company a supply chain "Master," joining just five other international companies: Amazon, Apple, McDonald's, and Unilever.

What does it look like when one of the best gets better?

To P&G management, Supply Chain 3.0 means automating routine procedures and near real-time data from the data lake. Employees will now have both the bandwidth and information to manage nearly any problem thrown their way.

Here are a few examples the company gave during Investor Day

• In 2021, the Texas winter storms disrupted the lucrative detergent business. Shortages were likely. The company reformulated 60% of the category in under a month--an action that took four months in the past.

• Increased P&G's share of the electric toothbrush market by redesigning an electric toothbrush without semiconductors during mass semiconductor shortages.

• Save $20 million a year by reducing idle time for truck drivers by optimizing schedules.

• Reduce shipping costs by $100 million by optimizing packing loads for trucks.

• $180 million by more efficiently souring and routing materials.

Digital drives P&G's Optimization Imperative

Digital is a buzzword in the modern consumer goods world. The simplest way I can define it is by combining technology and human ability. Humans analyze information from technology and execute its implications. This requires significant technical work (data lakes, APIs, etc.) and human work (Defining what people want to see and acting on the information).

The best way a corporation can ensure quality assurance is to bring the operations in-house (you can't control how an agency trains employees), which is exactly what Procter & Gamble is doing for many brands.

Here's how that is happening in practice.

• Pampers created an in-house media team. It created proprietary algorithms to test potential advertisements for $1,000 and 1 day. Traditionally, advertising agencies took $30,000 and 30 days. Last year, U.S. sales increased by 10%, while the return on media investment jumped 17%.

• The in-house Tide media team developed an internal advertising planning algorithm across 120 networks. It generates an optimized allocation of ads across weeks, days, and hours. Last year it saved the company $65 million. The company believes the savings will reach $100 million next year.

• The company can run thousands of automated tests around physical and digital shelf placement. What color should shaving cream be if it's placed next to aftershave at Walmart? Should an e-commerce placement include an instructional video? Procter and Gamble now have the tools to optimize shelves in days--something that competitors take years to do. The company used these tactics to increase Personal Care shelf space by 10%.

Again, the company is optimizing an already best-in-class organization.

P&G wants to make environmental sustainability profitable

Procter & Gamble are now optimizing marketing around environmental sustainability. What does that look like? It means finding the environmental benefits of the products and building campaigns around them.

• Washers and dryers account for 60% of greenhouse gas emissions from Fabric Care. Using cold water can reduce emissions by 30 million tons annually and save consumers $150 a year in energy costs.

• Dishwashers are so efficient that compared to hand washing, they use 20 gallons of water less per load.

With those two facts in mind, Procter & Gamble built the following brand campaigns:

• Cold water optimized Tide. The product grew 10% since the start of the campaign, compared to mid-single digits for the category itself (that means it's working).

• "Do it More" campaign attempts topersuade people to use their dishwashers more(and buy more Cascade). The ad has over 6 billion YouTube views, and sales are up 15%.

Optimizing a product while doing good.

Procter & Gamble wants to optimize employees

Not much to add here. It's really hard to analyze internal human resources initiatives.

Procter & Gamble's new strategy in about 40 words

Procter & Gamble is using technology and human execution to build one of the world's most agile corporations. It is looking to provide managers with near real-time data, giving them a significant speed advantage. In doing so, it could generate potentially unheard-of profits and dominate the consumer goods world for another generation.

They could pull it off.