Man with a mission: A.G. Lafley wants Procter & Gamble to serve the world's consumers. Yes, it's more than lip service. He's serious.

When A.G. Lafley went to Brazil not long ago, he went on walking tours through the tough barrios of Rio de Janeiro and Sao Paulo to see how consumers were buying and using Procter & Gamble products. Just to be on the safe side, he hired some contract security.

It just so happened that Wal-Mart CEO Lee Scott also was in Brazil at the time and heard through his own security team that "some fool CEO from the United States" was wandering around in the barrios.

A couple of months ago, both men attended a meeting in Bentonville, Ark. "Lee looked at me and said, "That wouldn't have been you in the barrios, would it? and he laughed," Lafley recalls. "I said, "That indeed was me.'"

For Lafley, of course, it's not a laughing matter. "I'm the kind of person who has to feel it, see it, touch it," he says. "That helps me understand it. That's my job." A Wal-Mart spokeswoman confirms that Scott and Lafley have a "warm relationship," but Scott wasn't available to comment because of travel.

It's because of his deep commitment to serving his customers that Lafley is Chief Executive's CEO of the Year for 2006. In his six years at the P&G helm, Lafley, now 58, has re-energized a venerable giant that seemed to have lost its way in the late 1990s. He has done it with a style and energy that will be the subject of business school case studies for years to come. He has launched a series of acquisitions, most recently the $54 billion deal for Gillette, without missing a beat, turning P&G into a nearly $70 billion a year giant. And his company's profit margins and stock price have outperformed the field. (See charts, page 32.) "The decision to pick A.G. Lafley was by acclamation," says George David, CEO of United Technologies and CEO of the Year for 2005. David chaired a panel that chose Lafley from nominees submitted by the magazine's readers. The judges included FedEx's Fred Smith, C.V. Starr's Hank Greenberg, Citigroup's Sandy Weill, all former CEOs of the Year, plus Chuck Lee, former chairman of Verizon.

When Lafley ascended into the CEO job at the Cincinnati-based P&G in June 2000, the company was confused about its very identity in some respects. It was taking money from its best brands and spending it on other new business efforts. The sprawling company did not seem to know what to focus on, reflected in two consecutive profit warnings in the first half of 2000. "The fact of the matter was we weren't executing," Lafley says. "We were over-invested in capital. We over-invested in R&D. We'd over-invested in people. We'd built the infrastructure for a $50 billion company and we were still a $38 billion or $39 billion company. That was fairly easy to see and not that difficult to get our arms around." (See full interview at www.chiefexecutive.net.)

Partly because John Pepper was still acting as chairman, Lafley was able to go on the road for the first 90 to 100 days of his tenure to talk to P&Gers, customers and suppliers. Among employees, he detected a lack of direction. "We had outstanding people, these human assets, who felt they had so much to do every day and weren't really clear about the one or two things that would really make a difference," he says.

Remarkably, Lafley and his team made critical "Where will we play?" decisions in the summer of 2000, while he was still new to the job, that have stood the test of time. Here were the choices:

* What is the growth strategy? "The first choice we made was that we're going to grow from our core," Lafley explains. "We'd been taking cash out of our core businesses and reinvesting it in new businesses, chasing higher levels of growth. I said, 'No, we generally do better in businesses we know the best.'" The core businesses at that time were fabric care, feminine care, hair care and baby care.

* What are the core brands? The team decided to concentrate on building core brands to $1 billion a year in sales or more. In 2000, P&G had 10 brands that represented half of its sales and more than half of its profits.

* Of the 160 countries where P&G sells, where should it concentrate? The new management recognized that 16 countries account for 80 percent of its sales, so the company decided to concentrate on its core brands in those markets. Lafley also signaled a major move into emerging markets such as China, Russia, Brazil, Mexico and India. (See Lafley remarks on emerging markets, page 35.)

Other crucial decisions were to emphasize an open innovation model in which the company would seek 50 percent of its new ideas from outside the company and to accentuate its leadership development activities. (See "Best Companies for Leaders," November 2005.)

Giving Her What She Wants

All of a sudden, a big company that was highly diversified geographically and across many businesses became a lot simpler. "You could scratch a P&G person in India or Venezuela or the Arabian Peninsula or France or Canada," Lafley says, "and they would be able to tell you, "These are the strategies. This is what it means for my country or my business.' What I was trying to do was get a level of focus so everybody at P&G knew what she or he was going to do when they came to work that day."

[GRAPHIC OMITTED]

It also helped that Lafley began hammering away at a unifying principle: The "boss" was the consumer, and everything the company did should be oriented toward improving the lives of women and their families around the world. Some CEOs might give lip service to these notions, but Lafley seems to really believe them. When he talks, his comments are peppered with indefinite antecedents--this is how "she" lives and this is what "she" wants. The "she" is the customer. Listeners are just supposed to know what he's talking about. Lafley's frequent forays into the homes of consumers also help drive that message through the company better than formal speeches could.

Force of personality

There are at least three other characteristics that distinguish Lafley:

* He believes in the "high touch" to shape P&G's internal culture. "Let's face it--we're big," he says. "We have 135,000 employees with Gillette on the ground in 80 countries or so. Just communicating across time and space, coordinating across time and space, is very difficult. We use the Intranet. We're all running around with BlackBerries and cell phones. But we also try to use a lot of high touch."

Lafley is a skeptic about distance learning or computer-based learning. His style is to bring P&Gers together to learn from other P&Gers who are actually line or functional leaders, not egghead consultants or professors. "You have to bring people together to learn from each other," he explains.

Getting employees to engage with each other in these ways seems to help them concentrate on the human dimension of understanding consumers. P&G had "gotten into bad habits," he says. "We were spending too much time in meetings. We were spending too much time with our head in our computer. We were spending too much time sending email to each other." No longer.

* He doesn't drive the organization purely by the numbers. Many CEOs impose financial targets on their operating units and manage by the numbers. P&G units have annual plans, of course. But Lafley's management style is to focus everyone on their mission. "I try to get them to focus on the strategy choices, the capabilities, executing everything we do with consistency and excellence," he explains. Excellent financial results seem to follow.

* He's so personal himself. Lafley is on the board of General Electric and is positioned at the very heart of Corporate America. But he doesn't maintain the same kind of psychological distance that many executives in his position do. "I try to exercise five times a week," he explains. "I can't tell you how many ideas I've had while exercising or in the shower."

He also tells visitors how he's learning to meditate to ease the pressures of the job. "My wife has learned how to do this--just sort of quieting yourself, just relaxing, no television or radio running," he explains. "Calming yourself is incredibly important." That degree of personal candor also helps shape the P&G culture.

When business school students one day try to understand how A.G. Lafley achieved what he did, they will no doubt study the formal management mechanics and processes. But they also should spend some time studying concepts such as "focus," "sense of mission" and "force of personality." Because those are the traits that ultimately will explain how Lafley revitalized a 169-year-old giant, better than any B-school buzzwords.

The P&G Powerhouse

Revenue

      Gillette   P&G

       (billion $)

2001    8.08    39.25
2002    8.45    40.24
2003    9.25    43.38
2004   10.48    51.41
2005   11.18    56.74

Source: Company reports

Note: Table made from bar graph.

The P&G Powerhouse

Percent of 2006 Sales * By Business Segment

Snacks & Coffee      4.3%
Beauty Care         29.5%
Fabric & HomeCare   22.4%
Baby & Family Care  17.1%
Health Care         14.4%
Blades & Razors      6.8%
Duracell & Braun     5.5%

* Estimated revenue, fiscal year ends 6/30/06

Source: Company reports

Note: Table made from pie chart.