Product Design - Term III 2009
MBA 631 Operations Management
Stout home MBA 631 home Syllabus Lecture notes Schedule
SECTION: COVER STORY; Number 3492; Pg. 96
LENGTH: 3468 words
HEADLINE: MAKE IT SIMPLE
BYLINE: By Zachary Schiller in Cincinnati, with Greg Burns in Chicago, Karen Lowry Miller in Brussels, and bureau reports
HIGHLIGHT: That's P&G's new marketing mantra-and it's spreading
BODY: Does the world really need 31 varieties of Head & Shoulders shampoo? Or 52 versions of Crest? Procter & Gamble Co., the world's preeminent marketer, has decided that the answer is no. After decades of spinning out new-and-improved this, lemon-freshened that, and extra-jumbo-size the other thing, P&G has decided that it sells too many different kinds of stuff. Now, it has started doing the unthinkable: It's cutting back. Procter's U.S. product roster is a third shorter today than it was at the start of the decade. In hair care alone, it has slashed the number of items almost in half. Fewer shapes, sizes, packages, and formulas mean less choice for consumers. So sales went down, right? Wrong. Market share in hair care grew by nearly five points, to 36.5%, over the past five years. P&G's overall sales, powered by international expansion, have grown by a third in the same period. P&G's drive to trim its product list is just one piece of a larger strategy of simplification. The company is now taking an ax to many of its marketing practices, hacking away at layers of complexity in a drive to cut costs, serve customers better, and expand globally. Besides just saying no to runaway product proliferation, it's standardizing formulas and packaging worldwide, selling marginal brands, cutting inefficient promotions, and curbing new-product launches. It's even putting its sacrosanct ad budget under the microscope to help shrink overall marketing costs to 20% of revenues by 2000, from 25% now.
Sure, these moves are saving Procter money -- lots of it. And those savings are giving P&G the leeway to propel sales with lower prices, while increasing margins. But although the drive to simplicity began as an exercise in old fashioned cost-cutting, P&G is looking for other benefits. It knows the thousands of supermarket products leave shoppers staggering down aisles in sensory overload, increasingly immune to marketing messages, indifferent to brands, and suspicious of pricing. Since so many of the 30,000 items in a typical supermarket offer niggling differences from each other, shoppers face numbing selection -- but little in the way of real variety. ''There's this vast array of products,'' says Shelby Reyes, a 58-year-old Cleveland bookkeeper. ''A lot of times I end up getting what's on sale...or I say the hell with it.'' Concedes P&G's president, Durk I. Jager: ''It's mind-boggling how difficult we've made it for them over the years.'' LESS IS MORE. The upshot: Stores have become crammed with things that people never buy. Here are the startling statistics of that waste: Almost a quarter of the products in a typical supermarket sell fewer than one unit a month, according to research by consulting firm Kurt Salmon Associates Inc. On the other hand, just 7.6% of all personal-care and household products account for 84.5% of sales, according to PaineWebber Inc. analyst Andrew Shore. A lot of the rest go almost unnoticed by consumers. A 1993 study by Willard Bishop Consulting Ltd. and market researcher Information Resources Inc. found that when duplicative items were removed, 80% of consumers saw no difference -- and 16% actually thought there was more variety. ''Most cosmetic and household product companies need an in-house Dr. Kevorkian,'' Shore says.
Complicated product lines and pricing cause worse problems for the retailer, who has to struggle amid the specials, rebates, and discounts to figure out the invoice. Often he fails. An astonishing 38% of all grocery invoices end up with errors requiring costly special handling to fix, according to a study by Andersen Consulting. ''We created a whole plethora of allowances and deals and conditions which were just simply confusing and added cost to the system,'' Jager says.
Five years ago, Procter led the way to more stable pricing by vastly reducing the array of supermarket specials in favor of lower list prices. At first, retailers, stung by the loss of their discounts and special deals, slowed purchases, and P&G's sales stalled. But by May of this year, its overall volume market-share had either held steady or increased for 38 months in a row.
Though Procter's drive to make it simple has been gathering force for years, it gained momentum with the ascent of Chairman John E. Pepper and Jager to their posts a year ago. Pepper sees enormous opportunities in simplification, and Jager is ramming the program through. The goal is to make the best choice for the consumer crystal clear, something Jager calls transparency. A case in point: With much fanfare eight years ago, P&G launched separate disposable diapers for boys and girls. Now, it's eliminating them, claiming its diapers have become so absorbent that such, well, anatomical targeting isn't necessary anymore. More to the point, a parent of a baby girl won't rummage through the boy Pampers, give up, and buy Kimberly-Clark Corp.'s Huggies instead.
As usual, P&G is something of a bellwether for the packaged-goods industry. The Cincinnati-based company is leading a broad movement among marketers as executives realize complexity alienates consumers and generates expensive and error-prone operations. ''Complex processes are the work of the devil,'' in the words of reengineering guru Michael Hammer. CORPULENT SYSTEMS. Now, some of America's biggest consumer-products companies are exorcising deviltry from their product lists, pricing, promotions, and ads. Nabisco Inc., acknowledging it let brand extensions get out of hand, is cutting new-product launches by 20% and taking some 15% of existing items out of production. Cereal makers have all vastly cut their once ubiquitous weekly promotions in favor of simplicity, stability, and lower list pricing
And the urge to simplify isn't limited to packaged-goods companies. Toyota has simplified car design by stripping out needless or redundant parts. Showtime Networks Inc. has made its bills easier to figure out, cutting the error rate dramatically. Instead of custom-designing model branches in each market, Citibank took a successful design in Chile, refined it in Greece, and reapplied it around the world. And Sun Co. is reducing the number of grades of Sunoco gasoline in the Northeast from five to four. ''In an effort to give you more, we gave you more choices than you wanted,'' its ads confess. ''So now, at Sunoco, we've simplified.''
There's some debate over how far the simplification drive will go. After all, it wasn't long ago that companies were waving the banner of micromarketing, aiming carefully calibrated products and messages at ever-smaller consumer segments -- selling spicier canned soup in the Southwest, for example. And John D. Bowlin, CEO of Kraft Foods International, continues to argue that Procter's variety-reduction kick is ill suited to food companies, which depend on new offerings to drive sales.
Still, there's no denying that the corpulent packaged-goods marketing system that grew up in the 1970s and 1980s needs to slim down. Consumer-product companies are launching more than 20,000 new items each year, according to New Product News, a trade publication. But the death rate is high: Barely more than a quarter of new products, excluding line extensions, introduced by the nation's largest advertisers maintain national distribution for more than two years, says market researcher IRI.
P&G's push to cut complexity began in manufacturing, amid the 1980s' Total Quality movement. Procter realized big savings by cutting the number of specifications, consolidating suppliers, and streamlining plants. Incredibly, P&G once had 61 different kinds of cover sheets on the back of Always sanitary pads. Now it has 13. Such moves, together with a 1993 restructuring that claimed 13,000 jobs and 30 plants, have helped the company cut its annual production and distribution costs by $ 1.6 billion, or about 8% over the past five years. It thinks it can remove $ 2 billion more by the end of the decade. ''The world is moving faster. That makes it even more important to simplify,'' says Pepper.
Meanwhile, the rise of supermerchants such as Wal-Mart Stores Inc. also spurred simplification. The hyperefficient retailer has become one of Procter's biggest trade customers, and it has increasingly demanded simplified pricing and shipping from its vendors. Learning from Wal-Mart, P&G created a leaner approach to logistics. More than 40% of P&G's orders are now shipped automatically, based on withdrawals from customers' warehouses, cutting reams of paperwork and sharply reducing inventory costs. ''I think they've been making moves that are absolutely essential for the industry,'' says Wal-Mart CEO David D. Glass. Indeed, Procter's system has become a model for other manufacturers.
While the industry has made considerable progress streamlining how goods are made and moved, the task of eliminating extraneous items has just begun. Procter again has been out front. One of the biggest cuts came in its U.S. hair-care business. P&G sold its Lilt home permanents in 1990, and minor brands such as Prell and Ivory shampoo were cut way back. Even the mighty Head & Shoulders line was pared in half, to 15 variations. The moves met some resistance from P&G's brand honchos, who thought, '''Oh my God, we're going to lose sales because we're going to have fewer items,''' says U.S. hair-care chief Robert S. Matteucci. ''There's a huge skepticism that this is the right thing to do, and that it's doable.'' INDUSTRY SHOCKER. But simplification quickly paid off: Sales per item in hair care more than doubled. In Japan, P&G cut the number of its Max Factor cosmetic items from 1,385 in June, 1995, to 828 nine months later. Sales have since climbed 6%.
Such payoffs have caught the eye of many top consumer-products companies. H. John Greeniaus, CEO of new-product star Nabisco, estimates that the company's 77 new products last year were about 20% too many. More than a quarter of a $ 428 million pretax restructuring charge it took in June will be used to eliminate more than 300 of the items it now carries, such as single-serving sizes of Lorna Doones and king-size packages of Nutter Butter cookies. Longer term, it plans to reduce the 8,000 items it carries worldwide by 15%.
Manufacturers that refuse to trim may find retailers doing it for them. Wegmans Food Markets Inc., a Rochester (N.Y.) supermarket chain, says it has culled redundant items from its shelves for greater variety. For instance, it dropped Bristol Myers-Squibb's slow-selling Nuprin, which is like other ibuprofens, for some herbal products. Instead of carrying four different sizes of the same brand of toilet paper, it's stocking only two, but added one with baking soda, one that's recycled, another that's free of dyes, and a fourth with a print.
Weeding out the losers doesn't stop with product extensions. To instill greater financial discipline -- and measure results based on the contribution of each business to shareholder return -- P&G has tossed out brands that aren't leaders. Since last year, it has gotten rid of 11 brands, from Lestoil household cleaner to Lava soap.
In June, the company shocked the industry when it bailed out of a joint venture selling the painkiller Aleve, upon which P&G had lavished a $ 100 million product launch two years earlier. Unable to extend Aleve globally and renegotiate the financial terms of its agreement with partner Roche Holding Ltd., P&G sold its 50% stake for a $ 120 million aftertax gain. It was hardly the sort of move associated with a company that has long pursued its strategic goals almost regardless of the financial consequences. Not only is Procter shucking unproductive items and brands, but it is also practicing what Jager calls birth control for new products, by charging managers' budgets when they launch new items. ''There is a real push in the company to do fewer, bigger things,'' one P&G executive says.
Procter has also taken strides to cut through the chaos and expense of special deals offered to retailers and distributors. Such deals are another costly and confusing form of marketing complexity. They cause shelf prices to bounce weekly and train consumers to buy on price instead of perceived brand superiority. A forthcoming study by Andersen Consulting will report manufacturers spent a staggering $ 49 billion, or 11% of sales, on such promotions in 1994, up from $ 15 billion, or 5%, in 1978. Yet half the time consumers buy an item on special, they don't even realize it, says Andersen partner Victor J. Orler.
The endless trade promotions don't confuse just the consumer; they also bewilder stores trying to navigate the discounts and rebates as they compute their bills. And since one-time-only deals cause wholesalers and retailers to stock up while the price is low, factories constantly cope with artificial surges in demand.
In a gutsy move five years ago, Procter cut sharply into the endless round of discounts it offered to retailers and instead lowered list prices on most of its products. The strategy, explains Pepper, was ''directed at trying to avoid pricing patterns that discourage loyalty through ups and downs.'' By cutting down on the special deals, P&G has sliced the proportion of invoices on which it needs to make manual corrections to 6% from 31% two years ago. It's now applying the same concept in Europe.
P&G is taking the ax to consumer coupons, too. With redemption rates down to 2% from 4% in 1980, coupons are a less and less efficient way to draw new customers. ''Over time, they've lost a lot of their effectiveness,'' says ad chief Robert L. Wehling. Instead, Procter is putting the money into lower prices and other promotions such as sampling and in-store demonstrations. So far, it has cut its use of coupons by half, and it may go much further. Since February, Procter has been testing total elimination of coupons in upstate New York. Wegmans, which operates in that test region, says sales of P&G products are up at its stores. VULNERABLE AD BUDGET. Procter's value pricing is helping to spark a major change in U.S. trade promotions. Few have made the outright cuts that P&G has, but marketers from Quaker Oats Co. to Colgate-Palmolive have overhauled their systems. After a debilitating price war using endless coupons and buy-one-get-one-free offers, General Mills Inc. and Kellogg Co. started the move to simplified cereal pricing in 1994. And these days, when Kraft's Post distributes coupons, they're good on any cereal that it makes.
As a global marketer, Procter has another reason to peel away complexity: Whenever it can apply an existing package, product formula, or ad campaign to a new market, it saves big money and can move faster. ''Reapplication is very, very important. A good reapplication is as good as a creation,'' says Herbert Schmitz, P&G's head of Central and Eastern Europe operations. In Eastern Europe, packages of Ariel detergent are printed in 14 languages, from Latvian to Lithuanian. Vidal Sassoon shampoos and conditioners now contain a single fragrance worldwide, with variations only in the amount; less in Japan, where subtle scents are preferred, and more in Europe.
P&G, the world's largest advertiser, is even rethinking how much it spends on advertising -- a major break with tradition. Even in its 1993 restructuring, advertising remained off-limits. ''For the first time, Procter is not afraid to touch that sacred marketing budget,'' says Smith Barney Inc. analyst Holly Becker. Advertising spending will probably still grow from last year's $ 3.3 billion, but at a slower rate. ''The main thing is to look at inefficient practices,'' says Pepper. The company has saved millions by consolidating most of its U.S. media-buying at one agency. And it has reduced TV production costs by 25% by using fewer production houses and shooting commercials for several countries at one location. AUTO MAKERS SIMPLIFY. It's also looking to spread good campaigns around the world. Procter had to step up its production recently of Pringles potato chips to keep up with global demand, thanks to a successful advertising campaign used around the world. Nearly everything in one ad -- the rap-music theme, the young people dancing around, the tag line, ''Once you pop, you can't stop'' -- was the same in Germany as in the U.S.
Colgate wanted to achieve much the same thing when it consolidated its $ 550 million in yearly ad spending at a single agency late last year. It's seeking more efficiencies like the savings it reaped when it replaced 20 separate local campaigns for laundry detergent with a series of successful commercials developed in France -- a campaign that ran in 30 countries.
Outside packaged goods, the attack on complexity is gathering force in the auto industry. The Japanese, pressed earlier this decade by a soaring yen, are simplifying the way cars are built by reducing the number of parts. Toyota, for example, set a goal of slashing development costs by 20% on the 1997 Camry coming out this fall. General Motors Corp., meanwhile, is working to comb out overlapping products and marketing efforts. It combined its Pontiac and GMC divisions in February and pruned the number of car models it sells in the U.S. from 53 in 1994 to 44 in the coming model year.
Not everyone embraces P&G's less-is-more credo, though. Kraft's Bowlin argues that the food industry is simply a different breed from Procter's household products. ''Variety is important,'' he declares. ''Look at ice cream. Vanillas and chocolates make up the majority of your buying, but how often will you go back to a shop if all they have is vanilla and chocolate?'' And rival Kimberly-Clark scoffs at Procter's move back to unisex diapers. ''Three out of four parents tell us they prefer boy and girl diapers,'' says a Kimberly spokesperson. ''Our strategy is to offer parents a choice.''
But it's hard to argue with P&G's overall results. Earnings excluding extraordinary items for the fiscal year ended June 30 were up 12%, to $ 3.03 billion, even though sales were up just 5%, to $ 35.3 billion. At 8.6%, margins were the highest in more than 45 years. Big leaps in overseas markets helped -- unit volume growth in China was more than 50% -- but those hefty margins are a testament to the power of simplicity.
Yet simplification doesn't guarantee double-digit earnings gains; in the current quarter, Procter's growth will slow, as lagging over-the-counter drug and toothpaste businesses take a toll. And P&G's struggle with Crest toothpaste shows it still sometimes falls off the simplicity wagon when the going gets tough. Battered by Unilever PLC's Mentadent and other rivals, Crest will soon offer a buy-one-get-one-free promotion -- a move P&G acknowledges ''isn't in line with the overall direction we're taking.'' Even for Procter, making it simple is no simple matter.
HOW PROCTER & GAMBLE IS PARING DOWN
STANDARDIZING product formulas and packages. P&G now uses just two basic packages for shampoo in the U.S., saving $ 25 million a year.
REDUCING trade promotions. P&G gives stores fewer discounts and rebates, and it bases them on sales volume. That means more stable prices.
EASING UP ON coupons. With redemption rates falling, Procter is issuing fewer coupons -- and going cold turkey in an upstate New York test.
GETTING RID OF marginal brands. Selling off second-tier brands such as Bain de Soleil sun-care products lets P&G concentrate on its market leaders.
CUTTING product lines. Axing extraneous sizes, flavors, and other variants makes it easier for consumers to find what they're looking for.
REAPPLYING strategies that work. Always sanitary pads uses the same ads worldwide. A distribution system developed in Eastern Europe is being exported to Asia.
TRIMMING new-product launches. Only items with a strong chance of making the top half or third of their category in unit sales get the green light.
NABISCO plans to trim its product line by 15% and cut new-product launches by 20%
TOYOTA is slashing by 20% the development costs of its 1997 Camry by taking out unnecessary content
CITIBANK is replicating model branches developed in Chile and Greece around the world, instead of reinventing them in each market
CLOROX simplified its trade promotions and trimmed the number of items it sells
GENERAL MOTORS has reduced the number of U.S. car models from 53 to 44 since 1994 and combined its Pontiac and GMC divisions to simplify marketing
COLGATE-PALMOLIVE consolidated worldwide advertising un-der a single agency to move winning ads around the world fast
KRAFT this spring led a cereal-industry move toward lower, more stable list prices
DATA: BUSINESS WEEK URL: http://www.businessweek.com/index.html
GRAPHIC: PHOTOGRAPH: P&G SOLD ITS 50% STAKE THIS YEAR PHOTOGRAPH BY BART GORIN ; ILLUSTRATION: CHART: PROCTER CUT ITS PRODUCT ROSTER...BUT SALES HAVE REBOUNDED CHARTS BY ALBERTO MENA/BW ; PHOTOGRAPH: '' IT'S MIND-BOGGLING HOW DIFFICULT WE'VE MADE IT FOR CONSUMERS OVER THE YEARS ''DURK JAGERP&G PRESIDENT AND CHIEF OPERATING OFFICER BOB HOWER/QUADRANT ; PHOTOGRAPH: BLOCK DRUG BOUGHT THE SOAP LINE BART GORIN ; PHOTOGRAPH: PFIZER BOUGHT THE SUNTAN LOTION BRAND PHOTOGRAPHS BY BART GORIN ; PHOTOGRAPH: GLOBAL JINGLE: MADE IN THE U.S., P&G'S PRINGLES CHIPS AD RAN WORLDWIDE PHOTOGRAPHS BY BART GORIN ; PHOTOGRAPH: SOLD IN 1995 TO JOHN B. SANFILIPPO PHOTOGRAPHS BY BART GORIN ; PHOTOGRAPH: SOLD IN JUNE 1996 TO CLOROX CO. PHOTOGRAPHS BY BART GORIN
LOAD-DATE: September 05, 1996