P&G’s Lafley: Lessons in leadership

by Patricia Sellers

There aren’t many hero CEOs anymore. So it’s remarkable that two of the most admired chiefs have announced their retirement within the past three weeks.

First came Anne Mulcahy, who saved Xerox (XRX) from near-bankruptcy.

Now comes the news that Procter & Gamble (PG) CEO A. G. Lafley is stepping down after reviving that consumer giant and doubling its size to $83.5 billion in less than a decade. Like Mulcahy, Lafley earned his leadership chops out of crisis, led with a quiet charisma, had a clear focus, and constantly communicated.

Not a coincidence that they both succeeded. Those are the things you need to do to be a great leader.

Even people who have followed Lafley’s career hardly remember how terrible things were in June 2000, when Lafley was plucked out of the beauty business to lead a company in crisis. He detailed the mess well in a Harvard Business Review piece this past May: “The company had announced that it would not meet its projected third-quarter earnings, and the stock price plummeted from $86 to $60 in one day…The price dropped another 11% during the week my appointment was announced. A number of factors had contributed to the mess we were in, chief among them an overly ambitious organizational transformation in which we tried to change too much too fast…But our biggest problem in the summer of 2000 was not the loss of $85 billion in market capitalization. It was a crisis of confidence.”

Lafley is too diplomatic to name his problematic predecessors, but I’ll tell you who they were because I knew them all: CEOs Ed Artzt and Durk Jager were as hard-driving as leaders come — and intimidating too. They knew how to line up followers. But inspire the troops to become leaders? They struggled to do that. And another CEO in between the Artzt and Jager regimes, John Pepper, was well-liked but not tough enough.

So P&G had lurched through leaders who just weren’t right—until Lafley surprised everyone. He understood the power of a consistent message. His mantra for nine years: “The consumer is boss.”

Diligently and methodically, he spread the word that P&G had to focus on big brands, big markets, and big customers. He said that P&G, to win with powerful discounters, must slash costs and reinvest savings in marketing and product design.

Focusing on those things, Lafley became the best organic-growth guy in the consumer-products industry. In a 2004 Fortune story about P&G’s innovation drive, I quoted him: “Organic growth is more valuable because it comes from your core competencies. Organic growth exercises your innovation muscle. It is a muscle. If you use it, it gets stronger.”

He drove innovation by reaching outside for ideas — an alien concept for promote-from-within P&G. Shamelessly, he used hokey terms to communicate: “Connect and develop” was his term for partnerships with outsiders who might  be more creative than the folks at P&G.

Here’s the key: P&G employees understood Lafley’s mission. The company’s results proved that. By driving innovation in age-old brands like Tide and Crest and Olay, P&G outperforming rivals like Unilever (UL) and Colgate-Palmolive (CL).

But even as Lafley declared that acquisitions are risky, he didn’t shy away from them completely. “When we acquire, we acquire to build the core,” he told me in 2005. He bought Wella and Clairol to expand P&G’s beauty business. And as P&G grew to be a top player in personal care, he bought Gillette for $57 billion in 2005. That acquisition added five billion-dollar brands — Gillette, Oral-B, Braun, Duracell, and Mach3 — to P&G’s stable of 16. Last year, annual sales of Gillette Fusion topped $1 billion, and today P&G claims 23 billion-dollar brands.

Lafley has been contemplating retirement for a while. As the global crisis hit and P&G’s growth around the world slowed, the board urged him to stay on. Fortune has been saying for a long while that COO Bob McDonald, a 29-year P&G veteran who is a West Point grad and U.S. Army captain, had the edge. Insiders says he played a key role in the Gillette acquisition. The other contender was Susan Arnold, a 29-year veteran who drove P&G’s high-margin beauty business to $20 billion in sales and went on to oversee all of P&G’s brands; she quit in March one day after her 55th birthday, clearing the way. (Speaking of birthdays, McDonald turns 56 on June 20, one week after Lafley celebrates turning 62.)

Now with P&G’s stock trading at $52.63, down from its high of $74.67 at the end of 2007, McDonald has his own recovery to pull off. But in terms of confidence in leadership, the new boss has nowhere near the turnaround challenge that Lafley did.