Ongoing Transformation:

Leading Change to Sustain Growth

and Leadership
A.G. Lafley
Chairman and Chief Executive

5 August 2007

Speech Transcript:
Presented to the Academy of Management, a leading professional association for scholars
dedicated to creating and disseminating knowledge about management and organizations.
A.G. also received the Executive of the Year award.
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At P&G, delighting consumers and building brands is a team sport,

and it’s a pleasure to accept this recognition on behalf of 135,000
P&G’ers around the world. Their capability, creativity and
commitment are the true source of our success at P&G.
This recognition means a lot to me because it comes from scholars who are advancing the practice of
management worldwide. Sustaining growth… creating value … transforming organizations and cultures… is
hard work. Practitioners benefit enormously from those of you who study this work and advance thinking
about what it takes to do the work well. Given the breadth, depth and quality of your scholarship, it’s
enormously gratifying to earn your recognition – and I thank you for the honor.

I’m here today as a practitioner, but I didn’t begin my career with plans to be in business. Instead, I was set
to become a history professor. In 1969, I was in the Ph.D. program at the University of Virginia studying
Medieval and Renaissance European history. When I drew a low number in the Vietnam War draft lottery, I
decided to join the Navy – where I had a unique experience.

• I was in the Navy, but never spent a day at sea aboard ship.
• I served in the Vietnam War but never spent a day on the ground in Vietnam – until I worked with the
P&G team to open a subsidiary there 24 years later, in 1994.
• I was in the military, but I never carried a gun.

Still, if it weren’t for the Navy, I would never have ended up in business or at P&G. I started out in military
intelligence, in Washington, DC. Then, when another officer suffered a heart attack, I was sent to run retail
and service businesses at a big U.S. airbase in Japan, just outside Tokyo.

It was my first chance to run a business, and I loved it.

We operated grocery, department and specialty stores, and a wide range of services: barbershops, beauty
salons, laundry and dry cleaning, gas stations, home kerosene delivery, restaurants, and packaged liquor
stores. We also ran the military clubs – complete with gambling and slot machines and live entertainment
that ranged from The Monkees to Frank Sinatra.

Essentially – all the retail and service operations for a small town of about 10,000 Navy, Marine Corps, and
their families.

Customers were demanding. Service expectations were high. The work force was a mix of Japanese women
and men, the husbands and wives of service women and men, and government civil service managers.

Competition was real – from nearby Army and Air Force exchanges and from low-cost Japanese
entertainment, service and shopping offerings in the Tokyo metro area.

Profits were critical because they paid for all the other services on base – golf, tennis and swim clubs, movie
houses, bowling alleys, amusement arcades, and more.

It was a great experience – a chance to learn about a lot of different businesses from the ground up in a
small $10 million-a-year business: my first general manager job, and I loved it!

When I left the Navy, I went to Harvard Business School. Two years later, I accepted an offer from P&G --
and more than 30 years later, I’m still there.
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The point I want to make is that while I look at the world through a practitioner’s lens, my early interest in an
academic career has pre-disposed me to keep a watchful eye on relevant research and scholarship. So, it’s
that balanced perspective that I hope to share with you this afternoon.

I understand that one of the important issues in business education

today is the challenge of fitting all the individual disciplines into a
single coherent whole.
In many ways, we in the management of business face a similar challenge. The organizations we lead are
multi-business or industry… multinational or, in P&G’s case, truly global… and multi-disciplinary or multi-
functional.

Our job – and this is particularly true for CEOs – is to bring together the many businesses, functions and
geographies and to leverage learning, scale and scope. We do this primarily through the choices we make in
eight critical areas: Purpose and Values, goals, strategies, strengths, organizational structure and systems,
innovation, leadership, and culture.

I’d like to talk about these choices and how they’ve helped transform P&G over the past seven years. It’s
neither my job nor my expertise to figure out how P&G’s and my experience could contribute to academic
research or to case studies in the classroom. That’s clearly your work and expertise.

But I thought it might be helpful to talk about the choices we’ve made in these eight areas. I want to explain
how they’ve enabled us to manage P&G’s business and the organization as a unified whole… and how, as a
result, we’ve been able to restore and strengthen P&G’s competitive position, deliver industry-leading
business and financial results, and sustain growth.

And growth, of course, is the biggest problem facing businesses

today, especially large companies.
We all know the general story. Growth eventually stalls at almost all large companies -- often after periods of
rapid growth and with little warning.

One study indicated about 80% of the world’s firms failed to meet a growth threshold of five percent in real
terms from 1994 to 2004. Another study found only one percent of more than a thousand firms grew EPS
10% every year of a ten-year period.

Over the past 25 years, P&G’s performance has been inconsistent: we have a few good years and then
inevitably encounter problems on one or two businesses… or in a couple of major countries. Total-company
sales, earnings, and cash flow suffer, and we have to begin the hard work of climbing the steep hill back to
sustainable growth.

We faced one of our greatest crises in 2000. We missed earnings in the March quarter. P&G’s stock price
dropped more than 50%, which was a loss of nearly $50 billion in market capitalization.

P&G leaders were lying low. Heads were down. Competitors were on the attack. P&G business units were
blaming headquarters, and headquarters was blaming business units. Employees were calling for heads to
roll. Retirees -- who had just lost half their retirement nest eggs -- were madder than hatters. Analysts and
investors were surprised and angry.
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So on the day I was announced as the new CEO, P&G stock

dropped four dollars
(which was an early confidence builder, I must admit!). After 15 days on the job, I lowered growth goals to
what I felt was a realistic and sustainable level -- and the stock dropped another $3.85.

The problems we were facing in 2000 were the same problems that had led to P&G’s inconsistent
performance over the prior two decades. We lost touch with consumers and customers. We spent ahead of
the business and let capital spending, R&D, and overhead costs get ahead of sustainable sales growth –
which drove pricing on several leading P&G brands to uncompetitive and unsustainable levels. And, we
defined victory too narrowly, on too many of our businesses, which allowed competitors to grow at our
expense.

Job One in 2000 was to get the company back on track. But that wasn’t the toughest job. We had to do
much more than get back on track. We needed to create the opportunities and build the capability for
sustainable, long-term growth.

This is harder work because it requires the ability to anticipate change continuously. It requires us to make
strategic and capability adjustments ahead of fast-changing external realities. In essence, it requires a
company to continually reinvent and transform itself to win in the face of unrelenting change and
competition.

I’m not given to overstatement, so I’m cautious about using a word like “transform.” But I think it’s a good
way to describe the level and pace of change necessary for sustainable growth.

It also demands the ability to integrate the many different businesses, functions, geographies and activities in
an organization… so, it may be a relevant way to link P&G’s experience to the broader questions many of
you in business education are researching and exploring today.

With that in mind, I’d like to take a closer look at the choices we’ve made to enable the ongoing
transformation of P&G.

First, Purpose and Values.

A company’s Purpose and Values are foundational. They’re

important because they drive high levels of trust in a world where
work is increasingly done across time and space without much
opportunity for high-touch interactions.
Trust is critical in a company that must have world-class innovation and world-class execution. Innovation
and execution are team sports. They demand high levels of collaboration. And collaboration requires trust –
trust in management, trust in one another, and trust in what is core and will remain unchanged.

In 2000, we had to restore trust inside P&G. Rebuilding trust in management and among P&G employees
would take time. Those of us in management would have to earn trust with our actions and results.
Intramural trust mainly needed to be reaffirmed; the organization’s confidence had taken a hit and we
needed to remind ourselves that P&G’s organization remained one of the best in the world.

The one area where we could move fastest was restoring trust in what would not change. I made this a
point everywhere I went and with every employee I met. I assured P&G’ers that our Purpose and Values
remained as rock solid and relevant as ever, and would not change. This went a long way with people.
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Our Purpose is to improve consumers’ everyday lives –

in small but always meaningful ways -- with brands and products that deliver superior performance, quality
and value. Our Values are Integrity, Trust, Leadership, Ownership, and Passion for Serving and Winning with
Consumers.

Our Purpose and Values are not particularly unique but they are powerful because they’ve been handed
down over generations. They are P&G’s core. Our Purpose inspires us. Our Values unite us. It’s as simple as
that.

By making it clear that our core Purpose and Values would not change, we gained employees’ permission to
embark on broad and sometimes disruptive change in virtually every other part of the business and company.

I don’t believe we could have accomplished all the change we’ve undertaken had we not reaffirmed our
Purpose and Values.

This was our first critical step toward transformation.

The second factor was getting growth goals right.

Goals are important because they guide or influence virtually every other critical choice. If goals are
unrealistic, they unleash organizational behaviors that are often inconsistent with long-term sustainable
growth. Businesses will inevitably make bad strategic and financial decisions in the pursuit of goals that are
too high and cannot be realistically sustained. On the other hand, if goals are too low, it shows up pretty fast
as competitors consistently out-perform you. It’s important to find the right balance.

We didn’t have the right goals in the late ‘90s. We had fallen into the bad practice of over-promising
investors with stretch goals (a practice we have since ended, by the way). Our cost structure got out of line
as we invested in too many initiatives that failed to pay out, and our credibility with investors crumbled when
we couldn’t sustain the growth.

Today, we have stretch goals for internal motivation… but we go to investors and shareholders with
commitment goals -- goals we know we can deliver. They may be higher probability but they are not low-
ball estimates. Commitment goals, when delivered, put us in the top third of our benchmark peer group
over the long term.

Here, too, balance is important. In addition to setting the right external goals, it’s also necessary to strike the
right balance between external and internal goals. Externally, we must say what we’ll do and do what we
say. Internally, goals should be higher. They must be demanding. They need to require choices,
improvements in capability, and changes in leadership behavior.

We re-set external growth goals in the summer of 2000 -- from stretch to commitment: four to six percent
sales growth, double-digit earnings-per-share growth, 90%+ free cash flow productivity.

These goals are realistic yet still demanding. The categories in which we compete grow about 3% a year. If
we maintain market shares, which is always a challenge given the competitive intensity of our industry, we
grow along with the categories. But we need another one to three percent top-line growth to meet our
goals.

The only way to achieve this is to increase market shares, to expand into new geographic markets, and to
create new brands and categories. And then, of course, we have to turn sales growth into double-digit
earnings- per-share growth, which requires consistent margin expansion of 50 to 75 basis points per year.
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Another challenge related to goals is the need to get key

stakeholders inside and outside the Company to accept them.
Externally, shareholders may think they’re too low; they need to understand why they’re realistic and
demanding. Internally, business leaders and employees may feel they’re too high; they need to understand
why they’re necessary and achievable.

It takes clear, persistent, compelling, and frequent communication – especially from the CEO – to build
alignment around a company’s goals.

But there’s no alternative. Unless alignment is achieved, it’s difficult to take additional steps toward
transformation. Future performance will always be evaluated in the context of the goals … and future
choices will always be influenced by how much growth is required and where it will come from.

The right external and internal goals are the pre-requisites for transformation.

Next is strategy. Strategies are the choices required by clear goals --

choices that result in winning with consumers and customers and
against competition.
Strategic clarity frees up and focuses the entire organization. It reduces complexity and confusion. It enables
more consistent, more disciplined, and more predictably excellent execution. Consequently, strategic clarity
leads to more reliable and sustainable business and financial results.

I feel strongly that strategy is the CEO’s job. It cannot be delegated. Strategy is about choices… about
deciding which business or businesses a company should be in and should not be in.

Peter Drucker said this is the most fundamental choice every company must make, and I agree. It’s a
question that demands a systemic view of the company and of the industries in which a company competes
or could compete.

It’s a choice that – ultimately -- only the CEO can make and which the CEO must make.

At P&G, we believe the purpose of our branded, consumable

household and personal care businesses is to connect with a
consumer through our brands. We serve her needs and wants for
as long as a given product is relevant and meaningful in her life.
P&G’s business model is driven by the creation of loyal consumers from the point of market entry to the point
of exit. Loyal consumers buy brands more regularly and more often. They are less price-sensitive and buy
more at full or list price. They use more products in the line. They’re more willing to expand their regimen of
product usage. They often become ambassadors for the brand.

To create loyal consumers, P&G brands must consistently provide greater consumer value and deliver greater
consumer delight than alternatives.

With this understanding, we made a few simple and clear strategic choices at the beginning of the decade –
choices about which businesses P&G should be in and should not be in.
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First, we focused on growing P&G’s core: four core businesses --

fabric care, hair care, baby care, and feminine care and ten leading
brands that each generated a billion dollars or more per year in
sales.
Keeping P&G’s core businesses healthy and growing was and remains critical. We got in trouble in 2000
because we took our eyes off some of our core businesses… or, we resigned ourselves to taking profit and
cash out of some important businesses rather than managing them for growth.

By refocusing on our core, we returned the Company to steady growth – which enabled investments into
other, faster-growing businesses.

P&G’s core is healthy today. For example, our fabric care business – one of our oldest and most mature
businesses – is growing double-digits today. In the early ‘90s, P&G was the #2, with a 19 percent global
share. Today, P&G has a 34 share of this big global category – nearly double the next competitor. And
we’ve grown share profitably every year for the past seven years.

Feminine Care is another good example. P&G was the last major player to enter this category in the ‘90s.
We’ve since leap-frogged competitors. We’ve added a global share point a year and, on average, two points
a year in the U.S. since the beginning of the decade. Today, we have a 55 share in the U.S. and a 37 share
globally -- double our closest global competitor.

In 2000, our ten billion-dollar brands accounted for about 50% of

net sales and slightly more of profits. Today, we have 23 billion-
dollar brands and they account for two-thirds of net sales and over
70% of profit.
The key point is this: where we’re focusing strategically and operationally on our core businesses and leading
brands, we’re widening the market share gap versus our best competition…and we’re delivering growth
rates at or above the top-end of our long-term targets.

Our second strategic choice was to migrate P&G’s portfolio toward

faster-growing, higher-margin, more asset-efficient businesses such
as beauty and health care.
This was an important choice that complemented our focus on P&G’s core. By generating disproportionate
growth in these businesses, we’re able to provide a balance of consistency and growth that’s unique in our
industry.

Here, too, the clear strategic focus is paying off. We’ve doubled our share of beauty and health in the past
decade. Beauty, for example, was about a ten billion dollar business just five years ago. Today, it’s a $23
billion business and profits have more than doubled.

Olay is now the #1 retail skin care brand in the world and P&G has been one of the fastest-growing skin care
companies over the past five years.

P&G is now the #1 hair care company in the world, and Pantene the #1 brand.
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We’re now the #1 fine fragrance company in the world, with nearly two and a half billion dollars in sales.

Beauty and Health represent about half of total company sales, up from about 40% a decade ago.

Our third strategic choice was to win with lower-income consumers,

particularly in the fastest-growing developing markets.
This was an important choice. Historically, P&G brands served largely middle-class consumers in developed
markets. Even in developing markets, where we began making a push in the early ‘90s, we were reaching
primarily the most affluent consumers.

We changed this by making the strategic choice to win with more of the world’s consumers. We’ve added
about a billion people to the total we serve since the beginning of the decade and we expect to add a billion
more by the end of the decade.

In the past seven years, developing markets have grown from about 20% of total company sales to nearly
30% today, or roughly $21 billion.
We’ve achieved this growth with greater household penetration… broader and deeper retail distribution… a
wider mix of brands and products targeted to consumers at a range of income levels… and strong local P&G
organizations.

As you can see, being clear about where to play – about which
businesses P&G should be in - made an enormous difference.
We also made equally tough and clear choices about what we would not do. We shut down under-
performing businesses and exited non-strategic businesses. We discontinued product lines like Olay
Cosmetics. We stopped geographic expansions like Tissue/Towel into Asia. We wrote off a huge investment
in Olean, our fat substitute product. We made the tough decision to sell P&G brand icons like Comet, Crisco
and Jif. And we cut capital spending in half without foregoing any investments in our capacity to grow, or in
important new innovation.

P&G’s entire corporate strategy fits on one piece of paper. Every conversation at P&G begins with goals and
strategy. It’s a fundamental discipline. Clear and simple strategies are easy to deploy and easier to execute
with excellence.

Most importantly, we’ve built strategic discipline into the rhythm of the business. We’ve made clear Where
to Play choices not only at the company level, but also at the business unit, brand, market, and customer-
team levels.

Choices cascade throughout the business. We conduct annual strategy reviews for each category and
geographic business unit. We do annual brand and customer reviews. We review our innovation pipeline
every year to ensure it’s sufficient to meet our growth goals. We review operating plans and budgets
throughout the year.

And at each review, we make choices. We set and reset priorities.

It’s all about creating a cycle of strategic commitment. It’s human nature to want to avoid choices. But
strategy is all about choices. And making and sticking with those choices is the responsibility of leadership.

Without strategic commitment… sustainable, ongoing transformation is difficult… if not impossible.

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The next important choice we made was about core strengths. This
has proven to be one of the most transformative choices we’ve
made.
We asked two simple and straight-forward questions:

• Which capabilities matter most to winning in consumer products?

• Does P&G have meaningful competitive advantage in those areas?

To get at the answers, we looked at our portfolio of businesses -- where we were doing well, where we were
not doing well, and why.

The facts were sobering.

Only two of P&G’s twenty-some businesses – Fabric Care and Hair Care – created virtually all the shareholder
value generated during the 1990s.

Big, multi-billion-dollar businesses like Baby Care and our tissue and towel business actually eroded value in
the ‘90s.

Our healthiest businesses were in categories that were more global than local. This gave us the opportunity
to leverage P&G’s leadership and scale. These categories were also driven by brands, innovation, and strong
partnerships with mass-market retailers.

Our weakest businesses were in capital-intensive categories, like diapers and paper towels. Or, they were in
categories that were trending toward commoditization, like food and beverages. We also got in trouble
when we moved too far from our traditional mass market retailing formats. Last, businesses that were more
local than global, like cooking oil or peanut butter, kept us from leveraging P&G scale.

This analysis helped us make the strategic choices I discussed a moment ago. It also helped us understand
that the deciding factor in P&G’s success had less to do with the structural characteristics of a given industry.
Far more important was our ability to leverage a few core strengths.

We determined that five strengths matter most to winning in

consumer products: consumer understanding, branding,
innovation, go-to-market capability, and global learning and scale.
We were strong in each of these areas but we didn’t have clear competitive advantages in all of them. This
told us where to focus and invest, which is what we’ve done over the past seven years.

For example, we’ve invested well over a billion dollars in consumer and shopper research. That’s far more
than any competitor and roughly double the competitive average in our industry. We’ve taken what was
arguably the industry’s most traditional market research organization and have turned it into a consumer
understanding powerhouse.

For example, we’ve moved away from traditional focus group research and have increased our investment in
immersive research more than five-fold.

We’re spending far more time living with consumers in their homes, shopping with them in stores, and being
part of their lives. This total immersion leads to richer consumer insights and faster speed to market.
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I’ll give you just one brief example.

Defining a brand’s target consumer is the most critical step in brand-building. It goes well beyond basic
demographics and psychographics.

It requires deep understanding of what drives their emotions

It requires us to understand not only her needs but also her aspirations.

If we do it well, we uncover unarticulated reasons why a consumer chooses one brand over another. For
example, a woman may say she buys a certain fine fragrance “because it reminds me of my first boyfriend.”

With insights like this, we can determine which groups of

consumers have the highest potential to be attracted to our brand,
and develop communications precisely targeted to them.
This is the foundation for effective and efficient brand building. It may sound painfully obvious, but to
appreciate how difficult it is to do well, think about this: only about one of every four brands and products
introduced each year succeed. Three out of four fail.

Olay is a perfect example of how to beat these odds. We’ve used very detailed consumer understanding to
build a great mega-brand.

Olay has created distinct boutiques in the anti-aging segment to meet unique needs for highly specific prime-
prospect groups.

Total Effects appeals to women who want to repair multiple signs of aging and restore their skin to its natural
condition.

Regenerist appeals to women who use a regimen of products to care for their skin. They’re very aware of
ingredients and the chemistry behind the benefits.

Olay Definity has many of the same attributes as Regenerist, but appeals to consumers who are also
concerned with the tone and texture of their skin. These are generally more mature women.

These insight-driven segments have enabled Olay to grow dramatically in very little time. Seven years ago,
Olay was “Oil of Olay” and lost in the clutter of skin-care brands. Today, it’s the world’s leading retail skin
care brand with more than $2 billion in sales.

I could provide similar examples for all of P&G’s core strengths – but I won’t take time to do that. The key
point is that it’s the combination of these strengths that is competitively decisive.

When we put it all together, we see and create more innovation opportunities … we bring innovation to
market on leading global brands and with deep local knowledge and strong retail partnerships … and we
commercialize innovation more consistently – all which leads to sustainable growth and superior shareholder
returns.

Clarity about core strengths had another benefit, as well. It enabled us to find creative ways to manage
other business activities that were critical but not core for P&G: back office services, information technology,
employee services, facilities management.

We’ve developed innovative partnerships with IBM, Hewlett Packard and Jones Lang LaSalle that are far from
traditional outsourcing. These partnerships ensure P&G gets best-in-class services at best-in-industry costs.
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This has significantly improved P&G’s cost structure and it’s protected the jobs of P&G employees who
provide these services.

It would have been more difficult to make choices and to establish these partnerships had we not been so
clear about P&G’s core strengths.

The fifth factor transforming P&G is our organizational structure and

supporting work systems.
We moved to a new organizational structure in the late ‘90s. It included global business unit profit centers, a
global Market Development Organization, and global Business Shared Services.

There was a lot of confusion as we moved people into new roles and as critical factors like decision rights
were ironed out. This confusion was another reason our business got into trouble in 2000.

There was a lot of pressure to turn back the clock and abandon the new structure, but I resisted it. I believed
the structure could become a source of competitive advantage because it played to P&G’s strengths. I felt it
would be difficult for competitors to duplicate. They lacked P&G’s scale, which the structure leveraged.

But even more important, the structure was tailor-made for P&G’s promote-from-within culture. Because we
all grow up together and spend our careers together, we have high levels of trust and familiarity. We’re very
collaborative.

It’s difficult to achieve the same level of trust and collaboration in organizations that are not primarily
promote from within. As a result, we can take better advantage of our structure than other companies could
do with a similar structure. This is an enormous advantage.

The power of the design is in the balance of independence and interdependence, of autonomy and
collaboration. The problem with matrices is overlap, duplication, and friction. P&G’s design reduces the
overlap and the friction.

We’re essentially running a number of highly focused companies that share common go-to-market
operations: global shared services and corporate capability. We’ve made it possible for each business unit to
maintain focus on its unique consumers, customers and competitors -- yet still capture all the capability,
knowledge and scale of a $76 billion global company.

The benefits of the structure are clearest in our go-to-market capability. We can commercialize a larger
innovation pipeline on more leading brands, in more markets, with more trade partners, simultaneously,
because of our structure.

For example, each year an independent survey ranks the most successful new products introduced in our
industry. Since 2001, roughly 40% of the top products have come from P&G and Gillette – a total of 55
separate initiatives. Our top six competitors combined had 47 of the top products over the same period.

The key point here is not just that P&G is by far the most successful
innovator in the industry. Equally important is that we’ve been able
to launch so many major products successfully.
We’ve launched nine major initiatives per year, on average, since the beginning of the decade. We could not
have done this successfully in our old structure, and I don’t believe any of our competitors could do it today.
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In this way, organizational design has become a huge source of competitive advantage. We’ve tried to create
a tight linkage between strategies, strengths, structure, and systems. We’ve optimized the structure to
enable strategies … and we’ve designed and institutionalized work systems that leverage strategy, structure,
and strengths.

In this way, structure and systems -- which could become liabilities, particularly in a large, global, diversified
company -- instead become powerful, sustainable sources of competitive advantage.

This emphasis on structure and systems enables transformation.

The sixth transformative factor for P&G is innovation.

It’s one of our five core strengths, but I call it out separately because it’s more than just a capability. It’s
P&G’s lifeblood and is at the heart of our business model.

Virtually every P&G billion-dollar brand was launched with a product discontinuity: Tide was the first heavy-
duty synthetic laundry detergent; Crest the first fluoride toothpaste proven to prevent cavities. Pampers the
first successful disposable diaper.

Every P&G brand that has sustained growth and leadership over time has done so with a steady stream of
consumer-meaningful innovations that set and re-set consumer expectations.

Innovation drives virtually all of P&G’s organic sales growth. Only one percent of our five-to-seven percent
sales growth goal comes from acquisition activity; the balance is innovation-driven organic growth.

Innovation is important for a number of reasons. It enables differentiation of our brands. It stimulates
growth and prevents commoditization of the categories in which we compete. And it drives premium pricing
and higher gross and operating margins.

Our choice is to lead innovation. But the choice to be the innovation leader has significant implications. It
demands ongoing investment in consumer and shopper understanding… technical capability and technology
development… innovation systems… concept and market testing… and consumer trial generation.

In short, innovation leadership requires sustained capability and

investment.
We define innovation broadly. Consumers increasingly think in terms of total brand experiences, not just
functional product benefits. To meet their expectations… to deliver delightful experiences… we draw on
innovation from every available source: concept innovation, design innovation, communication innovation,
go-to-market innovation, supply chain innovation, cost innovation.

As a result, it’s important that everyone in the organization sees innovation as his or her job. We have
systems in place to ensure innovation of all kinds can be developed, qualified, commercialized, and efficiently
spread throughout the organization.

We’ve worked hard at this over the past several years. There is a broader, stronger, more consistently
successful innovation culture at P&G today than at any time in its history. Not perfect, not yet where we
want to be, but improving.

The most important point here is that if a company chooses to be the innovation leader, then innovation
must be at the heart of growth strategies and business models.
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You must build the organizational capability to learn, to translate learning into insight, and insight into action
-- better, cheaper, and faster than competition.

Innovation leaders are growth catalysts in their industries, and they generally capture the lion’s share of the
growth they stimulate. A transformative culture is an innovation culture.

The seventh factor driving P&G’s transformation is cultivating

leadership that inspires.
Getting the right people into the right jobs is always a primary responsibility of management. But equally
important and more difficult is the need to anticipate the leadership capabilities that will be required three-
to-five years out and longer… and then, ensuring top-development managers get the experiences and
coaching they need to be ready.

Leadership development has long been a P&G strength. The number of former P&G employees who are now
CEOs of major companies is one of the most visible illustrations of our ability to develop strong leaders: Steve
Ballmer at Microsoft, Scott Cook at Intuit, Meg Whitman at eBay, Toni Belloni at LVMH, Jim McNerney at
Boeing, Kerry Clark at Cardinal Health, and Jeff Immelt at GE, just to name a few.

Less visible is the rigorous, intentional way we approach leadership development.

For example, I am personally involved in career planning for the top 500 development candidates at P&G. I
review their assignment plans, assess their strengths and weaknesses, and determine where I can help them
grow.

I’m also thoroughly engaged in succession planning for every organization in the Company.

We review leadership development with the Board once a year and with our senior management team three
times a year.

One outcome of this highly disciplined approach is in the diversity of our leadership team and our
organization at large. This is important because a diverse organization will out-think, out-innovate, and out-
perform a homogenous organization every single time.

We’re able to be very intentional about diversity. We see it as a

business strategy and a powerful source of competitive advantage.
When I joined P&G in the ‘70s, it was basically an American company. Today, we’re no longer just an
American company doing business overseas. P&G is genuinely a global organization. We have on-the-
ground operations in more than 80 countries and P&G’ers represent more than 140 nationalities worldwide.

The leadership team we have in place today is the most diverse and the most experienced in P&G history.
Nearly 40% are from outside the U.S. Our top 35 leaders hail from a dozen countries.

Dimitri Panayotopolous is a great example. His mother and father were Greek. He was raised in Tanzania
and educated in the U.K. He joined P&G in Europe. Worked in the Middle East. Led the start-up and rapid
growth of our business in China, and then led equally rapid growth in our Central and Eastern Europe/Middle
East/Africa Region. Today, he’s a vice chairman of the company and heads up our global Household Care
business.

Jorge Mesquita is another example of P&G diversity. He was born in Mozambique. He grew up in Portugal.
Joined our R&D organization as a chemical engineer in Venezuela. Made the jump into marketing and
 P&G Academy of Management A.G. Lafley - Page 14 of 18

general management. Led important businesses in Venezuela, Mexico and Brazil. And now is the head of
our global fabric care business.

We’ve also made important progress on gender diversity. Nearly 40% of P&G managers are women, and
they are at every level of the company.

Two are among Fortune’s Most Powerful Women in Business:

• Susan Arnold is president, global business units.

• Deb Henretta runs Asia – and before that ran Baby Care, the home of Pampers, the Company’s only
seven-billion-dollar brand.

Daniela Riccardi is another excellent example. She’s an Italian woman who has managed P&G brands and
businesses in Rome, Brussels, Bogota, Mexico City, Caracas, Moscow – and is now president of P&G’s
business in Greater China.

These are just a few examples. There are many more.

Diversity comes in different forms. It’s not only gender, ethnicity,

and culture. P&G people also have remarkably diverse life and
career experiences, leadership styles, thinking styles, and more.
Diversity comes in different forms. It’s not only gender, ethnicity, and culture. P&G people also have
remarkably diverse life and career experiences, leadership styles, thinking styles, and more.

This broad diversity is important because diverse organizations are more in touch. They’re far more capable
of understanding consumers from all walks of life. They’re more likely to be collaborative. They’re more
capable of tapping the diversity of outside partners.

Equally important, diversity strengthens the inspirational quality of P&G’s leadership team. Knowledge
workers need to be inspired. Our job as leaders is to unlock and unleash the creativity, initiative, leadership,
and productivity of P&G human capital.

This requires a blend of IQ and EQ – Intelligence and Empathy. EQ is incredibly important in a diverse,
people-intensive business like ours. Most of our creativity and innovation happens in teams, and often the
team-mates are working in different parts of the world.

To lead in this kind of environment, we need a balance of intellectual skills and empathic skills. We have to
develop the intuition to understand and appreciate people’s intentions, feelings and motivations – all of
which have been shaped by experiences that may be sharply different from those we’ve grown up with
ourselves.

Inspirational leadership is not “feel good” leadership. It’s not about charisma. It’s about creating conditions
that motivate peak performers to seize opportunities and attack problems. It can and must be carefully
cultivated through training and development, through personal coaching and example.

Diverse, inspirational leadership is essential to enable transformational change, capability and performance.
 P&G Academy of Management A.G. Lafley - Page 15 of 18

The eighth and final factor in P&G’s journey toward transformation

is growing a more courageous and collaborative culture. This is the
hardest work, and it’s the area where we still have the most work to
do.
P&G can still recruit world-class talent -- smart, accomplished, ambitious people who are going to be
successful wherever they go. The challenge is retention, especially between years four and seven.

There are several reasons people come to P&G and stay. Our Purpose and Values are enormously important.
The opportunity to work alongside some of the best people in the industry is very stimulating and difficult to
find in many other companies. Personal fulfillment – through career growth, personal growth, and financial
security – is critical.

But one of the most important factors is culture. The most talented people want to work in a culture that is
open, collaborative, and embraces change.

Creating and sustaining such a culture is difficult, and we know we need to change and evolve our culture.
We need to become more externally focused. More courageous about dealing with reality and embracing
change. We need to be more agile, more flexible and faster, more innovative and more productive.

This cultural transformation is underway but it will take time.

We’ve lowered the average age of the organization to 38, thanks to growth in developing markets and in
relatively new Beauty and Health Care businesses. In fact, the difference between a developing market such
as China and a developed market such as the U.S. is fairly dramatic; the average age of U.S. employees is 43,
of China employees 29.

We’ve also lowered the average age of top management by about ten years. These are good moves for
staying connected with the external world and being open to change.

Through acquisition, we’ve brought the outside world into P&G’s culture. With Gillette, about 40% of
P&G’ers have now joined the Company mid-career through acquisition. This is also good. It’s how we
refresh the organization in a primarily promote-from-within environment.

Success is the biggest short-term barrier to cultural change. When things are going well, the status quo looks
pretty good and there’s less appetite for change, especially more discontinuous change that will demand
some pain to achieve the gain.

Human nature is the biggest long-term barrier. Most human beings are “me” focused and short-term
oriented, even at P&G. It’s hard work to get them to sustain commitment to the greater good for the long
term. But that’s the role of leadership.

Despite these very human barriers, I’m not discouraged. Real-world challenges and threats will continue to
drive cultural change at P&G.

First, the growth challenge.

Adding the equivalent of Tide or Greater China or Latin America every year is daunting but that’s what we
have to do to meet or exceed P&G’s long-term sales growth goals. We’re doing it today. We should be able
to do it again in 2008. We think we can do it through 2010 -- but it won’t be easy.

As the base gets bigger, the magnitude of the growth challenge will only grow larger. And the growth
challenge will demand that we keep getting more agile, more flexible, better, and faster.
 P&G Academy of Management A.G. Lafley - Page 16 of 18

Second, new competitors.

We compete against some of the best companies in the world: Colgate-Palmolive, Johnson & Johnson,
Kimberly Clark, L’Oreal, and Unilever, among others. We also compete against new “lean and hungry”
competitors -- retailer private labels and local low-cost manufacturers in developing markets. They are
formidable foes, and they’ll demand sustained peak performance from us.

Third, the price/cost squeeze.

As discounters and low-price competitors squeeze prices down, higher energy and commodity costs push the
costs of goods up. The only way out is innovation and more productivity.

Fourth, the realities of the ”flat world”.

Customers and suppliers are continually forging new alliances and partnerships to find ways to grow, and to
create meaningful value.

This constant state of flux means that customers and suppliers can easily end up being allies and enemies at
the same time. This, too, will demand greater agility, flexibility and speed, and greater capability to deal with
ambiguity and unpredictable change.

Fifth, the worldly experiences and inspirational leadership of the

next generation of P&G leaders.
They are a balance and blend of “old and new” P&G. They have the analytical skills, discipline and
experience to win in traditional Household businesses like Laundry or Diapers. But they also have the agility,
flexibility, openness, and speed it takes to win in developing markets and in businesses like Beauty, Health
and Personal Care.

Many of these leaders have toiled in markets where P&G was not the leader, where P&G was battling to
secure a beachhead. They failed, picked themselves up, and learned from their failures. This transformed
them personally and made them stronger. These leaders, and those who will come after them, are my
greatest hope for transformation at P&G.

All of this will demand transformation. Ongoing transformation.

Which brings me to the point on which I’d like to close.

There are three basic kinds of change: crisis-driven change…

reactive change…and anticipatory change.
Crisis-driven change is the easiest to achieve because there are no alternatives. But crisis-driven change is
almost always the most costly change because it’s painful. It disrupts the business and people’s lives. At P&G,
we were forced to change by crisis in 2000.

Reactive change is necessary. The hot breath of competition and the pace of change in the world around
us dictate it. But it’s rarely if ever sufficient.

Anticipatory change is the hardest because it demands we continually come to grips with reality. It
requires us to see things as they are, and at the same time, to have the foresight to see -- and the courage to
pursue -- things as they could be.
 P&G Academy of Management A.G. Lafley - Page 17 of 18

But anticipatory change should always be the least costly because it can be led from a position of strength
with a plan to guide us.

Anticipating and leading change is the preferred way to play. It is

the key to ongoing transformation. It is the choice we’ve made at
P&G.
The eight choices I’ve talked about here today are the building blocks of anticipatory change and sustainable
growth. They are choices that anticipate achievable yet demanding levels of growth … that anticipate where
and how to achieve growth… that anticipate the strengths, structure, leadership and culture required for
transformative performance and growth.

And that brings me back to where we began.

I know you’ll continue to research and explore how to fit various management disciplines into a coherent
whole, and how complex organizations like P&G are managed as unified enterprises. I encourage you to pay
particular attention to the eight choices – the building blocks of transformation – that I’ve discussed here.

In my practitioner’s experience, these choices represent a management decision-making model. Every choice
must be coordinated, integrated, and linked together – which is easier said than done. But when each choice
is seen as being inter-dependent with the others, the result can be powerful.

We need to understand more about what it takes to successfully transform companies like P&G – not
sporadically but on a continuous basis. My hope is that the experience I’ve shared here today is a small step
toward that understanding -- and, perhaps, an additional catalyst for the research and scholarship that I
know you’ll continue to generate and lead in the months and years ahead.

Thank you once again for the recognition you’ve given P&G and me today, and for the opportunity to talk
with you. It has been an honor.
 P&G Academy of Management A.G. Lafley - Page 18 of 18

About Procter & Gamble [NYSE:PG]

Three billion times a day, P&G brands touch the

lives of people around the world. The company
has one of the strongest portfolios of trusted,
quality, leadership brands, including Pampers®,
Tide®, Ariel®, Always®, Whisper®, Pantene®,
Mach3®, Bounty®, Dawn®, Pringles®,
Folgers®, Charmin®, Downy®, Lenor®, Iams®,
Crest®, Oral-B®, Actonel®, Duracell®, Olay®,
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The P&G community consists of over 135,000

employees working in over 80 countries
worldwide.

Please visit http://www.pg.com for the latest

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Local External Relations Contact:

Greg Icenhower
513.983.3606