Harvard Business School Working Knowledg e Archive

American Business, 1920-2000: How It Worked - P&G: Changing the Face of Consumer Marketing

5/2/2000
On the road to becoming the world's largest producer of branded household goods, Procter & Gamble introduced innovative techniques like brand management and market research that were widely emulated and are still followed today. In this excerpt from his new book American Business, 1920-2000: How It Worked, HBS Professor Thomas K. McCraw offers a look back at P&G and the evolution of methods that are now standard operating procedure for consumer product companies around the world.
American Business, 1920-2000
"In the running of a company of whatever size," writes Thomas K. McCraw in American Business, 1920-2000: How It Worked (Harlan Davidson, 2000), "the hardest thing to manage is usually this: the delicate balance between the necessity for centralized control and the equally strong need for employees to have enough autonomy to make maximum contributions to the company and derive satisfaction from their work. To put it another way, the problem is exactly where within the company to lodge the power to make different kinds of decisions."

The issue of decision rights and relative centralization is "the key business problem," says McCraw, and it's a principal focus of his book, published by Harlan Davidson as part of its American History Series. He includes studies of historic struggles with the issue at, among other places, General Motors in the 1920s, Procter & Gamble in the 1930s, RCA in the 1950s and 1960s and McDonald's in the last decades of the 20th century.

In this excerpt from his chapter on the 1930s, "Depression, Consumers, and the Case of Procter & Gamble," McCraw tells how P&G's development of brand management and a new kind of market research changed the way consumer marketing decisions are made.


Neil McElroy's Epiphany
After its successes with Ivory and Crisco, P&G developed a new business technique called "brand management." Because it focused attention on a product rather than a business function, brand management turned out to be similar in its effects to the multi-divisional structure introduced by Alfred Sloan at General Motors. And it had the same powerful tendency to decentralize decision making.

Neil McElroy

The shift to brand management began on May 13, 1931, with an internal memorandum from Neil McElroy (1904-1972), an athletic young man who had come to P&G in 1925 right after his graduation from Harvard College. While working on the advertising campaign for Camay soap, McElroy became frustrated with having to compete not only with soaps from Lever and Palmolive, but also with Ivory, P&G's own flagship product. In a now-famous memo, he argued that more concentrated attention should be paid to Camay, and by extension to other P&G brands as well. In addition to having a person in charge of each brand, there should be a substantial team of people devoted to thinking about every aspect of marketing it. This dedicated group should attend to one brand and it alone. The new unit should include a brand assistant, several "check-up people," and others with very specific tasks.

The concern of these managers would be the brand, which would be marketed as if it were a separate business. In this way the qualities of every brand would be distinguished from those of every other. In ad campaigns, Camay and Ivory would be targeted to different consumer markets, and therefore would become less competitive with each other. Over the years, "product differentiation," as businesspeople came to call it, would develop into a key element of marketing.

McElroy's memo ran to a terse three pages, in violation of President Deupree's model of the "one-page memo," a P&G custom that had become well known in management circles. But the content of the memo made good sense, and its proposals were approved up the corporate hierarchy and endorsed with enthusiasm by Deupree.

Thus was born the modern system of brand management. It was widely emulated, and in one form or another was still followed in the early twenty-first century by many consumer-products companies throughout the world. Typically, brand managers were energetic young executives marked for bright futures within a company. All of Procter & Gamble's own CEOs after Deupree had brand-management experience. This group included Neil McElroy himself, who headed the company after Deupree retired in 1948, and who in 1957 became Secretary of Defense under President Eisenhower.

Brand management as a business technique was one of the signal innovations in American marketing during the twentieth century. It epitomized the persistent theme of balancing centralized oversight with decentralized decision making based on who in the company had the best information about the decision at hand.

Doc Smelser and the Market Research Department
Neil McElroy's formula for P&G's success was: "Find out what the consumers want and give it to them." Proctor & Gamble went to extreme lengths to do both. It hired hundreds of women to bake, wash dishes, and do laundry in their own homes, and then report the results. This kind of market research became the hallmark of P&G's approach to the development of new products and the continuous effort to improve existing ones.

Doc Smelser

For many years, the leader of the market-research effort was D. Paul "Doc" Smelser, a small, feisty, serious man who often came to work dressed in sporty suits and ties. (This was not a tradition at P&G, which was known, as mentioned, for its executives' conservative attire.) The cerebral Smelser had earned a Ph.D. in economics from Johns Hopkins (hence the nickname "Doc"). He started at P&G in a new unit that had been organized in 1923 for the purpose of analyzing the markets for cottonseed oil and other commodities. Doc was fond of walking up to senior executives and asking them, out of the blue, questions such as "What percentage of Ivory soap is used for face and hands and what percentage for dishwashing?" Often nobody knew the answer. Thus Smelser was able to conclude that P&G, as a company, remained ignorant of some basic elements of how its products were being used, and therefore how they should be marketed.

Doc Smelser's embarrassing questions raised big issues, and the company responded quickly. In 1925 it created a formal Market Research Department and put Doc himself in charge of it. For the next 34 years, until his retirement in 1959, Doc built this group into perhaps the most sophisticated unit of its kind in the world. He and his staff of researchers (ultimately several hundred strong) asked a variety of audiences a series of detailed questions. In tabulating the answers, they discovered almost everything that could be learned about how the company's products and competing items were being used, how they might be used, and what consumers liked or disliked about them. Doc was especially well informed about the reach of advertising media. He liked to surprise managers of radio stations by giving them precise statistics about the size of their audience, statistics they themselves did not possess.

One of Doc's best-known innovations was Procter & Gamble's corps of door-to-door interviewers. This group consisted mostly of young women who had graduated from college and therefore possessed "the maturity to travel alone," as one of their supervisors put it. A criterion for the successful applicant was that she be attractive but not inordinately so. Doc wanted members of his force to project a wholesome and nonthreatening image, so as to inspire confidence and elicit candid answers.

P&G Door-to-Door Interview

Doc's interviewers infiltrated neighborhoods all over the country, going from house to house armed with an imposing array of questions: about laundry, cooking, dishwashing, and every other activity for which P&G marketed a product or was thinking of introducing one. Female interviewers were instructed to wear a conservative dress, high heels, gloves, and a hat. As they knocked on doors and talked with consumers, they were to carry no lists, forms, or writing materials. The visits could then seem more casual, even though all conversations were designed to extract copious and specific data. Interviewers were expected to have total recall, and often would hurry back to their cars to record what they had learned. During Doc's 34 years with P&G, a total of 3,000 women and a fair number of men worked as field researchers.

In the 1960s, the company began to phase out this group. Cheap long-distance telephone rates had made it possible to conduct mass surveys more cost efficiently. By the 1970s, Market Research at P&G was doing about a million and a half telephone or mail-in interviews each year. When the company became a heavy television advertiser, it instituted its "DAR" (Day after Recall) method for measuring the impact and memorability of TV commercials. With the help of its many advertising agencies, P&G used focus groups and many other kinds of opinion-sampling techniques to adapt its products to changing needs and tastes and sharpen its commercial messages.

In time, nearly every consumer-products company had to conduct market research in order to prosper. But Procter & Gamble was the leader, and it remained so into the twenty-first century. The biggest changes at P&G after Doc Smelser's time were in the growing number of the company's brands and the broadening of its markets. As the new century began, about half of P&G's revenues derived from international sales, and the brands it offered constituted a long list of names it had made famous (or was keeping famous, since some had been acquired by purchase). These brands included soap and laundry products such as Ivory, Camay, Safequard, Tide, Cheer, Bold, Bounce, Cascade, Joy, and Dawn; paper goods such as Bounty, Charmin, Pampers, Luvs, and Tampax; personal care products including Pantene, Head & Shoulders, Oil of Olay, Cover Girl, Secret, and Sure; food and beverage brands such as Crisco, Folger's, Jif, and Pringles; and health care items including Crest, Scope, and Pepto-Bismol. The total advertising budget for these products ran to several billion dollars a year, the majority of it spent on daytime TV commercials.

Toward the close of the twentieth century, Proctor & Gamble took steps to update its corporate culture, such as adapting brand-management strategies to the forces of globalization and allowing employees to dress more casually. But overall it remained the same kind of tightly knit, secretive, ambitious, marketing-obsessed company that it had always been. One of its corporate goals was to double sales every ten years, an extremely ambitious target for a company that was already one of America's twenty largest.

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