Coppead Graduate School of Business the Federal University of Rio De Janeiro (Ufrj) Thiago Guedes De Melo How Growth May Affect

COPPEAD GRADUATE SCHOOL OF BUSINESS THE FEDERAL UNIVERSITY OF RIO DE JANEIRO (UFRJ)

THIAGO GUEDES DE MELO

HOW GROWTH MAY AFFECT THE SURVIVAL OF LONG-LIVED ORGANIZATIONS: THE COLGATE AND PROCTER & GAMBLE CASES

RIO DE JANEIRO

2016 THIAGO GUEDES DE MELO

HOW GROWTH MAY AFFECT THE SURVIVAL OF LONG-LIVED ORGANIZATIONS: THE COLGATE AND PROCTER & GAMBLE CASES

Thesis submitted to the Instituto COPPEAD de Administração, Universidade Federal do Rio de Janeiro

(UFRJ) as a prerequisite for the

completion of the Full-time MBA program and the obtention of a M.Sc. title.

Supervisor: Professor: Denise Lima Fleck, Ph.D.

RIO DE JANEIRO

2016

THIAGO GUEDES DE MELO

HOW GROWTH MAY AFFECT THE SURVIVAL OF LONG-LIVED ORGANIZATIONS: THE COLGATE AND PROCTER & GAMBLE CASES

Thesis submitted to the Instituto COPPEAD de Administração, Universidade Federal do Rio de Janeiro (UFRJ) as a prerequisite for the completion of the Full-time MBA program and the obtention of a M.Sc. title.

Approved by: ______Prof. Denise Lima Fleck, Ph.D (COPPEAD, UFRJ) - Supervisor

______Prof. Paula Chimenti, Ph.D (COPPEAD, UFRJ)

______Prof. José Vitor Bomtempo Martins, Ph.D (PUC-Rio)

RIO DE JANEIRO

2016

ACKNOWLEDGEMNTS

To my grandparents, Adélia and Fernando Guedes, Denise and Maurilio de Melo, who have set the roots of a united and supportive Family.

To my parents, Laurinda and Murilo Melo, who have shown me how to live, love, laugh and learn.

To my brother and best friend, Rafael Melo, who has shared with me so many adventures.

To my better-half, Natalia Muniz, who has brightened my world.

To my entire family, which has guided and supported me towards success before I even understood its meaning in my life.

Everything that I am, have accomplished, and have yet to achieve, reflect the firm lessons and principles you have passed on. Thank you for leading by example, constantly demonstrating the importance of personal development, and always acting with kindness and integrity.

(Acknowledgements in Portuguese)

Aos meus avós, Adélia e Fernando Guedes, Denise e Maurilio de Melo, que estabeleceram as raízes de uma família unida e uma estrutura de suporte.

Aos meus pais, Laurinda e Murilo Melo, que me mostraram como viver, amar, sorrir e aprender.

Ao meu irmão e melhor amigo, Rafael Melo, que compartilhou comigo inúmeras aventuras.

A minha cara-metade, Natália Muniz, que coloriu meu mundo.

A toda minha família, que me apoiou e me guiou ao sucesso antes mesmo de minha compreensão sobre seu significado em minha vida.

Tudo que sou, já consegui e que ainda vou conquistar é um reflexo dos firmes valores e aprendizado que vocês passaram adiante. Obrigado por liderar por exemplo, constantemente demonstrar a importância de desenvolvimento pessoal e de sempre agir com bondade e integridade.

ABSTRACT

MELO, Thiago Guedes de. How Growth May Affect the Survival of Long-lived Organizations: the Colgate and Procter & Gamble cases. Master Thesis (Full-Time MBA). Instituto COPPEAD de Administração, Universidade Federal do Rio de Janeiro. Rio de Janeiro, 2015.

Too often companies fail because they do not grow or because they grow in an unhealthy and unsustainable manner. Even when companies become successful, they frequently are caught- up in their own success and develop organizational behaviors that result in a tendency for self-destruction. Through the lens of Fleck’s growth challenges, this study seeks to deepen the understanding of how the consistency of certain organizational actions can improve the tendency for self-perpetuation. A longitudinal analysis was conducted to comprehend how growth may affect the survival of long-lived organizations. Colgate and Procter & Gamble have endured throughout the changing times and are part of a select group of only 33 publicly listed companies in the United States that are over 175 years old. Both companies began their business in the soap industry during the early 1800s, and overcame competition to become regional, national, and global leaders. They have consistently ranked in the top half of the Fortune 500, outperformed the Dow Jones average and the S&P 500, and are considered industry references. The growth trajectory of both companies helps understand how Colgate and P&G grew over time and how their expansion moves (or lack thereof) likely contributed to foster or hamper the requirements for their continued existence.

Key-Words: Corporate growth; Long-term Success; Self-perpetuation; Colgate; Procter & Gamble

RESUMO

MELO, Thiago Guedes de. Como o Crescimento Pode Afetar a Sobrevivência de Organizações Longevas: Os casos Colgate e Procter & Gamble. Dissertação de Mestrado (Full-Time MBA). Instituto COPPEAD de Administração, Universidade Federal do Rio de Janeiro. Rio de Janeiro, 2015.

É muito comum que o fracasso de companhias aconteça pela falta do crescimento ou por um crescimento não saudável e insustentável. Até mesmo quando companhias se tornam bem sucedidas, elas frequentemente ficam tão absorvidas em seu próprio sucesso que desenvolvem atitudes organizacionais que tendem à autodestruição. Através da lente dos desafios de crescimento de Fleck, esse estudo busca se aprofundar em um melhor entendimento sobre como a consistência de certas ações organizacionais pode aumentar a tendência à autoperpetuação. Um estudo longitudinal foi conduzido para compreender como o crescimento pode afetar a sobrevivência de organizações longevas. Colgate e Procter & Gamble se destacam por suportar mudanças no meio ambiente ao longo do tempo e fazem parte de um grupo seleto de apenas 33 companhias listadas na bolsa de valores nos Estados Unidos com mais de 175 anos de existência. Ambas as companhias começaram na indústria de sabonete no início de 1800s, superaram a competição e se tornaram em líderes regional, nacional e global. Elas consistentemente estão na primeira metade do Fortune 500, superam a média Dow Jones e a S&P500, e são consideradas referências na indústria. Individualmente e de forma comparativa, a trajetória de ambas as companhias permite identificar de que forma as duas empresas cresceram e como seus movimentos expansivos (ou a falta deles) contribuiu para promover ou dificultar a produção das condições necessárias à continuidade de suas existências.

Palavras-Chave: Crescimento corporativo; Sucesso longevo; Autoperpetuação; Colgate; Procter & Gamble;

LIST OF FIGURES

Figure 2.1 Five Growth Challenges. ……………………………………..……………………………………………… 20 Figure 2.2 Model of Requisites for the Development of Organizational Self-Perpetuation Propensity……………………………………..…………………………………………………………………… 21 Figure 3.1 Visual Mapping Sample for Contextual Synthesis……………………………………………….. 38 Figure 3.2 Analysis Process of Research……………………………………………………………………………….. 39 Figure 4.1 Classifications Within Soap, Cleaning Compound, and Toilet Preparations Manufacturing. …………………………………………………………….……………………………………. 50 Figure 4.2 Colgate Family Members who worked at Colgate Company. ……………………………… 60 Figure 4.3 Procter and Gamble Family Members who worked at P&G………………….………...... 83 Figure 4.4 Moon-and-stars Evolution. Source: Dyer et al., 2004, p. 280………………………………. 83 Figure 4.5 U.S. Tide Share…………………………………………..………………………………………………………. 103 Figure 4.6 Technology Evolution………………………………………….…………………………………………….. 107 Figure 4.7 Growth of P&G Hair Care Brands, 1985 – 2004. ………………………………………….…….. 116 Figure 4.8 Components of the Organization 2005……………………………………………..……………….. 119 Figure 4.9 Connect & Develop Connections………………………………………………………………………… 124 Figure 4.10 Strategy Playbook…………………………………………………………..………………………………….. 125 Figure 4.11 Strategic Choice Cascades………………………………………………………………………………….. 126 Figure 4.12 Strategy Logic Flow…………………………………………………………..………………………………… 127 Figure 4.13 Traditional Buy-in and Reverse Engineering Strategic Options……………………………. 127 Figure 4.14 P&G Activity System………………………………………………………….……………………………….. 128 Figure 4.15 Reinforcing Rods………………………………………………………….……………………………………… 129 Figure 4.16 Adapted OGSM………………………………………………………….……………………………………….. 130 Figure 5.1 Boundaries of the States during the Industry Formation Period…………...... 134 Figure 5.2 Net Sales as a % of US GNP…………………………………………………………………………………. 142 Figure 5.3 Net Profits as a % of US GNP……………………………..……………………………………………….. 143 Figure 5.4 Leadership Transition Comparison between Colgate and P&G…………………………….. 183 Figure 5.5 % Turnover of Top Management (Officers & Directors) at Colgate and P&G……….. 184 Figure 5.6 International Presence of Colgate and P&G through Subsidiaries and branches… 185 Figure 5.7 Retained Earnings at End of Year as % of US GNP……………………………….………………. 222 Figure 5.8 Proxy to Personnel Slack…………………………………………………………………………………….. 223 Figure 6.1 Soap & Detergent Industry Breakdown………………………………………….…………………… 247 Figure 6.2 Longitudinal Ranking of P&G and Colgate in the Fortune 500…………………………….. 251 Figure 6.3 Historical Perspective on the Total Number of Employees at P&G and Colgate...... 251 Figure 6.4 Gross Properties, Plants and Equipment as a % of US GNP……………………………..….. 252

LIST OF TABLES

Table 3.1 Facts and Events Database Sample……………………………………………………………………….. 37 Table 4.1 The Soap Industry in the 19th Century………………………………………………………………….. 44 Table 4.2 Cleaning Product Innovations from 1950s to 2000s……………………………………………… 48 Table 4.3 US Market Share in Soap & Detergent Industry……………………………………….…………… 49 Table 4.4 Perfumery and Cosmetics (1860-1890)……………………………………………..…………………. 51 Table 4.5 World Beauty Market in 1950, 1959, and 1976 ($ Million)a…………………………….…… 52 Table 4.6 Market Shares in Selected Dental Markets in 1959……………………………….……………… 53 Table 4.7 Share of World Shampoo Markets in 1973 by Leading Firms………………………………... 53 Table 4.8 Mergers and Acquisitions of Cosmetics Firms, 1947 - 1980………………………….………. 54 Table 4.9 Evolution of Total Firm Size and Payroll in Soap & Detergent Industry in the US (1998-2011)…………………………………………………………………………………………………………. 56 Table 4.10 Ten Largest Companies in Personal Care and Home Care Products in the Global Market, 2012………………………………….……………………………………………………………….…… 57 Table 4.11 Colgate Leadership since Incorporation…………………………………………………………….…. 64 Table 4.12 Firm Advertising to Sales Ratio (1965 - 1974)………………………………………………………. 74 Table 4.13 R&D Expenditures for Soap and Detergent Products, 1968 - 1974………………..……… 75 Table 4.14 Leaders at P&G since Incorporation……………………………………………………………………… 91 Table 4.15 Detergents Sales Revenues from 1954 to 1957 ($ Millions)………………………………….. 104 Table 4.16 Ten Things I Believe by Lafley, June 2000………………………………………………….………….. 122 Table 4.17 Results of P&G’s Transformation from 2000 to 2009……………………………………………. 125 Table 5.1 Population during the Industry Formation Period…………………………………………………. 133 Table 5.2 Main Actions during the Industry Formation Period (1806 - 1879)………………………... 138

Table 5.3 Main Actions during the Industry Consolidation Period (1879 - 1946)…………………… 139 Table 5.4 Stock Capitalization during Industry Consolidation…………………………..…………………… 140 Table 5.5 Main Actions during the Era of the Detergents…………………………………………………….. 141 Table 5.6 Colgate Acquisitions During the First Half of the Era of the Detergents (1940- 1985)………………………….………………………………………………………………………………………… 153 Table 5.7 Colgate’s Acquisitions During the Second-half of the Era of the Detergents (1986 – 2015)………………………….………………………………………………………………………………………… 156 Table 5.8 Advertising during Early Years of Ivory Soap………………………………………..………………. 163 Table 5.9 P&G Acquisitions during 1940s, 50s, and 60s………………...... …………………………. 171 Table 5.10 Colgate's Principle Products in 1959 and 1979. Source: Moody’s…………………………. 195 Table 5.11 P&G’s Organizational Development During Industry Consolidation Phase…….………. 206 Table 6.1 World's Largest Personal Care Companies, 1950 ($ million)………………………………..... 249 Table 6.2 World's Largest Personal Care Companies, 1977 ($ million)………………………………..… 250

TABLE OF CONTENTS

1. INTRODUCTION ...... 13 2. LITERATURE REVIEW ...... 17 2.1 ORGANIZATIONAL SUCCESS ...... 17 2.2 ORGANIZATIONAL FAILURE ...... 18 2.3 ARCHETYPES OF SUCCESS AND FAILURE ...... 19 2.3.1 Organizational Renewal Through Growth ...... 22 2.3.2 Enterprising ...... 22 2.3.3 Navigating the Environment ...... 24 2.3.4 Organizational Integrity ...... 26 2.3.5 Human Resource Provisioning ...... 28 2.3.6 Diversity ...... 29 2.3.7 Organizational Slack ...... 31 2.3.8 Complexity ...... 32 3. RESEARCH METHOD...... 34 3.1 DATA COLLECTION ...... 35 3.2 DATA PREPARATION...... 36 3.3 DATA ANALYSYS...... 38 3.4 STUDY LIMITATIONS ...... 40 4. HISTORICAL OVERVIEW ...... 42 4.1 US INDUSTRY OVERVIEW ...... 42 4.1.1 Candle & Soap Industry ...... 42 4.1.2 Detergents Industry ...... 46 4.1.3 Beauty Industry ...... 49 4.1.4 Personal & Household Care Industry...... 55 4.2 COLGATE HISTORY ...... 57 4.2.1 Antecedents ...... 57 4.2.2 First Generation ...... 59 4.2.3 Second Generation ...... 61 4.2.4 Third Generation...... 62 4.2.5 Incorporation ...... 64 4.2.6 Early Internationalization ...... 65 4.2.7 The Palmolive Company ...... 66

4.2.8 The Peet Brothers Company...... 67 4.2.9 The Colgate-Palmolive-Peet Company Merger...... 67 4.2.10 The Great Depression...... 68 4.2.11 World War II ...... 70 4.2.12 Period of Diversification ...... 72 4.2.13 Restructuring ...... 75 4.3 PROCTER & GAMBLE HISTORY ...... 80 4.3.1 Procter and Gamble Partnership ...... 80 4.3.2 Early Procter & Gamble ...... 81 4.3.3 Second Generation Procter & Gamble ...... 85 4.3.4 Ivory Palace ...... 86 4.3.5 Incorporation ...... 91 4.3.6 Third Generation...... 92 4.3.7 Deupree Leads P&G ...... 97 4.3.8 World War II ...... 100 4.3.9 Rise of Tide ...... 102 4.3.10 Golden Age at P&G ...... 105 4.3.11 Emergence of Problems ...... 111 4.3.12 Restructuring ...... 114 4.3.13 The New Millennium ...... 121 5. ANALYSIS ...... 132 5.1 INDUSTRY PERIODS ...... 132 5.1.1 Period I (1806-1879): Soap Industry Formation...... 133 5.1.2 Period II (1879 – 1946): Soap Industry Consolidation ...... 135 5.1.3 Period III (1946 – Present): The Era of the Detergents...... 136 5.2 RENEWAL THROUGH GROWTH ...... 137 5.2.1 Colgate and Procter & Gamble Comparison ...... 137 5.2.2 Colgate ...... 144 5.2.3 Procter & Gamble ...... 159 5.2.4 Renewal through Growth Recap ...... 180 5.3 ORGANIZATIONAL INTEGRITY ...... 181 5.3.1 Colgate and Procter & Gamble Comparison ...... 181 5.3.2 Colgate ...... 185 5.3.3 Procter & Gamble ...... 198 5.3.4 Organizational Integrity Recap ...... 219

5.4 SLACK PRODUCTION ...... 220 5.4.1 Colgate and Procter & Gamble ...... 220 5.4.2 Colgate ...... 223 5.4.3 Procter & Gamble ...... 226 5.4.4 Slack Production Recap ...... 234 5.5 PROPENSITY TOWARDS LONG-TERM SUCCESS ...... 235 6. CONCLUSION ...... 237 6.1 Future Research ...... 239 REFERENCES ...... 241 APPENDIX ...... 247

1. INTRODUCTION

This study has been conducted to determine how Colgate and P&G grew over time and how their expansion moves (or lack thereof) likely contributed to foster or hamper the requirements for their continued existence. Corporate growth is a topic of primary interest to any business and has been capturing the increasing attention of academics. Companies that do not grow die, yet companies that do grow also face challenges that may lead to their failure. Such conjecture of the growth imperative has led authors to study growth and success, decline and failure.

Fleck (2009) has conducted a comparative study between General Electric (GE) and Westinghouse, two companies with similar origins and trajectories that have had opposing results. Despite their many similarities, GE is often associated to the epitome of organizational success, while its historically main competitor, Westinghouse, is associated to failure. The study, which posed the question: “Why do certain firms display a process of continuous growth and existence while other firms decline and disappear?”, has indicated that the company’s ability to develop a propensity for long-term success and self-perpetuation is contingent on the renewal of the organization through growth and the nurturing of organizational integrity, both of which are affected by the firm’s slack production. Fleck has further identified that these pillars are sustained through the five growth challenges of enterprising, navigating the environment, managing the provisioning of human resources, managing diversity, and managing complexity (Fleck, 2009).

Fleck’s Model of Requisites for the Development of Organizational Self-Perpetuation Propensity was used as the framework for analyzing the organizational responses by Colgate and P&G towards the growth challenges. The contributions of many academics have been reviewed to increase the thoroughness in breadth of the investigation, and enhance the depth of how Fleck’s dimensions affect the propensity for the organization to self-perpetuate.

Penrose’s view on growth elaborated in the Theory of the Growth of the Firm has served as a foundation for this study as her concepts permeate Fleck’s growth challenges and are apparent in the growth trajectories of Colgate and P&G (Penrose, 1968). Selznick’s concepts of institutionalization and organizational character have also been a bedrock for an in depth investigation of how the company’s responses affected their organizational integrity (Selznick, 1957).

Chandler has argued that managers have conferred on the modern enterprise seeds of continuous existence. The firm, which has a life of its own that can extend well beyond the life of its members, has an ability to self-perpetuate considering its existence and its continuous organizational growth. Chandler further suggests that success is not a final stage, but a dynamic process that requires constant nurturing and development (Chandler, 1962).

Even though companies have the ability to succeed and endure over time, it has often been noted in the business world that most companies fail. Business statistics demonstrate that the majority of the companies die within the first couple of years, and those that remain undergo the demanding task to survive in the marketplace. Companies must consistently create value in order to be relevant to its customers, must capture sufficient value to develop the business (Lepak, 2007), must overcome the challenge of competition (Porter, 1979), must handle external influences including macro-economic and political factors, and must undergo internal organizational changes (Mintzberg, 1991). Even when a company successfully overcomes these challenges, it has also been suggested by Miller through the Icarus Paradox, that success may breed failure (Miller, 1992). Grove suggests that “Success breeds complacency. Complacency breeds failure. Only the paranoids survive” (Grove, 1999).

A few companies, however, have created sustainable businesses that have endured throughout the changing times. According to the Standard & Poor’s Capital IQ, which lists a total of 488 public companies that are 100 years old or older, The Colgate-Palmolive Company and The Procter & Gamble Company are amongst the 30 oldest in the United States. Besides Colgate’s and P&G’s presence amongst the top 30 companies with the largest market cap of the 488 oldest public companies, they have also consistently ranked within the top half of the Fortune 500, outperformed the Dow Jones average and the S&P 500, and have become coveted industry references. In fact, both Colgate and P&G are part of a select group of 33 companies that are over 175 years old.

Both Colgate and P&G, founded in 1806 and 1837, respectively, have succeeded in overcoming the challenges associated to growth and remain to date, widely respected and recognized companies. Colgate and Procter & Gamble make interesting organizations for analysis since both companies have developed from similar beginnings and undergone similar market influences that enable an investigation of how their choices and organizational actions have affected their trajectory and their propensity for long-term success and self- perpetuation.

Among the many similarities, Colgate and P&G were founded in the early 19th century by individuals with roots from the United Kingdom, who engaged in the soap and candle trade within the United States. Both companies participated during all the phases of the industry, emerged as leaders amongst their local and regional competitors, and maintained industry leadership despite the increased national and global competition. They underwent similar macro-economic and political conditions including the integration of the United States, the California Gold Rush, the American Civil War, World War I, The Great Depression, World War II, and the opening of European and Asian markets, to name a few. Both companies were also impacted by several technological advancements in their industry such as the Solvay and Glycerine Recovery processes, innovations beyond their industry that affected the trade, such as the light-bulb and the washing machine, among other Schumpeterian Revolutions such as the development of new forms of mass media communication.

Directing the company in the midst of all these changes, were the leaders at Colgate and Procter & Gamble. To further benefit the analysis of how the companies responded to the growth challenges throughout time, both companies were at similar development phases in the industry. The founders of Colgate and P&G passed on the leadership of their companies to the second generation close to the American Civil War. The second generation passed on the leadership of the company to the third Generation near the 1900s. The third generation then passed control of the company for the first time to an individual outside of the founding family around 1930.

Such similarities in Colgate and P&G’s trajectory and the long extent of their histories enable a comparison, and consequently a better understanding of what actions tend to increase a company’s propensity for organizational decline and failure, and which actions contribute towards success and self-perpetuation.

This document is composed of six chapters. The first chapter contains the introduction, which contextualizes the objects under investigation and poses the research question that guides this work. The second chapter contains the literature review and provides the theoretical framework that will serve as a basis for analysis. Such section provides an understanding of the importance of growth and its requirements in the longevity of organizations. The third chapter defines the research method and describes the research process from data collection to data analysis. The fourth chapter depicts the history of the

15 industry to provide context for both objects under investigation, then traces the history of Colgate and P&G to provide a better understanding of their growth trajectories and to enable a more appropriate diagnosis. An analysis is conducted in the fifth chapter and compares the growth of Colgate and P&G in light of Fleck’s growth requirements for long-term success. The sixth chapter encompasses the final considerations of this research, summarizes its findings and suggests future research to expand on the topic.

2. LITERATURE REVIEW

2.1 ORGANIZATIONAL SUCCESS Three distinct perspectives in organizational theories and how they regard organizational success are compared by Ulrich & Barney (1984). The resource dependence perspective is rooted in sociology and political science, and considers organizational success the maximization of power. The efficiency perspective is rooted in economics, and considers organizational success the capability of organizations to manage their transactions efficiently. The population perspective is rooted in biology, and argues that organizational success can be defined as survival (Ulrich & Barney, 1984).

The resource-based view is coherent with the three distinct perspectives. When a firm controls certain resources, which imply a certain power, it is capable of conducting efficient and effective transactions that enable the implementation of strategy and tactics, thus increasing its chances for organizational survival. The resources a firm can control include physical (Williamson, 1975), human (Becker, 1964), and organizational capital (Tomer, 1987), and are heterogeneously controlled among firms. According to Barney (1991), when the organization possesses resources that are valuable, rare, imperfectly imitable, and cannot be substituted, it develops a sustained competitive advantage (Barney, 1991).

Lepak discusses the difference between value creation and value capture at a multi- level perspective, which affects the ability of organizations to retain competitive advantage. A party will have little incentive to create value if value slippage occurs as value capture may slip away from the creator towards competitors (Lepak, 2007). Fleck describes that continued value creation and value capture is required by an organization if it is to achieve long-term success (Fleck, 2007).

According to Doyle (1994), the most common measurement for defining success or failure by Western companies is profitability. Although many other criteria exist, profitability is often seen as the most adequate form to judge company performance (Doyle, 1994). Penrose (1968) defends that profitability and growth are highly correlated terms and may be used interchangeably. A company will not invest in expansion for growth’s sake if the expected return is negative, nor will it invest outside the firm if it does not increase the firm’s own available funds, thus making “growth and profits become equivalent as the criteria for the selection of investment programmes” (Penrose, 1968, p. 30).

Chandler considers that organizational success is not a final stage, but a dynamic process that requires constant nurturing for the development and maintenance of a propensity to self-perpetuate (Chandler, 1977). Collins calls Enduring Great Companies, these companies that have become great in comparison to other companies in the industry, and have become long-lasting by stimulating progress and preserving the core ideology (Collins, 2001). According to Fleck (2009), the propensity for long-term success and the self- perpetuation of an organization depends on its ability to renew itself through growth and its ability to preserve organizational integrity, both of which are affected by organizational slack and the growth challenges (Fleck, 2009).

2.2 ORGANIZATIONAL FAILURE Contrasting organizational success is organizational failure. Empirical observations of organizations seem to suggest that “Success breeds complacency. Complacency breeds failure” (Grove, 1999). According to Whetten (1987), some scholars argue that organizations are characterized by a life-cycle model and that at some point in time they decline and eventually die. Boulding (1950) defends the life-cycle model with a literal biological analogy that all organisms, including organizations, follow an “irreversible process of (decline) and entropy…towards the equilibrium of death” (Boulding, 1950, p.37). Modis (1994) takes a step further and defends that the life-cycle model enables the forecasting of the rise and fall of technologies, companies, industries, and entire economies.

Many other scholars claim that success and failure of a company is associated to organizational behaviors, rather than the determinism of a life cycle model. Weitzel and Jonsson (1989) argue that “there appears to be no reason to have to accept a life-cycle concept for organizations” (Weitzel & Jonsson, 1989, p. 93). Penrose (1952) refutes biological analogies since data does not support such postulations, and such analogies to the natural selection process or to the life-cycle model “contribute little to… the theory of growth and development of firms [,] and in general tend to confuse the nature of important issues” (Penrose, 1952, p. 804).

Weitzel & Jonsson (1989) iterate that as long as the organization is not in the final stages of the decline process, when it has insufficient resources to redirect its course towards adequate organizational equilibrium, there is no reason to believe that “decline is not reversible at any point along the continuum” (Weitzel & Jonsson, 1989, p. 107). Weitzel argues that the first stage of a decline process occurs as a company is blinded and fails to

18 anticipate changes, and that the second stage results from inaction. The third stage is characterized by faulty actions, which may lead to the fourth stage of crisis, and possibly the fifth stage of dissolution (Weitzel & Jonsson, 1989).

Sull (1999) sustains that companies are not taken by surprise, but they decline due to active inertia (Sull, 1999). In Sull’s view, companies have a tendency to maintain the behavior and mindset that brought about their initial success, even as the business environment changes (Sull, 1999). According to Sull (1999), assumptions that determine how managers see the business become blinders, processes of how things get done become routines, relationships become shackles, and values that determine corporate culture become dogmas (Sull, 1999, p. 45).

Collins (2001) considers that failure results from a doom loop. Companies react without a complete understanding of what they are trying to achieve and how such endeavor should be effectively pursued. As a result, the company changes its direction, launches sporadic events and programs, obtains new leaders, performs acquisitions or follows the latest business fads, which leads to a lack of momentum build-up that yields disappointing results and propels more inappropriate reactions (Collins, 2001).

2.3 ARCHETYPES OF SUCCESS AND FAILURE Fleck (2009) has developed archetypes of organizational success and failure, which result from consistent organizational responses to five organizational challenges that are presented next.

Challenge Category Challenge Description Polar Responses to Challenge

Enterprising Promoting continued Satisficing High Reaching entrepreneurship by (Low level of ambition, (High level of ambition, fostering the firm’s versatility, imagination, versatility, imagination, willingness to carry out vision, fund-raising vision, fund-raising reinforcing, value- ingenuity, and ingenuity, and creating expansion while judgement, using nil- judgement, using also preventing the defense motivated productive & hybrid- organization’s exposure moves) motivated moves) to risk. Navigating into the Dealing with the Drifting Fashioning Dynamic organization’s multiple (Poor scanning, (Regular Scanning, Environment stakeholders in order to untimely or inadequate timely and adequate use secure value capture and use of response of response strategies*) organizational strategies*) legitimacy. *These are: manipulation, defiance, avoidance, acquiescence, compromise Diversity Sustaining the firm’s Fragmentation Integration Management integrity in face of (Failure to establish (Successful increasing organizational bonding relations and development of conflicts and rivalry coordinating bonding relations and capabilities) coordinating capabilities) Managerial Steadily equipping the Late Early Resources firm with necessary (Just-in-time or after the (Planned in advance Provisioning qualified human fact actions) actions) resources. Complexity Managing complex Ad Hoc Systematic Management issues and solving (Poor problem solving (Strong problem problems of increasingly capabilities upholding solving capabilities complexity so as to avoid quick search for promoting risks to the solutions and precluding comprehensive search organization’s existence learning) for solutions and fostering learning) Figure 2.1. Five Growth Challenges. Source: Fleck, 2009, p. 85

Although polar responses are given to each growth challenge in Figure 2.1, companies in fact operate somewhere within the given range. Consistent responses to the right of the “Polar Responses to Challenges” column will result in a company with a propensity to self- perpetuate, while companies with responses to the left will be more inclined to self-destruct (Fleck, 2009). Furthermore, due to the dynamic character of self-perpetuation, as described by Chandler (1977), the tendency of the organization for self-perpetuation or self-destruction may oscillate within the spectrum throughout time (Fleck, 2009).

The five growth challenges are interrelated in Fleck’s “Model of Requisites for the Development of Organizational Self-Perpetuation Propensity”, which is presented next in Figure 2.2.

Growth Challenges (Required responses) Analysis Process of Research

Enterprising Central Mechanism (High-reaching value creating entrepreneurship) NC NC Renewal through Navigating Growth NC (Fashioning to secure value capture) Complexity NC +/- (Systematic problem Slack Long-Term Success solving) HR Provisioning Tendency (Early building, developing, +/- +/- retaining, recruiting) NC Organizational Integrity NC Diversity NC (Coordinating & integrating mechanisms) NC: Necessary Condition +/-: Positive or negative Influence

Figure 2.2. Model of Requisites for the Development of Organizational Self-Perpetuation Propensity. Source: Fleck, 2009, p.90 Adequate response to the challenge of complexity is a necessary condition for appropriate responses to all of the other four growth challenges: enterprising, navigating the environment, human resource provisioning, and managing diversity. The enterprising and navigating challenges are necessary conditions for organizational renewal through growth to occur. Organizational renewal through growth is a necessary condition for an organization to develop the propensity for long-term success. The human resource provisioning and the diversity challenges are necessary conditions for the nurturing of the organizational integrity, which in turn is also a necessary condition for an increased organizational tendency for long- term success. Slack production by the company is a necessary condition for organizational growth and renewal, and in turn may also be positively or negatively affected by the company’s growth. Organizational Integrity is also interdependent with organizational slack, and may either positively or negatively influence and be influenced by it (Fleck, 2009). Fleck’s model regarding the challenges and requisites for an organization to develop a propensity to self-perpetuate is discussed in light of the perspective of other academics.

2.3.1 Organizational Renewal Through Growth Fleck considers that renewal through growth is a necessary condition for an organization to increase its propensity to self-perpetuate (Fleck, 2009). Besides the economies of scale and economies of scope that create cost advantages and enable companies to compete more effectively by setting lower prices and permitting increased profit margins, growth also encourages the move towards new market opportunities. Chandler (1990) argues that once a company successfully makes a first mover investment, it is extremely hard for a competitor to regain competitiveness in the industry. The difficulty encountered by a follower company to capture customer demand may result in such a financial burden that it may compromise the longevity of the firm (Chandler, 1990). As companies grow bigger, their managerial tasks become more complex (Chandler, 1990). Despite the increased complexity, Penrose argues that there is no reason to assume that as firms grow larger, they become inefficient. In fact, given enough time to adjust, “big firms appear extremely successful and there is no evidence at all that they are managed inefficiently” (Penrose, 1968, p.18). Furthermore, small companies have an incentive to grow since historically, smaller firms have on average, inferior economic performance, productivity levels, improvement capacity and lower standard quality jobs when compared to bigger firms (Harrison, 1994). Harrison states that through growth, firms that have become large are consistently experiencing the “fastest rates of growth over time, and [have] the smallest chances of going out of business during any given interval of time” (Harrison, 1994, p.151), thus contributing to Fleck’s argument that growth is a necessary condition for long-term success (Fleck, 2009). Collins and Porras further support Fleck’s notion of renewal through growth with their finding that enduring great companies display evidence of a purposeful evolution. Although growth may happen to any company by mere chance, “visionary companies more aggressively harness the power of evolution” to stimulate progress aligned with their core ideologies (Collins & Porras, 1994, p. 148).

2.3.2 Enterprising Enterprising is considered by Fleck one of the growth challenges that affects the ability of an organization to renew itself through growth. Fleck argues that this challenge is characterized by the ability of the entrepreneur to develop high reaching value-creating activities while preventing overexposure to risk (Fleck, 2009).

In Built to Last, Collins and Porras (1994) argue in favor of the necessity to create value through enterprising actions, which they termed Big Hairy Audacious Goals (BHAGs). According to them, the use, the audacity, and the historical pattern of BHAGs in visionary companies have helped them as powerful mechanisms to stimulate progress (Collins & Porras, 1994). Collins describes in Good to Great that a good BHAG results from the intersection of the Hedgehog Concept and incorporates what the organization is deeply passionate about, what it can be best in the world at, and what drives its economic engines (Collins, 2001). In the Blue Ocean Strategy, Kim & Mauborgne argue that the only commonality among successful firms is their ability to develop blue oceans, which are regions of unexplored marketspace beyond existing industry boundaries, where demand can be created and sustained for high profits. The creation of such marketspace is driven by value innovation, which creates a leap in value for buyers and the company itself (Kim & Mauborgne, 2005). Schumpeter also discusses the process of creative destruction, whereby the competitive spaces of the industry are redefined. Even though a Schumpeterian revolution can only be “imperfectly anticipated” by most organizations in the industry, it must be led by a given entity (Barney, 1986, p. 797). Penrose argues that the Schumpeterian process of creative destruction has not destroyed the large firm, but has forced them to become more creative (Penrose, 1968, p. 94). Christensen also discusses the process of disruptive innovation as a mean through which a company can shake up the industry (Christensen et al., 2015). The new entrant with fewer resources establishes itself by enterprising in either the low-end footholds, which are overlooked segments of the market that Penrose calls the interstices of the economy (Penrose, 1968), or by establishing new-market footholds, which are new ways to turn non-consumers into consumers (Christensen et al., 2015). According to Christensen, when the previously more successful incumbents are overtaken and begin to adopt in large scale the enterprising methods and offerings of the new entrants, disruptive innovation occurs (Christensen et al., 2015). Penrose states that firms possess managerial services and entrepreneurial services. While managerial services are concerned with planning growth, supervising operations for organizational maintenance, and executing entrepreneurial ideas, entrepreneurial services are concerned with the introduction and acceptence of new ideas that enable productive opportunities. Such productive opportunities may occur from the greater use of underutilized

23 resources, the development of new services from existing resources within the firm, or from external opportunities (Penrose, 1968). Chandler also differentiates company administration into two business roles, that of managers and that of entrepreneurs. Chandler defends that managers are chiefly concerned with operating tactical decisions that use already allocated resources to coordinate, appraise and plan efficient and smooth day-to-day operations. On the other hand, Chandler argues that entrepreneurs are concerned with strategic decisions that entail resource allocation in the entire organization to ensure long-term organizational health (Chandler, 1962). According to Penrose, enterprising is closely associated to the temperament of an entrepreneur and his or her predisposition to take chances based on the belief of capturing future returns (Penrose, 1968). Penrose describes four dimensions of entrepreneurial services, the most important of which is ambition. Penrose argues that in the presence of the other three dimensions, versatility, fund-raising ingenuity, and judgement, a lack of interest from the absence of ambition is the limiting factor (Penrose, 1968). Drucker notes that the “first sign of decline of a company is a loss of appeal to qualified, able, and ambitious people” (Edersheim & Drucker, 2007, p. 195), while Collins highlights the importance of ambition in level 5 leaders, which have been observed in all enduring great companies. Collins notes that the ambition of level 5 leaders is not geared towards personal glories, but channeled first and foremoest towards the success of the institution (Collins, 2001). According to Penrose (1968), entrepreneurial versatility is concerned with imagination and vision, which enables the company to expand the range of its offerings and circumvey unfavorable demand for the original offering. Ingenuity relates to the capability of a firm to raise capital and instill confidence. Judgement encompasses a combination of personal qualities that enable individuals to gather information and to weight the expectation of return with the associated uncertainty and risks (Penrose, 1968).

2.3.3 Navigating the Environment Fleck argues that navigating the environment is another growth challenge to ensure organizational renewal through growth. According to Fleck, a company will have an increased ability to renew and grow, and consequently self-perpetuate, if it is capable of regularly scanning the environment to act in a timely and adequate manner. Such actions enable proper handling of all stakeholders and increases value capture by the organization. Barney advocates that the organization that has the capability and power to redefine the “structural characteristic of their industry” in their own terms, will establish a competitive

24 advantage and a positioning that will be translated into “high returns” (Barney, 1986, p. 792). According to Drucker, “the only way you can manage change is to create it” (Edersheim & Drucker, 2007, p. xi). Porter complements that the strategic positioning should leverage a firm’s competitive advantages, should maximize its strengths, and should help it engage in areas of less competition (Porter, 1979). Kim and Mauborgne (2005) argue that companies should proactively seek blue oceans, where competition is irrelevant, thus enabling the company to reap larger profits. The company must, however, continuously monitor its blue ocean since competition will eventually engage and transform the blue ocean into a red ocean, which will result in high competitive forces and decreased profit margins (Kim & Mauborgne, 2005). Day and Schoemaker argue that although the stronger market position and greater resources of the existing market players should provide them with an advantage over new entrants, incumbents normally fail to monitor the environment and belatedly notice the development of new emerging technologies (Day, Schoemaker, 2004). Incumbents become victims of a few traps that include “delayed participation, sticking with the familiar, failure to fully commit, and lack of persistence” (Day, Schoemaker, 2004, pg.24). In order to avoid such traps and adequately navigate the environment, it is suggested that companies consistently manage and monitor their stakeholders by widening their peripheral vision, which can be done with an ecosystem analysis, as well as develop a learning culture, a proper degree of organizational autonomy and a flexible organizational strategy (Day, Schoemaker, 2004, pg.24). Harrison argues that a company that fashions the environment is able to improve its competitive position relative to that of its competitors and become increasingly irreplaceable players. External relationships and strategic alliances create a global web that enables the company to position itself as the locus of “ultimate power and control” and “at the center of the world stage”, thereby increasing its relevance in the ecosystem (Harrison, 1994, p. 1, p. 4). This keystone positioning enables the company to better respond to emerging competition and to take advantage of surging opportunities resulting from industry changes, thus increasing its likelihood to retain power (Harrison, 1994).

According to Lepak, for an organization to be successful, it must capture the value it creates for the individual, the organization itself, and society (Lepak, 2007). Catino also considers adequate monitoring of the environment instrumental to avoid the concept of organizational myopia since it helps organizations improve their understanding of the

25 environment, limits their short-sightedness and increases their ability to anticipate and control unexpected events (Catino, 2013). When companies suffer from what Sull considers active inertia, and according to Fleck drift in the environment, they have a propensity to decline and fail. On the other hand, when companies proactively monitor and fashion the environment, they have a tendency to grow and succeed.

2.3.4 Organizational Integrity Fleck defends that organizational integrity is necessary for a company to pave its way to self-perpetuation (Fleck, 2009). In her view, leadership is not only responsible for creating values, but also for preserving them (Fleck, 2007, p. 68). Collins (2001) considers that the first step towards developing an enduring great company is hiring the right people and obtaining level 5 leadership in the organization. Level 5 leaders build organizations through the duality of personal humility and professional will. Humble and fearless, such leaders are primarily concerned with the success of the organization rather than their personal riches and glory (Collins, 2001). Barnard (1968) defends that top management must be proactive in nurturing an organizational environment that is effective in creating cooperation among its employees and in communicating its purpose. The organization must also be efficient at aligning and adjusting the interchanges between the organization and the individual. According to Barnard, such effectiveness and efficiency are necessary for continued organizational existence (Barnard, 1968). Selznick (1957) also believes that top management is vital to create and safeguard the corporate philosophy, which promotes an organizational identity through an administrative ideology, directs organizational commitment, and improves internal cohesion (Selznick, 1957). Selznick argues that the transformation of the organization from a technical instrument into an institutional structure capable of mediating and guiding group integrity and values result from an institutionalization process, and helps promote the longevity of the company (Selznick, 1957). Although the process of institutionalization creates organizational stability required for organizational longevity, the development of organizational habits may result in a rigid structure that is resistant to change, thus harming the company’s long term competitive advantage and long-term ability to succeed (Fleck, 2007, p. 168). According to Fleck, the institutionalization paradox does not hold for companies with a proactive mode of

26 institutionalization and dynamic capabilities, as they develop a systematic learning attitude that neutralizes organizational rigidity and resistance to change (Fleck, 2009, p. 78).1

Starbuck (1965) also defends that the formalization process, in which the company standardizes procedures and communication mechanisms to stabilize organization behavior, often associated to increased organizational rigidity, does not necessarily make a company more resistant to change. In fact, informality and instability may also be associated to resistance to change (Starbuck, 1965, p. 58).

Fleck’s proactive mode of institutionalization with dynamic capabilities is observed in Selznick’s comment that organizations may become “well adapted to perform an action program” outside of their routine administrative tasks (Selznick, 1957, p. 50). Furthermore, Fleck’s argument that organizational integrity, preserved by an institutionalization process is a necessary condition to increase a company’s propensity for self-perpetuation, is supported by Porter who stated that continuity reinforces the company’s identity and enables the firm to build its unique capabilities (Porter, 1996, p. 74).

Collins and Porras further support the need for an organizational integrity since all the enduring great companies in their research displayed evidence of clear and authentic core ideologies. According to Collins and Porras, in addition to having a stated ideology, the ideology must be historically sustained, go beyond mere profit objectives, and have a consistency with company actions. Cultism helps preserve the ideology and guide the company’s actions, and may be observed through indoctrination, tightness of employee fit with the company culture, and elitism, which is when the firm’s employees believe to be part of something much greater. All of these elements contribute to fortifying the company’s organizational integrity. Collins and Porras also state that although the core ideology of a company typically traces back to specific individuals, they become institutionalized in visionary companies (Collins & Porras, 1994, p. 86).

Drucker has also emphasized the importance of preserving the organizational culture when he stated: “I don’t like changing the culture. I like how we build on it for a changing world” (Edersheim & Drucker, 2007, p. 75). According to Drucker, organizations need “commitment to values and their constant reaffirmation, [just] as a human body needs

1 Institutionalization Paradox: Company achieves organizational stability, which is necessary for its longevity, through an institutionalization process. The institutionalization process, however, may create rigid structures that reduce the company’s competitive advantage and diminish its propensity towards self-perpetuation (Fleck, 2009).

27 vitamins and minerals. There has to be something ‘this organization stands for,’ or else it degenerates into disorganization, confusion, and paralysis” (Drucker, 2002, p. 56).

2.3.5 Human Resource Provisioning Fleck (2009) considers that the human resource provisioning challenge is a necessary condition for building and sustaining the organizational integrity. According to Fleck (2009), the company can either respond early by recruiting, training and retaining talented personnel before an organizational need appears or it can respond late to the challenge in an ad-hoc fashion. When the firm has planned in advanced the equipping of the firm with qualified personnel, then it is more likely to nurture its organizational integrity and to develop a propensity for long-term success, whereas when it responds late to the human resource provisioning challenge, it harms the organizational integrity and contributes to a tendency for organizational failure (Fleck, 2009).

According to Penrose (1968), managerial services limit the expansion of a firm in any given time since the firm will suffer if it attempts to expand the organization faster than the pace that managers can gain the required capabilities. Such capabilities are developed according to the knowledge that the company’s personnel acquires from formal education and personal experience. Penrose argues that “if a group is to gain experience in working together, it must have work to do so”, which takes time (Penrose, 1968, p.46). The rate at which the necessary experience is gained is further limited by the mechanisms installed by past management (Penrose, 1968).

Instruments that promote the early provisioning of human resources through talent acquisition, training, and employee retention, will thus improve the quality and amount of services that the individual and the team of employees can provide. To such effect, Penrose argues that the growth of managerial services “involves both acquisition of new personnel and promotion and redistribution of the old” (Penrose, 1968, p. 51). Newly-hired employees from outside the firm will lack the ability to provide unique services until they spend enough time to gain the experience about the operations valuable to the firm, and to get acquainted with the new team members (Penrose, 1968), thus depicting the importance of early provisioning of human resources for a company’s success as pointed out by Fleck (Fleck, 2009).

Chandler (1977) also discusses the importance of human resources for the health of the organization. According to Chandler (1977), managers inserted seeds of continuous

28 existence in the modern business enterprise since the employees sought security in a long- term career within the firm, yet could be replaced by other employees. The result was that the enterprise obtained a life of its own, which could extend well beyond the life of its individual members (Chandler, 1977).2 As employees concentrate on both the long-term health of the enterprise and the day-to-day operations, “its present health and future growth surely depend on the individuals who guide its activities” (Chandler, 1962, p. 8).

Collins (2001) further highlights the importance of human resource provisioning through the statement that enduring great companies should start first and foremost with the right personnel. Only after obtaining disciplined people, is the company able to develop disciplined thought, and implement disciplined actions (Collins, 2001). Collins and Porras also defend the importance of early human resource since all the enduring great companies have displayed management continuity. Evidence amongst these companies concerning the early provisioning of human resources include the internal development of CEOs, no “post- heroic-leader vacuum” or “savior syndrome”, and the implementation of mechanisms for formal management development programs and careful succession planning (Collins & Porras, 1994).

Succession planning and early provisioning of human resources is of vital importance for the perpetuation of an organization. According to Drucker, “An organization that is not capable of perpetuating itself has failed. An organization therefore has to provide today the men and women who can run tomorrow. It has to renew its human capital. It should steadily upgrade its human resources” (Drucker, 2002, p. 56).

2.3.6 Diversity Organizational integrity is affected by the firm’s ability to manage the growth challenge of diversity. As a company grows, it faces challenges in structural diversity, workforce diversity, and diversity in business opportunities. New business products are released, new technologies emerge, new business segments are engaged, new geographic markets are entered, new human resources are attained, and new forms of organizational structure are developed to address the development of the company. Fleck argues that bonding relations, and the presence of integrating and coordinating mechanisms, act to

2 Since Chandler’s analysis focuses on a specific time period, some observations may not be suitable for modern times due to changes in the business landscape (Fleck, 2003). Although in the modern times employees may no longer be looking for a life-time career, the concept that companies may replace its employees and thus ensure its seeds of continued existence remains valid and is not time-bound (Fleck, 2003).

29 promote organizational cohesiveness, and thus enhance organizational integrity, while fragmenting responses such as organizational conflicts, rivalry, and unrelated diversification harm it (Fleck, 2009).

Mintzberg argues that “few organizations get the chance to spend their entire lives in one place” (Mintzberg, 1991, p. 58). Even though an organization may use a given structure “when the form fits… at least for a time” the dynamism of the market may render such structural form eventually outdated (Mintzberg, 1991, p. 58). Chandler also considers that the structure of an organization is focused on “integrating [the] enterprise’s existing resources to current demand”, and that a new or at least refashioned structure for the enterprise is necessary for it to operate efficiently under new conditions (Chandler, 1962, p. 383). Chandler notes that in the managerial revolution of American business, professional managers became responsible “to coordinate the greatly expanded flows of goods” in the modern multi-unit enterprises (Chandler, 1977, p.485), thus corroborating to Fleck’s argument that firms must be continuously integrated, even as new structures develop, in order to sustain the organizational unity and retain the organizational integrity (Fleck, 2009).

Increased organizational diversity may result in a conflict of power between employees who promote and who resist change. Greiner argues that the “passage of time also contributes to the institutionalization of managerial attitudes” (Greiner, 1972, p. 40), which may cause “behaviors that were once functional [to] become dysfunctional” (Mintzberg, 1991, p. 59). Chandler argues that the dysfunctionality in the organization and the inability to develop appropriate strategy and actions for future endeavors “may result from past training and education” (Chandler, 1962, p. 16). Consequently, if individuals with an outdated thinking and behavior consistently lead the organization, it will be incapable of adequately allocating resources to anticipate demand and assure its continued existence.

Mintzberg argues that politics is a way to trigger the change necessary in a stagnant organization in order to correct certain deficiencies and dysfunctions, to “promote necessary organizational change blocked by legitimate systems of influence” (Mintzberg, 1985, p. 149), and to help implement emergent strategies (Chandler, 1962). Change results in a rebalance of power, which may affect the behavior of individuals composing the organization, and the deeply ingrained attitudes of the institutions. Political confrontations may be functional, speed up, and realign a “shift in power configuration necessitated by a change in a fundamental condition of the organization” (Mintzberg, 1985, p. 150). The political arena

30 may be especially valuable “when the established order has outlived its usefulness” (Mintzberg, 1985, p. 150). Even though politics may have a positive role in helping the organization undergo a necessary change required for success, if politics leads to segregation and disputes, the fragmented responses will jeopardize organizational integrity and will result in a propensity for self-destruction (Fleck, 2009).

Fleck argues that responses that promote bonding relations have a tendency for organizational success. Penrose stresses that “businessmen commonly refer to the managerial group as a ‘team’”, which implies that the group of individuals work as a unit (Penrose, 1968, p. 46). The experience of working together through teamwork, enhances the individual and the collective knowledge, enables the expansion of existing services and the creation of new unique services through a different combination of the company’s resources. According to Penrose, these services permit the individuals in the organization to develop working relationships that “determine the efficiency and confidence with which action can be taken by the group as a whole” (Penrose, 1968, p. 46).

2.3.7 Organizational Slack Fleck argues that slack production is a necessary condition for continued growth and affects organizational integrity, thus impacting the propensity of the firm to self-perpetuate (Fleck, 2009). According to Chandler (1977), a greater organizational size and diversity enable the transfer of a wider variety of resources between products and departments, including material resources and personnel, thus increasing the likelihood that resources may be underutilized. Chandler argues that firms are pressured to grow in an attempt to reduce these underutilized resources (Chandler, 1977, p. 489). Penrose (1968) discusses underutilized resources through the concept of unused services, which may occur in the form of idle man-hour, but are typically concealed in the form of unused personnel abilities. According to Penrose, healthy growth must occur within the limits of the “capacities of the existing personnel of the firm”, otherwise the firm will suffer (Penrose, 1968, p. 45). Collins has called this concept, in which“no company can grow revenues consistently faster than its ability to get enough of the right people to implement that growth and still become a great company”, as Packard’s Law (Collins, 2001, p. 54). Although the capabilities of personnel dictates a healthy growth, Drucker also warns against overstaffing. Too much human slack becomes “an impedement to performance, rather than the means thereto” (Drucker, 2002, p. 43). Penrose further argues that uncertainty and risk

31 limit healthy expansion when resources are not available. When resources are available, information can be obtained to reduce uncertainty and minimize risk (Penrose, 1968, p 69). Even though Fleck (2003) and Penrose (1968) discuss the same concept, Fleck’s nomenclature of slack for the unused services and resources infers a sense of organizational flexibility. It also encompasses Chandler’s concept of underutilization of resources, which implies organizational inefficiency (Fleck, 2003). According to Fleck, complete or nearly complete optimization of resources will inhibit and harm growth, and may lead to other struggles such as political coalitions for the obtention of spare resources that would harm organizational integrity. On the other hand, too much slack may mask operational inefficiency and hurt organizational coordination. An adequate amount of slack must be continuously sustained by the company if it is to maintain a healthy growth and to preserve its organizational integrity, thus increasing its propensity for self-perpetuation and long-term success (Fleck, 2009).

2.3.8 Complexity A company will have a tendency to self-perpetuate, according to Fleck, if it responds to the complexity challenge with a systematic approach to problems by searching for comprehensive solutions, and by incorporating organizational learning as a way to minimize organizational risk. On the other hand, a company will increase the likelihood of organizational failure if it forgoes learning and responds to problems in inconsistent ways privileging quick solutions. The complexity challenge influences and permeates the other growth challenges of enterprising, navigating the environment, managing human resource provisioning, and managing diversity, since its approach may be utilized in all of them (Fleck, 2009).

Greiner argues that even when problems from growth occur, they may result in a positive experience and may even be a necessary condition for the organization. Periods of substantial turmoil in the life of organizations create “learning experiences in the organization that will be essential for success in subsequent phases” (Greiner, 1972, p. 45). These revolutions may be further beneficial to organizations since they can create “pressure, ideas, and awareness” required for a necessary change, and encourage “the introduction of new practices” that would help in the long-term success of the firm (Greiner, 1972, p. 45). Weitzel further argues that since failure of an organization is associated to an organizational behavior, organizations may learn to anticipate, recognize, and appropriately respond to internal and

32 external challenges to successfully avoid death and become self-perpetuated (Weitzel & Jonsson, 1989).

Starbuck defends that the adaptive process of organizations typically depends on their age and the environment in which they are in. According to Starbuck, “as an organization gets older, it learns more and more about coping with its environment and with its internal problems of communication and coordination” (Starbuck, 1965, p. 58). As the organization learns, it attempts “to perpetuate the fruits of its learning” through formalization processes (Starbuck, 1965, p. 58). Older organizations have typically learned to prioritize complications and ignore minor issues, developing mechanisms to address routine problems, while younger organizations often need flexible structures to address the variation of problems that occur. Starbuck also argues that the environment plays a role in the formalization process and in the mechanisms developed, since the stability of the environment affects the variation of problems that a company may encounter (Starbuck, 1965).

Collins further argues that enduring great companies have built a culture of discipline, which he describes through a flywheel analogy. It is not one decision or one event that will cause the flywheel to spin and create organizational momentum towards success. “Breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another” (Collins, 2001, p.69). Whereas good companies are disciplined by leaders through force, enduring great companies have established mechanisms that enable sustained discipline to determine not only what should be done, but also what should not be done (Collins, 2001).

Collins’ research findings demonstrated the “continual use of words like disciplined, rigorous, determined, diligent, precise, fastidious, systematic, methodical, workmanlike, demanding, consistent, focused, and responsible” in enduring great companies, while they were absent from the material of merely good companies (Collins, 2001, p. 127). Fleck’s complexity challenge, which argues that systematic and comprehensive problem solving increases the propensity for organizational long-term success and perpetuation, is therefore in line with these notions (Fleck, 2009).

3. RESEARCH METHOD

A qualitative research method was utilized in this study since it is considered the best way to investigate a subject in depth, with an understanding of the actions and the events within their overarching context (Myers, 2009). It comprises history-based investigation of two case studies, which has made use of a panoramic approach (Fleck, 2014) to the subject matter.

The longitudinal study reported here investigates the development of the Soap Industry in America from its inception in 1608, and the history of Colgate and P&G from the early 19th century until the present day. History-based studies are adequate to identify the development of patterns throughout time and help understand the contemporary situation. The investigation carried out a case study research, a method that helps address how or why questions (Yin, 2003). Finally, a panoramic approach to doing research on strategic management (Fleck, 2014) was used as it considers a multi-level perspective of the company and the environment, and incorporates distinct dimensions for a more comprehensive analysis of the longitudinal growth of the company. Such panoramic approach and multi-level perspective further helped neutralize the possibility of a targeted focus and information selection. Besides contemplating the effects of time and taking into consideration the effects of the economy, the moment of the industry, the actions of the organization, the decisions of the company leaders, and perspective of the company’s employees, the analysis also took into consideration constructive and destructive elements.

The possibility of a confirmatory bias was also considered prior to starting this research. Initial perception as a consumer of products by both, Colgate and P&G, suggested that the companies were excellent at marketing, especially P&G. Throughout the development of the research, however, it was noticed that in order to attain the impressive continued existence of over 175 years other elements were in place that helped Colgate and P&G overcome the growth challenges and sustain a propensity towards self-perpetuation.

This research is further qualified as a comparative case study due to the analysis of two distinct subjects, Colgate and P&G. Their parallel growth trajectories among their many other organizational similarities enabled an investigation of and across each company. According to Yin, although such multiple-case studies have the disadvantage of being more time consuming and expensive to conduct, they are considered more robust and reliable (Yin, 2003).

A rigorous case study must have a developed research question typically posed with how or why, the application of a conceptual framework, logic linking data to the proposition or research question, and criteria for interpreting its findings (Baxter & Jack, 2008, p. 550). This research meets these conditions as it poses a how question, how Colgate and P&G grew over time and how their expansion moves (or lack thereof) likely contributed to foster or hamper the requirements for continued existence, and uses “Fleck’s Model of Requisites for the Development of Organizational Self-Perpetuation Propensity” as a conceptual framework that guides data collection and preparation. The logic linking data to the research question and the criteria of analysis are explored in the following sections.

3.1 DATA COLLECTION Initially, a general information search about Colgate and Procter & Gamble was conducted to determine whether the availability of material would enable one to perform a thorough investigation. The preliminary research overview also sought to determine if both companies had enough similarities that would justify a comparative case study research, and allow for the cross-comparison of Colgate and P&G. Upon observing that enough material had been published on Colgate and P&G, and that both organizations displayed enough similarities, a commitment to the subjects of analysis was established.

The current study utilized secondary data and traced relevant historical events pertaining to Colgate, P&G and the Soap industry, as early as the colonization of the American colonies in the early 1600s. The data collection process began with a review of two bibliography compendiums (Daniells, 1957 and Geahigan, 1988), which referenced publications of American and Canadian businesses and the biographies of their businessmen. An intensive online search of all other existing published material on Colgate, P&G, their founders and the soap industry was then reviewed and listed. Documentation such as books, academic journals, magazine and newspaper articles, case studies, corporate publications and other historic records were utilized. A comprehensive list detailing the material used in this study is provided in the References.

The materials were acquired through amazon.com, iTunes store, and online databases such as the US Library of Congress and Google Scholars, among other databases available at the UFRJ-COPPEAD Library, which included Fortune and Forbes. The corporate websites of Colgate and P&G were reviewed and the annual reports for Colgate since 1997, and for P&G since 1999, were also obtained. This research also made an extensive use of all the

35 information, since the year 1900, pertaining to Colgate and P&G in the Moody’s Manual of Industrial and Miscellaneous Securities, located at the Harvard Library.3 Multiple sources of data were used to cross validate facts and events, and to enhance the credibility of the work.

The material was collected in chronological order, starting with the biography of Colgate’s founder, then the foundation and growth of the company until the present day. After the literature review for Colgate was complete, the same process was undertaken for Procter & Gamble. Simultaneously, research was conducted to contextualize the evolution of the industry as well as the macro-economic and political conditions in the United States over time.

Although Colgate and P&G currently partake in several business segments worldwide, investigation of the industry concentrated mainly in the US geographic market. A greater focus was also placed within their core business segment, the Soap and Candle Industry, which evolved into Soap and Detergent Industry, and more recently became part of the larger Personal Care and Household Segments within Consumer Goods.

3.2 DATA PREPARATION Data preparation for this research proceeded in successive steps. The first stage of the data preparation utilized Langley’s narrative strategy, in which a detailed story of each company was produced from distinct literary sources. Although the detailed narrative may improve organizational understanding from the richness of the data, which produces high accuracy in studies, it was mainly used as a preliminary step in the process research to prepare a chronology for subsequent analysis.

A temporal bracketing strategy was also utilized as a way to structure the description of the events (Langley, 1999). The extended period of research was decomposed into three successive phases, the Industry Formation, Industry Consolidation, and Era of the Detergents. Besides its descriptive utility, the separation of the periods according to the continuity of actions and the marking of a significant event at the frontier of the periods also contributed to sense making of the data. The preparation of data in a chronological order organized in periods further served as a validation tool to ensure newly acquired data was historically and contextually accurate (Langley, 1999).

3 I’d like to express my gratitude towards Prof. Denise Fleck who photographed all pages from the year 1900 to 2013 pertaining to Colgate and P&G in The Moody’s Manual at the Harvard Library.

Since the detailed narrative strategy may have forgone certain details in order to maintain a flow in the storyline, a spreadsheet was organized to record all facts and events. A sample of the spreadsheet used is shown in Table 3.1. The data permits the tracking and organizing of sources, and facilitates inspection and analysis of the raw data (Baxter & Jack, 2008). The raw data was classified per entry number, book source and page location, the subject it pertained to, the year, the fact and/or event. The data was then classified under one of 7 dimensions, enterprising, navigating, HR, diversity, complexity, slack, and context of the environment. The table further permitted filtering for ease of rearrangement according to source, subject of study, chronology, dimension of interest, or any desired combination.

Entry Book Page Subject Year Event Dimension # Colgate Advertising shows that by 1817 William was bidding for foreign 54 Story 57 Colgate 1817 business Navigating Reckless attitude towards credit and debt of Grant administration led P&G to consult mercantile agency reports, list approved customers by grades, and be guided by the buyers' character and 462 It Floats 39 P&G 1870 credit standing as well as capital Complexity Rise of Discovery of oil in western PA uncovered rich supplies of kerosene 447 Tide 19 Environment 1859 and oil lamps began replacing candles in households. Context Table 3.1. Facts and Events Database Sample

Upon the preparation of the database, a visual mapping strategy was utilized in order to synthetize a large amount of information in relatively little space (Langley, 1999). Figure 3.1, presented next, illustrates a portion of a visual map that was utilized throughout the analysis.

Cear 1800 1810 1820 1830 1840 1850 US Population 5.3 7.2 9.6 12.3 17.1 23.2 (Million) Louisia Anglo- Finan Business na Erie California American cial Miami Canal Purcha Canal Gold Rush Environment War Panic se Artificial alkali First US Soap 75% of used Soap comme & Candle soap is according Principles of becomes Industry rcial export home to Saponification commodity steamb surpasses made Leblanc item oat imports Process

Chevreul Cincinnati is recovery largest meat

of packing Glycerin industry Figure 3.1 Visual Mapping Sample for Contextual Synthesis Visual maps were also elaborated with respect to Colgate and P&G. Historical financial accounts were plotted and used to validate the qualitative findings. Besides the extraction of all the financial data available for Colgate and P&G since the year 1900 in the Moody’s Manual of Industrial and Miscellaneous Securities, other topics were also tracked yearly, and were tabulated and graphed to support the development of the analysis. Yearly tracked topics from the Moody’s Manual include: major organizational events, product changes, acquisitions and divestures, total amount of employees, entry and exit of company officers and directors, entry and exit into foreign countries, among all financial data.

3.3 DATA ANALYSYS After the collection of the data from multiple sources and its preparation through a narrative, a temporal bracketing, a visual mapping strategy, and the elaboration of a facts and events database, the data was used to develop an analysis of how each company responded to Fleck’s growth challenges throughout their existence. Such information was then synthesized according to Fleck’s Central Mechanism, which permitted an analysis comparing how each company acted regarding their ability to renew through growth, to nurture organizational integrity, and to maintain an adequate amount of slack production. Finally, a summary comparing their propensity towards long-term success was elaborated. The analysis procedure began in a highly detailed manner with the growth challenges, and gained increasing generality to enable a relevant cross-comparison of their central mechanism and

their tendency for long-term success. A visual representation of the data analysis process is displayed in Figure 3.2 presented next.

Growth Challenges Analysis Process of Research

Enterprising Central Mechanism

Renewal through Navigating Growth

Complexity Long-Term Slack HR Provisioning Success Tendency Organizational Diversity Integrity

3 4

1 2

1. Individual analysis of each growth challenge for P&G and Colgate. 2. Integration of growth challenges for Colgate and P&G, individually, according to Central Mechanism. 3. Comparison of Colgate and P&G according to elements in Central Mechanism. 4. Synthesis of the effect of growth moves (or lack thereof) on the long-term existence of both organizations

Figure 3.2. Analysis Process of Research

The criteria used for analysis drew on the following notions regarding the growth challenges:

 Enterprising behavior in each company has been identified, according to Fleck’s notion of high-reaching and value creating activities through entrepreneurship (Fleck, 2009). Penrose’s four dimensions of ambition, versatility (imagination and vision), capital- raising ingenuity, and judgement have also been considered (Penrose, 1959). Furthermore, the motives of entrepreneurship have been studied according to Chandler’s account of productive and defensive expansion (Chandler, 1977), and Fleck’s identification of hybrid and nil motives (Fleck, 2009).  Navigating the environment was determined by each company’s ability to deal with multiple stakeholders and capture value. According to Fleck, companies may have

responses to the navigating challenge that range from fashioning the environment, whereby they proactively monitor and shape the environment, to drifting responses, in which the company poorly scans the environment and performs untimely or inappropriate responses (Fleck, 2009).  Human resource provisioning concerns the challenge of attaining, training, and retaining qualified personnel. According to Fleck, provisioning may be early responding, when the company anticipates the need of the resource and strengthens organizational integrity or late responding, when resources are sought after the need is discovered, thus weakening the organizational integrity (Fleck, 2009).  Managing Diversity deals with the challenge of each company’s coordinating capabilities to sustain the integrity of the firm in light of organizational conflicts, which includes workforce, structural and business diversity. Chandler argues that bonding through sharing promotes organizational unity (Chandler, 1977), corroborating to Fleck’s argument that integration-oriented responses to the diversity challenge improves organizational integrity, while fragmentation-oriented responses, harms it (Fleck, 2009).  Managing Complexity refers to how each company approaches the intricate issues in the four challenges of enterprising, navigating the environment, human resource provisioning, and diversity management. According to Fleck, systematic problem solving will enable the company to approach the issue in a comprehensive and analytical manner that will permit learning and better-informed decision making. On the other hand, ad hoc problem solving may expose the organization to higher risks as it neglects learning, and is characterized by quick-fix solutions (Fleck, 2009).

3.4 STUDY LIMITATIONS This research was done with the help of secondary data. All of the available material utilized in this research is limited by the observation and the understanding of those who registered the given events. Such material may therefore include opinion and interpretation that might make the investigation less accurate. To increase historical accuracy and precision, the author distinguished fact from opinion, as well as used multiple data sources to validate events.

The longitudinal character of this study also raised some difficulties. This study analyzed the growth trajectory of Colgate and P&G, which occurred in parallel to the formation of the United States. Record keeping in the past was more rudimentary, and

40 preservation and storage of documents used to be more difficult than it currently is. The availability of documentation from the 19th century and the early 20th century is therefore more limited when compared to the existing documentation of the late 20th century and the 21st century.

Another limitation of the study was the geographical constraint of the researcher in relation to the objects of study. Although Colgate and P&G conduct their business worldwide, a large part of their literature refers to the United States operations. The author resorted to digital documentation, such as e-books and digitalized copies by the US Library of Congress, while physical ordered documents were shipped internationally to Brazil. The physical material used by the author, thus depended on the availability of the documentation, and their effective arrival after international transportation. Such conditions limited the use of certain sources.

Despite the given limitations, and the greater availability of existing literature on P&G than on Colgate, enough secondary data was obtained from multiple sources of documents and historic records to allow cross-comparing Colgate and Procter & Gamble.

4. HISTORICAL OVERVIEW

The Historical Overview chapter contextualizes the environment in which Colgate and Procter & Gamble conducted their businesses within the United States. It highlights the evolution of the main segments in which both companies participated in, and describes the growth trajectory of Colgate and P&G since their foundation.

4.1 US INDUSTRY OVERVIEW Colgate currently conducts its business in the Oral Care, Personal Care, Home Care, and Pet Nutrition segments, while Procter & Gamble partakes in the Fabric Care and Home care, Baby, Feminine and Family Care, Beauty, Grooming, and Health Care segments. Although Colgate and P&G have become global players in what came to be known as the Personal and Household Care Industry, both companies began within the Candle & Soap Industry in the United States during the early 1800s. The evolution of the main segments in which both companies did business in (Candle & Soap, Detergents, Beauty, and the larger Personal & Household Care Industry) is described next, providing contextualization for the companies’ histories. Other important segments entered by Colgate and P&G have been included within their respective histories.

4.1.1 Candle & Soap Industry The origins of the candle and the soap industry in America may be traced back to the first settlements that came from England. Among the colonists that arrived at Jamestown with the Second Supply in 1608 were a few skilled craftsmen with knowledge for handling fat and soap-ashes. The abundance of resources found in the virgin woodlands along with the expertise of the craftsmen enabled the growth of the industry (Colgate, 1895).

The export of one hundredweight of soap-ashes to England in 1621 was worth six to eight shillings, and in 1671, the settlements that then included Maine and New Hampshire derived their wealth mainly from the production of soap-ashes and fat. The extraction of lye from the wood-ashes and its boiling with fat-remnants were turned into tallow candles and soap. At the time, these raw materials were mainly used in the production of tallow-dip and candles, which were the common means of illumination (Colgate, 1895). Soap had little importance as an industrial product until 1791, when Leblanc devised an industrial process capable of manufacturing a large production of soda-ash from salt instead of the traditional means through the leaching of wood-ashes (Lamborn, 1918). Although the process enabled a

42 greater production of good quality and inexpensive soda-ash, it only gained commercial momentum among soap producers thirty years later (Colgate, 1895).

By 1795, a small soap-boiling establishment was present in practically every large town, and the soap industry produced a total of about $300,000 annually (Colgate, 1895). Professional soap makers started the practice of collecting waste fats from households in exchange for soap bars (SDA, 1994); however, soap-making continued to be considered a home-made activity as soap was mainly produced by the house-wives. In 1806, William Colgate & Company was amongst the first establishments that helped set the foundation of the soap business in the United States by converting house-wives, who were initially competitors, into customers (Colgate, 1895).

The increased importance of the American soap industry was demonstrated mainly through an increase in production rather than advances in quality. In the beginning of the 19th century, American soap was considered common grade, and fine soaps were inexistent. By 1838 American manufacturers supplied all the demands of their home market, with the exception of some finest qualities soap, which were imported from France and England (Hardin, 1959). Since England and France possessed secret processes for producing finer quality soaps, William Colgate & Company, much like other American Soap manufacturers, had concentrated on producing laundry soap.

The manufacturing processes had remained basically the same until 1841, when the French chemist, Michel Chevreul, demonstrated the principles of saponification and established the basis for fats and soap chemistry. The discovery “greatly transformed the industry and enabled the manufacture of many new varieties of toilet and shaving soaps” (Ingham, 1983, p.180).

The increase in production enabled by the discovery was observed the following year when the “United States alone produced 50,000,000 pounds of soap, 18,000,000 pounds of tallow candles, and 3,000,000 pounds of wax and spermaceti candles” (Colgate, 1895, p. 423). Table 4.1, demonstrates the value of the soap product in the United States increasing in the 19th century (Colgate, 1895).

Material Value of Year Establishments Employees Wages Capital Consumed Product ($) ($) ($) ($) 1795 … … … … … 300,000 1850 … … … … … 10,000,000 1860 614 3,247 … … … 18,464,574 1870 614 4,422 1,925,951 10,454,860 15,232,587 22,535,337 1880 620 5,289 2,219,531 14,541,294 19,907,444 26,552,627 1890 578 9,305 4,951,648 … 28,687,412 43,600,385 Table 4.1. The Soap Industry in the 19th Century. Source: Colgate, 1985, p. 425 Of the total soap production in the US in 1842, “Massachusetts was credited with over one quarter, and of the spermaceti she produced nearly all” (Colgate, 1895, p.423). In New York, the many prominent soap and candle manufacturers in the 1850s included “Enoch Morgan, James Buchan, Johnson, Vroom & Fowler, D. S. & J. Ward, J. D. & W. Lee, Holt & Horn, Patrick Clendenen, John Alsop, C. W. Smith & Company, John Taylor & Sons, W. G. Browning & Company, Lee A. Comstock, John Buchanan, George F. Penrose, John Ramsey, John Kirkman, and John Sexton” (Colgate, 1895, p. 423). Colgate had moved its manufacturing facility from New York to New Jersey in 1847 (Hardin, 1959). Cincinnati had become known as the nation’s Porkopolis since it was the largest meatpacking center in the US. The city was further developing as a western hub since it connected through the Ohio River to New Orleans, which was the biggest cotton exporting city, and to the Great Lakes, after the construction of the Miami Canal in 1840 (Dyer et al., 2004, p. 12).

During the first half of the 19th century, the United States still had a rudimentary infrastructure. New York City was lit by whale-oil lamps, and neither mail service nor telegraph existed to facilitate information transfer. Transportation of products was also difficult due to the inexistence of railroads and little availability of steamboats, the first of which was commercially developed in 1807. In 1825, however, the Erie Canal was opened creating a waterway connection from New York City to the Great Lakes and onto the West.

The era of the railroad expansion in the 1830s and their spreading in the 1840s further enabled new business opportunities. Unlike river traffic that was seasonal and depended on the rivers not being frozen, railroad commerce worked year-round. It was “faster, more regular, and less expensive than steamboat freight” (Dyer, 2004, p. 16). Although new market opportunities appeared with new city connections, competition between cities such as Cincinnati and Chicago also intensified (Dyer, 2004). Railroad connections continued to expand and connected the Midwest to New England and Mid-Atlantic markets prior to the start of the American Civil War in 1860. After the Civil War ended in 1865, railroad lines

44 connected the south and western regions (Dyer, 2004). By 1877, about 80,000 miles of railroad track had been constructed, and in 1890 had reached 164,000 miles (Dyer, 2004, p. 20).

In 1859, the discovery of oil in Pennsylvania created ample supply of kerosene for oil lamps. As the oil industry consolidated with Rockefeller’s Standard Oil during the 1860s and 1870s, oil lamps began to replace candles creating a drastic shift in the candle and soap industry, which began to focus on the production of soaps (Dyer et al., 2004).

The introduction of machinery during the Industrial Revolution quickly altered the soap manufacturing processes. “As Individual establishments grew in size, notably in Cincinnati, New York, Boston, Philadelphia, Baltimore, Detroit, Buffalo, Pittsburg, Zanesville, Chicago, and St. Louis, conditions requisite for the introduction of labor-saving machinery [were] soon obtained” (Lamborn, 1906, p.5). Machines were adapted for almost every step of the process, replacing human labor and transforming the production into quicker and cheaper processes. Examples include the first soap press built by James Atkins of Brooklyn, and the first cushion-shaped pressed bar built by Babbitt in 1865. The ammonia process created by Solvay in the 1860s to further reduce cost, and increase the quantity and quality of soda-ash, along with the 1870 patent by Jobbins and Van Ruymbeke for glycerin recovery, transformed soap into a widespread commodity and greatly increased the competition amongst companies (Lamborn, 1906).

Increased competition amongst companies led to the development of novelty products and an emphasis on differentiated packaging through artistic wrapping (Colgate, 1895). Soap manufacturers also turned to brand advertising to differentiate their products, a practice that soon characterized the industry (Laux et al., 1997). In the early 1880s, magazines began to broaden their readership and change their advertising content. As the circulation of magazines began to grow, it developed a new medium for mass media, which became highly utilized by soap manufacturers in advertising (Dyer et al., 2004). Soap manufacturers also became large radio advertisers in the 1930s and television advertisers in the 1950s.

In 1895, the greatest firms in the soap industry were considered to be “B.T. Babbitt, N.K. Fairbank & Company, James S. Kirk & Company, D. S. Brown & Company, Procter & Gamble, and Colgate & Company” (Colgate, 1895, p. 426). This same year, Lever Brothers

45 entered the US Market and within 5 years purchased several soap manufacturers in Boston and Philadelphia (Wilson, 1954, v.1, p.207).4

The early 1900s was marked by a considerable growth of soap manufacturers in the West, which had been closely associated to the packing and provision industry, and the establishment of large soap manufacturing centers in the South, which had traditionally been a market for Eastern soap producers (Lamborn, 1906). From 1890 to 1920, the US population increased from 22 million urban dwellers to 48 million, thus increasing the demand per capita. Toilet Soap production per capita increased almost by 50% between 1909 and 1919 and though in 1916 seventy-thousand washing machines were sold, its sales increased by eightfold in 1920 (Laux et al., 1997).

The soap manufacturing industry in the United States underwent a period of consolidation between 1890 and 1929. The amount of soap manufacturers decreased from 578 to 282, while the size of the soap market increased from $46.6 million to $310.2 million (Dyer et al., 2004, p. 47). In 1929, one of the biggest amalgamations in European history also occurred with the combination of Margarine Unie/Margarine Union, which were large suppliers of edible fats, with the Lever Brothers, which had a large portion of the soap trade, to form Unilever (Wilson, 1954, v.1, p.xvii). By 1949, Unilever would direct over five hundred companies spread all around the world (Wilson, 1954, v.1, p.xvii).

During the period of industry consolidation, the industry also encountered many technological shifts in the laundry soap market. Consumers “migrated from bar soap to flakes and chips, and then from flakes and chips to granules” (Dryer et al., 2004, p. 50). After World War II, synthetic detergents swept the market in the United States, and later abroad.

4.1.2 Detergents Industry A shortage of fat in Germany due to the consequences of World War I, which started in 1914, prompted the development of a substitute material for the manufacturing of soap. In addition, the further need to create a cleaning agent insoluble in water led to the elaboration of the synthetic detergent in 1916 (SDA, 1994). The production of household detergents began in the United States in 1933 with Dreft by P&G, however, it was only with the “interruption of fat and oil supplies as well as [the] military’s need for a cleaning agent that

4A compilation of US and Canada owners of brands of soaps in 1911, may be found US Soap Brand Register (Berriman, 1911).

46 would work in mineral-rich sea water and in cold water” during World War II, that American soap producers were stimulated to research detergents (SDA, 1994).

The first detergents were used for dishwashing and laundry of fine fabrics, yet in 1946, a breakthrough all-purpose detergent was introduced in the US by P&G that greatly improved cleaning performance (SDA, 1994). After the launch of Tide in 1946, Lever introduced Surf, and Colgate-Palmolive released Fab, however, neither was as successful as P&G’s product (Laux et al., 1997). The introduction of synthetic detergents in the United States also coincided with the spreading of washing machines.

As synthetic detergents began to cut into the sales of soaps, chemical companies entered the market segment. In 1946, Monsanto, introduced All, a low sudsing detergent through retailers after its unsuccessful attempt to sell the product to each of the Big 3 in the Soap & Detergent Industry: P&G, Unilever, and Colgate-Palmolive. This was a significant moment as it created a brief exception to the Big 3 market control. Monsanto obtained the support from front-loading machine manufacturers such as Westinghouse, and became the fourth best-selling detergent within 1 decade. P&G responded with its own low-sudsing detergent in 1954, shortly followed by Colgate, with its Ad detergent. As a result, Monsanto sold All to Unilever in 1957 (Laux et al. 1997, p. 222).

The whole soap and detergent sales market increased by 30% between 1946 and 1956 (Laux et al., 1997). By 1953, the sales of detergent within the Soap and Detergent Industry in the United States had surpassed those of soap (SDA, 1994). The real output of the industry between 1954 and 1971 grew at an annual rate of more than 4% (Cox, 1976). Such growth encouraged the development of more cleaning products in the second half of the 20th century, all of which are listed in Table 4.2, presented next (SDA, 1994).

1950s 1960s 1970s 1980s 1990s 2000s  Automatic  Prewash  Liquid hand  Detergents  Ultra (Super  Disposable dishwasher soil and soaps for cooler concentrated) cleaning powders stain  Fabric water powder and wipes  Liquid removers softeners washing liquid  Pre- Laundry  Laundry (sheets and  Automatic detergents measured  Hand powders wash-cycle dishwasher  Ultra fabric dissolvable dishwashing with added) liquids softeners packets  All-purpose enzymes  Multifunctional  Concentrated  Automatic  Spa scents cleaning  Enzymes products Laundry dishwasher and natural products presoaks (detergents powders gels options  Fabric with fabric  Laundry and softeners softener) cleaning (rinse-cycle product refills added)  Detergent with oxygen bleach Table 4.2. Cleaning Product Innovations from 1950s to 2000s. Source: SDA, 1994 Much like the soap industry, the synthetic household detergent segment remained extremely concentrated, with P&G, Unilever, Colgate-Palmolive and Purex together controlling 95% of the market in 1954, 90% in 1958, and 92% in 1963. Purex, considered the fourth largest in this segment at the time, only produced one light-duty detergent under the brand Trend. Other detergent manufacturers were Witco Chemicals, DeSoto (producing for Sears), and grocery chains such as A&P, Winn-Dixie, and Safeway. Private label producers of detergents were Armour Dial, Fels and Company, Los Angeles Soap Company, Church and Dwight, Beatrice Foods, Economics Laboratories, Darrell Industries, B.T. Babbitt, and Theobald Industries (Cox, 1976).

The detergent consumption in the US increased from 70 million pounds per year in the 1940s to 1.6 billion in the 1950s, when “detergents controlled a share of the laundry and dishwashing market three times that of traditional soaps” (Laux et al., 1997, p. 222). The rapid development of detergents led the Federal Government and the Association of American Soap and Glycerine Producers, which predates the Soap and Detergent Association (SDA), to investigate the environmental impacts of detergents in the early 1950s. At first, concern was related to the non-biodegradable molecular structure of the alkyl benzene sulfonate (ABS) surfactant in the synthetic detergent, which led to water contamination. Although US detergent manufacturers began to use biodegradable linear alkyl benzene sulfonate (LAS) molecular structures in 1965, synthetic detergent still provoked eutrophication due to its phosphate built (Advameg, 2015). Phosphates were used to improve

the washing efficiency and to reduce the raw material costs of detergents (Cox, 1976), however the addition of such nutrient to the water contributed to the growth of algae, which resulted in a decrease of oxygen levels in the water. Phosphate bans in some states and restriction in others encouraged the development of liquid laundry detergents without phosphates. These liquid laundry detergents gained popularity in the mid-1970s, and seized half the market by the end of the 80s (Advameg, 2015).

Initially, the leading soap and detergent manufacturers, P&G, Unilever, and Colgate- Palmolive resisted the non-phosphate trend enabling the entry of new detergent players. The products introduced by new players such as “Sear’s non-phosphate detergent, Beatrice Food’s Miracle White, and Church and Dwight’s powder marketed under the Arm and Hammer label were successful”, however none challenged the dominant position of the Big 3 (Cox, 1976, p. 44). Table 4.3, presented next, demonstrates the captured market share by the Big 3 along the 20th century.

Big 3 1931 1939 1940 1950 1966 1975 1976 1978 1991 2004 2011 2012 P&G (%) 40 40 34 57 47 53.9 53.3 55.5 60.4 58.4 59.3 80% Lever (%) 14 20 30 17 27 20.1 20.3 18.0 ------Colgate (%) 24 20 11 11 12 13.8 14.7 15.0 ------Total Market 78 80 77 85 86 87.8 88.3 88.5 ------Sales by Big 3 (%) Table 4.3. US Market Share in Soap & Detergent Industry. Source: Laux et al., 1997 & Steiner 2013 Other companies such as Dial and Darrel Industries also attempted to develop non-phosphate detergents, but were unsuccessful in their market entries (Cox, 1976).

Animal testing became a popular practice in the 1970s and 1980s as a method of research to identify the safety of detergent ingredients, and to determine possible human reaction and injuries. Through the initiative of animal rights organizations, such practice was diminished by 64% between 1980 and 1988 (Advameg, 2015).

4.1.3 Beauty Industry In general terms, the beauty industry encompasses products that are applied to the body to keep it clean and make it look more attractive. Such products include “bath and shower products, such as toilet soaps; deodorants; dental, hair care, and skin care products; colour cosmetics (including facial and eye make-up, and lip and nail products); fragrances; men’s grooming products, including shaving creams; and baby care products” (Jones, 2008, p. 125). Although there has often been a distinction between toiletries, which includes

toothpaste and shampoos, from cosmetics and fragrances, they are all intertwined under the concepts of toilet preparations or personal care (Jones, 2008).

A breakdown with the classifications within the Soap, Cleaning Compound and Toilet Preparation Manufacturing according to the North American Industry Classification (NAIC) and the Standard Industrial Classification (SIC) is depicted in Figure 4.1, which is presented next.

NAIC Code 32 NAIC Description Manufacturing NAIC Code 325 NAIC Description Chemical Manufacturing NAIC Code 3256 NAIC Description Soap, Cleaning Compound, and Toilet Preparation Manufacturing NAIC Code 32561 32562 Toilet Preparation NAIC Description Soap and Cleaning Compound Manufacturing Manufacturing NAIC Code 325611 325612 325613 325620 Soap and Other Detergent Polish and Other Surface Active Agent Toilet Preparation NAIC Description Manufacturing Sanitation Good Manufacturing Manufacturing Equivalent SIC 2841 2844 2842 2843 2844 Codes Specialty Soap and Other Perfumes, Surface Active Cleaning, Perfumes, Cosmetics, Detergents, Cosmetics, and Agents, Finishing SIC Description Polishing, and and Other Toilet Except Specialty Other Toilet Agents, Sulfonated Sanitation Preparation Cleaners Preparations Oils, and Assistants Preparations Figure 4.1. Classifications Within Soap, Cleaning Compound, and Toilet Preparations Manufacturing. Source: Elaborated from naicscode.com

A list of all other alternative titles used within Soap, Cleaning Compound, and Toilet Preparation manufacturing is depicted for reference in Figure 6.1, in the Appendix.

The perfumery segment is worth mentioning along with the soap industry as in the 19th century, it was “sometimes a subsidiary branch in the great soap establishments… Under the general head of perfumery are grouped a great variety of articles for toilet use, such as cosmetics, pomades, toilet powders, oils, depilations, dentrifices, sachet powders, etc.” (Colgate, 1895, p. 426). The perfumery industry had little importance during the establishment of the American colonies since colonists were primarily concerned with securing elements critical for survival. Consequently, the perfumery and cosmetics industry only began to gain relevance once the confederation was formed. Much like the soap industry in the early history of the United States, it also took many years for the perfumery industry to shift from a house-hold task to a professional industry activity. Even though perfumery articles mainly came to the United States from England or France some products were home- made (Colgate, 1895).

In 1847, the main perfumery manufacturers in New York were: “Thomas Jones, John Lindmark, Levi Beals, John Wyeth, Johnson, Vroom & Fowler, James Mackey, John Ramsey, William White & Company, Robert Reed, and John B. Breed. The French households that participated in the market were J. M. de Ciphlet, F.F. Gouraud, August Grandjean, and Eugene Roussel” (Colgate, 1895, p. 427).

Until the mid-19th century, most people smelled unpleasant. Bathing was uncommon in western societies as people had developed “a widespread aversion to washing with water which became prevalent during the outbreaks of bubonic plague in the middle ages” (Jones, 2008, p. 127). The initial development of the beauty industry, which accompanied the rapid urbanization of the United States, the population’s growing concern about hygiene and health care, and their changing diets, resulted in a shift of values and habits. Washing became routine since personal cleanliness became an indicator of “moral, social and racial superiority” (Jones, 2008, p. 127). As a result, American companies that previously focused on producing laundry soap, a small segment of the tallow-candle trade, began to manufacture toilet soap, which was previously considered part of the perfumery industry and had been centered in France (Jones, 2008, p. 127).

The production of the perfumery and cosmetics in the US industry grew in the second half of the 19th century as demonstrated in Table 4.4, presented next.

Material Value of Year Establishments Employers Wages Capital Consumed Product ($) ($) ($) ($) 1860* 33 535 … 597,000 … 1,222,400 1870 64 727 260,415 1,172,900 892,219 2,029,582 1880 67 741 238,259 813,827 1,201,409 2,203,004 1890 157 1,755 877,679 … 2,128,420 4,630,141 *Statistics for this year include manufacture of fancy soap Table 4.4. Perfumery and Cosmetics (1860-1890). Source: Colgate, 1985, p. 427 In 1894, the value of imports was $427,850, and still surpassed the value of exports, which was only $327,835 (Colgate, 1895, p. 427). By 1895, the most prominent American companies in the Perfumery and Cosmetics industry were “Colgate & Company, Lundborg, Lazell, Dalley & Company, Theodore Ricksecker, Solon Palmer, Alfred Wright, E. W. Hoyt & Company, Lanman & Kemp, and Frederick Stearns & Company” (Colgate, 1895, p. 428).

In 1915, retail sales of cosmetics and toiletries totaled only $45 million. In 1920 it had risen to $129 million, in 1930 to $340 million, in 1950 it had reached $840 million, and

51 continued to increase throughout the second half of the 21st century. Three types of players were active in the beauty industry. The first group consisted of large consumer goods companies, primarily Procter & Gamble, Colgate-Palmolive and Unilever. The second group was made up of pharmaceutical companies, especially those in the Over-the-Counter (OTC) business. The third group contained specialty color cosmetics, skin care, and hair care firms. This group was populated by numerous smaller firms such as Max Factor and Helena Curtis. In 1954, it was estimated that 750 firms competed in the US cosmetic industry alone (Jones, 2008).

While toilet soaps had initialized the globalization process of the beauty industry prior to World War II, the international expansion fueled by post-war growth along with the spread of the American cinema, diffused the American ideals of hygiene and beauty world-wide. After World War II, the United States emerged as and remained the largest beauty market in the world. The size of the beauty markets are depicted in Table 4.5, presented next.

Years 1950 1959 1966 1976 North America 589 1,270 2,455 6,000 (e) USA 560 1,184 2,430 5,670 Europe 287 543 1,600 4,740 France 62 105 430 972 Germany 62 132 350 1,586 Great Britain 58 124 290 581 Italy 57 84 240 553 Scandinavia 14 21 58 … Australia and New Zealand 15 32 66 214 Asia (excluding Japan) 30 82 … … India 16 37 … 74 Indonesia 6 10 … 90 Japan 24 112 285 1,957 South America 61 80 … … Brazil 28 38 … 372 Argentina 18 24 … … Africa 12 18 … … South Africa 7 11 … 141 Nigeria … 8 … 49 ‘World’ ($ nominal) 1,026 2,173 5,200 15,000 (e) ‘World’ (Constant $ 1976) 2,422 4,248 9,131 15,000 (e) Notes: a) Data are for manufacturers’ shipments, not retail sales, and exclude toilet soap. Communist countries are not included. Pounds and yen converted to US $ at the then current exchange rate. Table 4.5. World Beauty Market in 1950, 1959, and 1976 ($ Million). a Source: Jones, 2008 Despite the large US domestic market, potential global growth in the beauty industry was appealing as “technology appeared basic, fixed capital requirements were limited, and the industry was highly fragmented” (Jones, 2008, p. 133).

The large consumer goods companies began a rapid globalization process in the beauty industry through toilet soaps, toothpaste and shaving creams. The market share for the main companies in the global dental markets in 1959 is depicted in Table 4.6.

Country Total Colgate- Unilever P&G Bristol Beecham Market size Palmolive (%) (%) Myers (%) ($ Million) (%) (%) United 167 30 19 20 n. a. n. a. States UK/Ireland 23 27 32 9 n. a. 19 Germany 19 16 14 n. a. n. a. n. a. France 8 40 31 n. a. n. a. n. a. Denmark 2 42 13 n. a. n. a. 20 Brazil 9 21 9 n. a. n. a. n. a. Thailand 2 82 n. a. n. a. 9 n. a. India 11 17 2 n. a. n. a. n. a. Phillipines 4 96 n. a. 4 n. a. n. a. Australia 6 56 12 n. a. 17 n. a. South 3 51 18 n. a. 11 n. a. Africa Table 4.6. Market Shares in Selected Dental Markets in 1959. Source: Jones, 2008 Although Colgate’s dominance in the US market was ended with the introduction of Crest, which came to control and hold about 40% of the market, “by the 1970s, Colgate-Palmolive sold around one-third of the world toothpaste outside Japan and the Communist countries, while Unilever and P&G sold a further one-fifth each” (Jones, 2008, p. 137).

The hair care market was less oligopolistic and more volatile than the toothpaste market. The global market share of the leading firms in the shampoo markets in 1973 is shown in Table 4.7.

Firms Colgate-Palmolive Unilever P&G Beecham L’Oreal (%) (%) (%) (%) (%) Europe 7 12 2 9 15 North America 4 --- 21 ------Latin America 9 33 2 2 11 Africa 13 15 --- 7 --- Asia (except Japan) 17 40 --- 1 1 ‘World’ 6 8 12 4 6 Note: ‘World’ excludes Communist countries and Japan Table 4.7. Share of World Shampoo Markets in 1973 by Leading Firms. Source: Jones, 2008

The globalization of beauty was much smoother in toiletries than in cosmetics. The cosmetics industry faced several challenges in becoming globalized. A large degree of competition was present in the developed markets, and large investments were required to

53 educate consumer in how to use the products in the developing markets. Although the prestige of the United States and the influence of Hollywood strengthened the American concept of beauty post-World War II, by the 1970s, “cosmetics firms were more inclined to use local models and make other local adaptations than [they had been] three decades previously, but [this] practice differed widely between firms, markets, and price ranges” (Jones, 2008, p. 141).

Unilever was the first mover to diversify into cosmetics in 1947, however, the consolidation of the cosmetics industry intensified in the 1960s with the merger and acquisition of cosmetic companies by other cosmetic players, consumer products firms, pharmaceutical companies, and conglomerates. Most of these, however, were only temporary affairs and resulted in divestures since the mass-marketing and manufacturing capabilities of most firms failed to transfer to the industry that highly valued creativity and fashion. Table 4.8, presented next, shows the mergers and acquisitions, and divestures of cosmetics firms between 1947 and 1980.

Table 4.8. Mergers and Acquisitions of Cosmetics Firms, 1947 - 1980. Source: Jones, 2008, p. 146

By the 21st century, leadership in the cosmetics industry was shared between firms that had originated in cosmetics and hair care, and a few consumer goods companies, “especially P&G and Unilever, which belatedly developed the capacity to acquire and integrate businesses in skin and hair care and cosmetics” (Jones, 2008, p. 150).

4.1.4 Personal & Household Care Industry Soap and detergent manufacturing, and the beauty industry have become recognized as part of a broader category of products known as the Personal & Household Care Industry. The Personal Care Industry has become very concentrated with P&G, Unilever, Colgate- Palmolive, and Dial controlling 63% of total industry value added in 1992. The control of these four largest firms in the industry was even greater in the laundry detergent and traditional soap bar submarkets. In 1992, the largest 20 companies controlled 85% of the personal care industry, and the top 50 companies controlled 91%.5 As a matter of fact, these largest 50 companies controlled 24% of the U.S. total value added for manufacturing independent of the industry (UO/E, 2000).

In the 1990s, the personal care industry has been greatly influenced by the changing age composition of the population and the desire for age sign concealment. While the group that contributed to the highest amount of sales was women between 45-54 years old, companies also specifically targeted children between the ages of 4 and 12 due to their power in influencing the purchase decision of parents. The increased awareness of germs and skin problems also helped improve sale of personal soaps.

Even though traditional brands such as Dove by Unilever, Dial by Dial Corporation6, and Irish Springs by Colgate-Palmolive had the largest share of the toilet soap market in the US, smaller companies found niche markets they could explore introducing specialty soaps. Soap production is not considered a high-technological endeavor, and there are no unsurmountable constraints that would keep small and medium-sized soap producers from establishing their own physical infrastructures (UO/E, 2000). Census data indicates, however, that since 1998, the number of small, medium, and large size firms in the United States have decreased as depicted in Table 4.9.

5 The revenues from the largest personal care companies in the world in 1950 and 1977 are shown in Table 6.1, and Table 6.2, respectively, in the Appendix. 6 Henkel AG acquired the Dial Corporation and the Dial Soap in 2004 (Bloomberg, 2005).

NAIC Code 3256 NAIC Description Soap, Cleaning Compound, and Toilet Preparation Manufacturing Total Firm Employment Size Annual Payroll Year <100 100-499 500+ ($1,000) Number of Firms 1998 2016 147 136 4,910,181 1999 1950 149 132 4,903,968 2000 1935 141 127 5,148,645 2001 1887 138 116 5,040,724 2002 1869 133 111 4,895,056 2003 1811 146 112 4,989,449 2004 1825 138 111 4,997,663 2005 1833 139 107 5,022,329 2006 1819 130 108 5,223,137 2007 1795 123 105 5,354,573 2008 1791 136 98 5,650,079 2009 1734 120 105 5,174,752 2010 1772 120 104 5,264,230 2011 1786 119 103 5,359,340 Table 4.9. Evolution of Total Firm Size and Payroll in Soap & Detergent Industry in the US (1998-2011). Source: Compiled from http://www.census.gov/

Besides the reduced number of companies in the industry described as small, medium, and large sized, the total number of the soap and detergent firms, the total amount of establishments, and the total number of contracted employees by the trade has also decreased from 1998 to 2011. The total annual payroll, on the other hand, has overall increased (census.gov).

In 1998, The Personal Care industry in the US consisted of $4.4 billion in laundry detergent sales, $2.3 billion in skin care sales, and $2.2 billion in personal soap sales. The personal soap segment includes bar soap, body wash, and liquid hand soap (UO/E, 2000).

Supplier consolidation along with the development of new technologies that capture consumer purchasing patterns and behavior has enabled retail to experience increased power over soap and detergent manufacturers. “Procter & Gamble, Unilever, and Colgate, divested much of their chemical capabilities, [and] they are turning to raw material suppliers to provide chemical expertise” for new product innovation that will boost sales (UO/E, 2000, p.10).

A list of the ten largest global companies in the Personal Care and Home Care Industry in 2012 is presented in Table 4.10.

Ranking in Ranking amongst 250 Net Sales, 2012 Name of Company Country Product Sector largest companies ($ million) The Procter & 1 5 US 84,167 Gamble Company Netherland / 2 7 Unilever 66,007 UK 3 20 L’Oreal France 28,889 4 31 Henkel Germany 21,233 5 32 Kimberly-Clark USA 21,063 6 45 Colgate-Palmolive US 17,085 7 46 Kao Corporation Japan 16,268 8 51 Reckitt Benckiser UK 15,165 9 63 Svenska Cellulosa Sweeden 12,623 10 67 Maxingvest Germany 12,357 Table 4.10. Ten Largest Companies in Personal Care and Home Care Products in the Global Market, 2012. Source: Deloitte, 2014 More than half out of the ten largest players have had their early origins in the soap and detergent Industry. These companies include: P&G, Unilever, Henkel, Colgate- Palmolive, Kao Corporation, and Maxingvest through Beiersdorf.

4.2 COLGATE HISTORY

4.2.1 Antecedents Robert Colgate was a Deacon at the General Baptist church, and the son of a Baptist Minister, Stephen Colgate. When Robert was 18 years old, the American colonies signed the declaration of independence in 1776, and made twenty-eight charges against the King of England, George III, who they deemed a tyrant unfit to rule. Robert Colgate supported the American colonies in their struggle for freedom. Later, he manifested his support for the French Revolution, which started with the storming of the Bastille in 1789. By this time, Robert Colgate had become an influential man and openly advocated for political and religious freedom (Hardin, 1959).

The imprisonment and death by guillotine of the French Monarch, Louis XVI, in 1793 made other European kings uneasy of a spread rebellion (Hardin, 1959). In 1795, the Tory party that controlled the government made a list to punish a few men, considered dangerous to England, through imprisonment or death. Although Robert Colgate headed the list, he received a secret message from William Pitt the Younger, a long-time friend who had come to power in the British Parliament, informing Robert that the charges would not be

57 prosecuted and that he would escape punishment should he leave the country within two weeks (Everts, 1881).

To avoid the hardships that his family would have endured had he stayed in England, Robert Colgate sold everything he owned in England and sailed to America with his wife and four children. The oldest son was William Colgate, a twelve-year old boy, born on January 25th, 1783. Robert Colgate purchased a home in Maryland; however, after two years he discovered that the deeds to the land he had purchased were fraudulent, and thus lost the farm along with all of his possessions. Robert moved to West Virginia to attempt farming, but lacking success, returned to Maryland where he entered into a partnership with Ralph Mather in the manufacture of candles and soap in 1800. William Colgate, who was 17 years old, was first introduced to the candles and soap business. After two years, Robert dissolved the partnership and moved to the state of New York to join his widowed sister and her five small children (Hardin, 1959).

William Colgate remained in Baltimore, financially supported by his Aunt Mary Colgate Boorman and went into business in the soap manufacturing trade by himself for another year. He then decided to head to New York City, a larger city where he believed better opportunities existed and that would enable him to better earn his own living. Upon William’s arrival in 1803 at New York City, which had a population of 78,000 people, the twenty-year-old man attempted to obtain a job with local candle and soap makers (Hardin, 1959, p.47). Even though there was no vacancy in the largest tallow-chandler establishment in the city, Mr. Slidell was captivated by William Colgate and offered him the position of an assistant clerk in John Slidell & Co at 50 Broadway. Despite the need for a job since he had no money, credit or friends, William politely turned down the job explaining, “I desire, sir, to learn the business. I wish to work to earn a living for myself. Anyone can assist a clerk, but I wish to know how to work” (Everts, 1881, p.49). Mr. Slidell was so surprised by the young man’s frankness and ambition to work, that he requested his foreman to “give this man work. Show him everything about the business” (Everts, 1881, p.51). Even though the salary was small, within three years William Colgate had worked in manufacturing and sales, became the company’s principal manager and an expert in the business (Everts, 1881).

4.2.2 First Generation In 1806, William Colgate decided to open his own company located on 6 Dutch Street. William would work all day and would spend most of the night stirring the soap mixes in small kettles (Hardin, 1959).7 His biggest customers were the house-wives; however, they were also his main competitors since soap-making was a house-hold activity (Hardin, 1959). At the time, “at least 75 percent of the soap used was home-made” (Sims II, 1956, p. 9). The house-wives would store fat and eventually roll it into soap balls with little scent (Hardin, 1959). The soap William produced was better than the soap produced by the house wives since it could be cut into a uniform size, had the addition of a sweet fragrance, and was mild for the hands. Many people in town acknowledged the good quality of William’s soap, which obtained quick recognition. William Ward, a cloth manufacturer, attested that the soap made in 6 Dutch Street was “quite superior to any soap [he had] ever used in this country, and quite equal to the best [he had] ever used in England” (Hardin, 1959, p.51). The word quickly spread about the young man who besides manufacturing a good soap also provided an excellent service (Hardin, 1959). William would often deliver the soap bars to the customer’s house (Colgate.com, 2015), an “unheard of service in those days”, which became one of the “unusual policies he had decided upon for his small company” (Sims II, 1956, p. 9). As he recalls, “It may have cost me double my profit on that first sale to make the delivery, but I won a good customer, and have kept him ever since” (Sims II, 1956, p. 9).

William Colgate was considered an integral and honest man, and one of his first acts when he began to earn money in New York City, was to pay his father’s debts and buy his father a farm in the State of New York. In order to help his father financially, he signed a partnership with Francis Smith in January 1st, 1807 to share the business in exchange for an advanced capital of $700. By 1813 the business had grown to such an extent that William was capable of buying Francis Smith’s shares for $1,000 with an understanding that Francis would not make soap or candles in New York City for the next three years. Colgate then invited his brother Bowles into a partnership (Hardin, 1959). A genealogy tree of Colgate family members who participated in the company history is shown in Figure 4.2.

7 “A normal working day was 12 to 15 hours then, but William Colgate worked even longer hours” (Sims II, 1956, p. 9).

Figure 4.2. Colgate Family Members who Worked at Colgate Company. Source: Hardin, 1959 & Moody’s

The William Colgate & Company grew quickly along with the growing country (Hardin, 1959). William built new buildings for his business on 8 and 10 Dutch Street and rented other buildings in William Street (Foster, 1975). In 1812, when the Anglo-American War started, William Colgate was 29 years old, had accumulated a sizable fortune of $5,000 and obtained nearly undisputed control of the soap market (Hardin, 1959). During this year, William began producing starch at an extensive scale (Ingham, 1983). In 1820, William established a starch factory in Jersey City (Colgate.com), and “soon developed one of the largest factories in the country” (Everts, 1881, p. 53). Despite the large production of starch, William was not willing to further grow the starch segment in addition to the “constant enlargement of his original [soap] business” (Everts, 1881, p. 53). As a result, his “foreman and partner of this manufacture opened independently the starch business, first in Jersey City, and then in another city nearer the great corn-fields of the country, [and] gained a reputation as the largest-starch-manufacturers in America” (Everts, 1881, p. 53).

In 1838, Samuel, who was William Colgate’s son, opted not to attend college and immediately joined his father’s business at the age of sixteen. Samuel was made partner in 1843, the same year that Charles, who was Bowles Colgate’s son, entered the company. Charles was made partner in 1844 and the company ownership was divided into six equal stocks, where William and Bowles each controlled two parts and each son controlled one part. When Bowles passed away the following year, William invited another of his own son, Joseph, into partnership (Hardin, 1959).

Much like other American Soap manufacturers, Colgate had concentrated on producing laundry soap, yet, after Chevreul’s discovery of the principles of saponification in 1841, Colgate quickly began to produce “quality hand soaps” (Ingham, 1983, p.180).

In 1845, William, Samuel and Charles decided to expand their business creating a soap building pan with a capacity for 43,000 pounds, known as the “Colgate’s folly”. Many believed that the Colgates, who were considered visionaries, were bound to fail for reaching beyond their capabilities. The larger kettle, however, was a success and soon the increased volume became too small to meet demands. In fact, many New Yorkers visited Dutch Street simply to see the pan, which was the first of its kind in America. As a result of the accelerated growth, the company opted to move its manufacturing in 1847 to a larger location in New Jersey, on the west bank of the Hudson River, while the administrative offices and salesroom remained in New York City (Hardin, 1959).

4.2.3 Second Generation Upon William’s death in 1857, Samuel took charge of the company and along with Charles and Joseph, renamed the company from William Colgate & Company to Colgate & Co. The environment in which Samuel led the company was difficult since during the first year under his leadership, the US underwent one of the worst panics it had ever experienced with the financial crash of 1857. Although Wall Street made and lost millions, Samuel Colgate led Colgate & Co. through sound judgment and a conservative basis, enabling the company to undergo continuous progress with an expanding domestic and international business. Samuel upheld the principles that his father, William, had infused in the company by conducting business with honesty, service, frugality and prudence (Hardin, 1959).

When Samuel took over, Colgate & Co.’s competition consisted of about 600 soap establishments in the country, all of which were considered small and employed an average of five employees (Hardin, 1959). Under Samuel Colgate, in 1866 the starch production was discontinued (Hardin, 1959) after a fire destroyed the plant (Schusteff et al., 2005, p. 1). The company also began manufacturing perfumes and essences, and introduced perfumed soap. In 1872 the luxury-line consisting of the “first milled perfumed toilet soap”, Cashmere Bouquet, was introduced and became one of the company’s first global successes (Colgate.com, 2015).

The company also produced tooth powders and toothpaste. In 1877, The Colgate Dental Cream, which was initially sold in jars, was developed and became another great success (Sims II, 1956, p. 11). In 1896, the Colgate toothpaste was amongst the first products to be successfully sold in collapsible tubes (Colgate.com, 2015), and “for eighty years, [since its introduction,] the Colgate Dental Cream was the largest selling toothpaste in the world” (Ingham, 1983, p.180).

During Samuel‘s presidency, Colgate & Company “became the largest soap manufacturer in the United States, marketing over one hundred different types of toilet soaps” (Ingham, 1983, p.180). The competition between Colgate and Procter & Gamble became more intense in the 1880s after P&G introduced its Ivory Soap in 1879. In the 1880s, P&G’s use of “new continuous-process machinery for the manufacture of soap, along with the development of a national advertising campaign and a network of sales offices to market its product” enabled it to overcome Colgate & Co. as the largest soap manufacturer in the United States (Ingham, 1983, p.180). Procter and Gamble’s rise “forced Colgate, along with other American soap manufacturers to build an integrated enterprise similar to Procter and Gamble’s and to engage in large-scale national advertising of their products” (Ingham, 1983, p.180).

Prior to Samuel’s death in 1897, the Colgate plant had 800 employees and eight boiling kettles, each one having a 600,000 pound capacity (Ingham, 1983, p.180). This demonstrates a much larger Colgate Company than the one in 1845, when Samuel, his father, and his cousin used a single pan withholding a capacity of 43,000 pounds (Hardin, 1959).

Samuel had also been selected by US Politician, Chauncey M. Depew, as a prominent figure in the American soap industry, and was asked to write a chapter about the entire soap- manufacturing field from 1795 until 1895 to celebrate One Hundred Years of American Commerce (Hardin, 1959).

Upon Samuel’s death, the leadership of Colgate & Co. transferred to the third generation of the Colgate family. Although Samuel Jr. never entered the soap trade as he opted to join the ministry, Samuel’s other five sons took over the business (Hardin, 1959).

4.2.4 Third Generation The oldest brother, Richard, became president because of his seniority in the company, however all brothers had an understanding that the five of them controlled the company equally. The five brothers divided their responsibilities by office titles, and maintained the tradition that William and Bowles had started in which problems were discussed every Tuesday at one o’clock, over a cup of tea or coffee. They made every possible effort to participate in the lunch together, a practice that remained over the years (Hardin, 1959).

Besides assuming presidency upon Samuel’s death, Richard led purchasing. Gilbert and Austen acted as vice-presidents and controlled manufacturing. Sidney acted as treasurer and was responsible for sales, distribution and advertising, while Russell became head of the office and personnel. The five brothers were known by the newspaper as the “Famous Quintet in American Business” (Hardin, 1959, p. 65).

When Colgate & Co. celebrated its centennial anniversary in 1906, it produced “more than 800 products, 160 different toilet soaps, laundry soaps, perfumes and other scented personal care products” (Colgate.com, 2015). To celebrate the success of the company, the brothers conducted the unusual act of renting the dining hall of the Grand Central Palace in New York City and closing their factories on January 20th, 1906 in order to offer a banquet for their 1,000 employees. This unusual activity attracted the attention of one hundred and seventy-nine newspapers that published the news in the following days. During the celebration, where employer, employees and their families sat together, Richard announced that the company would give every employee “a five-dollar gold piece for every completed year of continuous service”, a generous act that cost the company about $40,000 (Hardin, 1959, p.67).

At the banquet, Richard made a speech discussing the progress of the company’s growth and its values over its century of existence:

Things have greatly changed in one hundred years. Our methods of doing business, our methods of manufacturing, our methods of doing this work and that work have all changed, and we all rejoice in the change; but there is one change which I am thankful to say has not been made, and that is the old-fashioned, honest business methods of doing business that William Colgate founded…. We want to grow. We want to increase. We are all Americans – but we do not wish to grow or increase at the expense of honesty and uprightness and strict business principles. When our salesmen dispose of our goods, we wish them to tell the truth in regard to them, and not exaggerate. If a man is wrapping up a cake of soap at our factory we expect him, if he sees anything the matter with it, to throw it aside. If any one of the girls in the perfumery department is filling a bottle or putting on a label and that bottle is not full, is not as it should be, we expect it to be thrown aside. We wish to have honest goods. We will back up all that the salesman say in regard to them, and when we make out our bills in the office we expect to treat everyone alike, so that when a man receives his bill he can be absolutely sure that his next-door neighbor is not getting a cut price, or able to get our goods cheaper than he can get them (Hardin, 1959, p. 67).

Built on such principles, Richard states with pride that:

deep appreciation of the many kindness shown them in the past; therefore be it /Resolved, That the firm of Colgate & Company have been to us most considerate and exemplary employers; have been model members of the communities in which they did business; have been liberal in charities, and have been examples of Christian men in business; be it further /Resolved, That we extend Messrs. Colgate and Company our best wishes and trust that they will be as prosperous in the future as in the past (Hardin, 1959, p.69).

4.2.5 Incorporation In 1908, the five Colgate brothers incorporated Colgate & Co. and authorized $1,000,000 in capital stock (Moody’s, 1909). Although the company became publicly traded after 102 years run as a family business (Foster, 1975), the owners of all the capital stock were the directors, all of which were from the Colgate family (Moody’s, 1909). Table 4.11 lists the dates that each leader headed Colgate after incorporation in 1908.

1. Richard Colgate (1908 - 1919) 2. Gilbert Colgate (1919 - 1925) 3. Sidney Colgate (1925 - 1928) 4. Charles Pearce (1928 - 1933) 5. Samuel Bayard Colgate (1933 - 1938) 6. Edward Little (1938 – 1953; 1956 - 1960) 7. J.H. McConnell (1953 – 1954) 8. William L. Sims II (1955 – 1956) 9. George Lesch (1960 - 1970) 10. David Foster (1970 - 1979) 11. Keith Crane (1979 - 1983) 12. Reuben Mark (1983 - 2007) 13. Ian Cook (2007 - Present ) Table 4.11. Colgate Leadership since Incorporation. Colgate leaders have had an average term of 8.2 years since incorporation, yet there is a high variability in lengths of the terms.

Under Richard Colgate, who remained President for another 11 years after incorporation, the company moved its executive offices to New Jersey, where the manufacturing plants had been relocated to at an earlier date under William, Samuel and Charles Colgate. The show and sales room were retained in New York City (Hardin, 1959).

At one point, rumors started spreading that Colgate & Company was controlled by a foreign government, however, the five brothers immediately ended such stories since no one stepped forward to claim a reward of $1,000,000 offered for any evidence proving such statement (Hardin, 1959).

4.2.6 Early Internationalization During World War I, between 1914 and 1918, “Colgate allied with two other large soap and toiletry manufacturers and began a massive expansion into foreign markets. Colgate was one of the earliest multinational firms, establishing sixteen foreign subsidiaries between 1914 and 1933” (Ingham, 1983, p.180). The first international factory was established in Montreal, Canada, in 1914 (Colgate.com, 2015). Once Richard passed away, the company presidency went to the second eldest brother, Gilbert. Again, the brothers had an understanding that all shared equal control in the company’s management. The company continued to expand nationally and internationally. In 1921, Colgate & Co. opened a new plant in Clarksville, Indiana, to service the Midwest and increase the reach of its national operations (Hardin, 1959). Major international operations also began in 1921 in South Pacific and Asia, and in 1922 all across Europe (Colgate.com, 2015). In 1925, Gilbert assumed the newly created position of Chairmen of the Board of Directors, and consequently Sidney Colgate assumed presidency (Hardin, 1959). Under Sidney’s presidency, the company continued to extend its operations abroad, with the addition of operations in Latin America in 1925, and later in Africa in 1929 (Colgate.com, 2015).

Sidney Colgate had spoken at the centennial dinner in 1906 through a speech that demonstrated Sydney’s conservative values, yet with an enterprising spirit. During the dinner he had announced,

So let us put our hearts into it, and if our aim is high, the success is sure, and the good ship Colgate and Company will go on into the next generation and into the next century. Whether you live or whether I live, this ship is bound to sail on. We are stopping here this afternoon to adjust our compasses and compare them with the compass which we had – the founder of this concern. We have come here to adjust our compasses, but we must sail out into new seas and into untried conditions. Let us sail out with confidence, knowing that even in the terrific storms of business competition of the present day, this ship will sail on if we keep true to the compass that

has been set by the founder, and if the ship during the next century is manned by such a loyal and such a gallant crew, from captain down to the cabin boy, as I see present before me this afternoon (Hardin, 1959, p. 71). Even though Colgate advertising had begun as early as 1817, through postings on the newspaper that bid for domestic and international business (Foster, 1975, p. 9), Sidney established a well-devised, systematic and consistent advertising program for Colgate under his presidency. For years the advertising slogan was, “Truth in advertising implies honesty in manufacturing” (Hardin, 1959, p. 70). Under his leadership, Sidney grew the company under a conservative philosophy. According to him, “Conservation of assets was not inconsistent with profits. So whenever there is any doubt, we settle it by whatever conserves assets” (Hardin, 1959, p.71).

Much like William Colgate and Samuel, who had spent much of their time and money devoted towards civic, educational and religious purposes becoming influential figures in their communities, Gilbert and Sidney also assumed influential positions during the course of their careers. Gilbert had been the president of the American Perfumers’ Association while Sidney had been the president of the Association of American Soap and Glycerine Producers as well as president of the Cleanliness Institute. Furthermore, Sidney was also chairman of the War Service Commission of the Soap Industry during World War I (Hardin, 1959).

Colgate merged with Palmolive-Peet Company in 1928 and placed Palmolive-Peet’s president, Charles Pearce, at the helm of the combined company. Gilbert became director, and Sidney Chairman of the Board, however, Sidney passed away in 1930, and Gilbert in 1933. Russell remained a director of the company and a member of its board after the merger. Austen had died the year before the merger occurred. Despite going against the Colgate family’s wishes, the Colgate executive offices were transferred from New Jersey to Chicago, where the administrative offices of Palmolive-Peet were located. From the five brothers who led the company in the third generation only the youngest brother Russell lived to see the fourth generation of the Colgate family regain control of the company through the presidency of Sidney’s son, Samuel Bayard Colgate (Hardin, 1959).

4.2.7 The Palmolive Company B.J. Johnson Soap Company was started by Mr. Johnson in 1864 with the manufacture of soap, candles, and cheese in Milwaukee, Wisconsin (Foster, 1975). The company grew since its beginning and became one of the largest soap-producers in the Midwest. The founder’s son, Caleb Johnson, was instrumental in establishing one of the first

66 chemical labs in the US to test and develop new products for the company’s soap line. Palm- oil and Olive-oil were effectively combined to create a gentle soap made entirely from vegetable oils for the face and hands (Hardin, 1959). In 1909, the company purchased machinery for making hard-milled soaps (Sims II, 1956, p. 12).

The success of the product was further propelled by advertising campaigns promoted by Charles S. Pearce, then Sales and Advertising Manager, in national magazines, and through promotional coupons that encouraged the growth of the business (Foster, 1975). In the early years of the 20th century, the Palmolive Soap became the “largest selling brand in America” (Ingham, 1983, p.181). In 1913 it exported to England and within another few years to almost every country in the globe (Hardin, 1959), becoming the best-selling soap in the world (Schusteff et al., 2005). The strong recognition of the Palmolive soap product prompted a change in the company name from B.J. Johnson Soap Company to The Palmolive Company in 1916. Three years later, The Palmolive Company acquired another Milwaukee- based company, The Crystal Soap Company, known to produce the finest transparent toilet soaps. Due to the continued growth, The Palmolive Company became incorporated in Delaware and transferred its headquarters from Milwaukee to Chicago in 1923. It also began producing the Palmolive Soap in Paris in 1924 (Colgate.com, 2015).

4.2.8 The Peet Brothers Company The Peet brothers began their laundry-soap business in Kansas City in 1872 with an investment of five hundred dollars. William, Robert and Jesse made soap, cut them into pound bars, and travelled the countryside by horse and carriage selling their products from door-to-door. Their business quickly expanded, and despite suffering from a flood and later from a fire, the company became one of the largest soap producers in the West through the hard and honest work of the owners (Sims II, 1956, p. 12). At the time of the merger with the Palmolive Company, the Peet Brothers Company had a manufacturing plant in Kansas City and another one in Berkeley, California (Foster, 1975).

4.2.9 The Colgate-Palmolive-Peet Company Merger The merger of The Palmolive Company and The Peet Brothers in 1926 made strategic sense as it increased their geographical reach and production capability. Furthermore, although both produced toilet and laundry soap, The Palmolive Company had been specialized in toilet soap whereas The Peet Brothers Company had an emphasis in laundry soap (Hardin, 1959).

When Colgate & Company merged with Palmolive-Peet in 1928, Charles Pearce became president of the combined Colgate-Palmolive-Peet Company (Foster, 1975). The Colgate-Palmolive-Peet Company formed the second largest manufacturer of soap and toilet articles in the United States, with a business volume that increased by twenty-five times and obtained a combined total assets of the $63 million (Ingham, 1983, p.181). The merger enabled Colgate to have a “geographical spread of plant and warehouse to economically cover the entire U.S.” (Foster, 1975, p. 16).

At the time Colgate & Company merged with Palmolive-Peet Company, “Colgate had an annual sales of 42 million dollars on which it made net profits of 2.4 million. Palmolive-Peet had sales of 51 million dollars with net profits of a little over 5 million. A look at Procter & Gamble at that time shows sales of 156 million dollars or 68% larger than the new Colgate-Palmolive-Peet Company” (Foster, 1975, p.16).

4.2.10 The Great Depression In 1929, the National City Company, which was rival of J.P. Morgan, presented to The Colgate-Palmolive-Peet Company an idea to “set up a combine food and drug companies, both manufacturers and retailers, to carry certain standard products straight from the plant to the consumer” (Foster, 1975, p.17). The International Quality Products Corporation, as it would be called, would act as a holding for the companies that would continue operating independently (Schusteff et al., 2005). The Colgate-Palmolive-Peet Company would be at the nucleus of the trust, which would have a total combined asset exceeding $125 million. An agreement was reached and papers were signed to merge The Colgate-Palmolive-Peet Company with Kraft-Phenix Cheese Corporation, valued at $38 million and Hershey Chocolate Corporation, valued at $25 million. Meanwhile, negotiations to obtain a grocery chain, meat packer, and canning company had also begun. The deal was well regarded by the market, which raised Colgate’s shares from a low of $63 in May up to $90 in October 1929. Only a few days after the contracts were signed, the stock market crashed in what was the beginning of the Great Depression. The Colgate-Palmolive-Peet stocks decreased to $40 a share and despite a small recovery when the company listing was transferred from the Curb to the New York Stock Exchange, the stock price eventually dropped to $7 a share. With the crash, the companies did not exercise their stock options, which expired, and the holding was not formed (Foster, 1975).

The crash reshuffled the leadership of The Colgate-Palmolive-Company, and Charles Pierce, who had been the President since the merger in 1928 became Chairman in 1933, while some of his management team resigned. The Palmolive-Peet management now had less than 10% of common stock and the Colgate family remained with 40% voting stocks (Foster, 1975).

At the age of 35, Samuel Bayard Colgate was elected President in 1933 (Foster, 1975, p.18). S. Bayard moved the executive offices back to Jersey City and was received with a banquet from the Chamber of Commerce. Eventually, due to the expanding business in Jersey City, the executive offices moved to New York City, where the company was received with a Certificate of Business Merit by the Mayor (Hardin, 1959). S. Bayard was President from 1933 to 1938 and expanded the operation of the company from $62 million to over $100 million. In 1938 he became Chairman of the Board, a position he held until 1952, when he became an honorary Chairman until 1959 (Ingham, 1983, p.181).

Other Colgate family members from the fourth generation were also present in the upper echelon ranks of The Colgate-Palmolive-Peet Company. Gilbert had two sons in the business, Robert B., who was the vice-president, and Gilbert Jr., who was a director of the Board and member of the Finance Committee. Richard’s son, Henry A. Colgate, was a director and member of the Executive Committee (Hardin, 1959).

Colgate-Palmolive-Peet Company only made two small acquisitions in the US between 1928 and 1960. The company acquired Kirkman Bros and Kay Daumit (Lustre- Crème Shampoo). During this era,

P&G made mergers to complement its conventional business (Duz, Spic & Span, American Family) moved into food (Duncan Hines, Big Top and Shortening) and into paper (Charmin). Colgate was, in fact, divesting itself of other U.S. interests. The Delawanna Company, making essential oils and synthetics was sold in 1928, so was the Troco Company, a subsidiary of Palmolive-Peet making nut margarine. The edible oil department, refining coconut oil into edible products, in Portland and Kansas City was disbanded and the land and plant sold (Foster, 1975, p.16). Overseas, The Colgate-Palmolive-Peet Company merged with the Cadum Soap Company in France, and with Bider-Ketels in Germany. The purpose of the European acquisitions was to add soap manufacturing facilities for the production of Palmolive Soap, not to acquire local brands. In fact, the only brand that remained after the European acquisitions was the Cadum Soap since it was the leading toilet soap in France. The Colgate-

Palmolive Company also set up new subsidiaries in Sweden, Italy, Poland and Switzerland (Foster, 1975).

4.2.11 World War II S. Bayard Colgate was President until 1938, when he was substituted by Edward H. Little, who became Colgate’s President, Chairman and Chief Executive Officer (Colgate.com, 2015). Edward H. Little joined Colgate in 1902 and attended the company’s 100th Anniversary ceremony in 1906; however, he left the company due to health issues. After becoming cured, Little joined B.J. Johnson Soap Company, which later became The Palmolive Company, The Palmolive-Peet Company, and then The Colgate-Palmolive-Peet Company (Sims II, 1956). He has also held the title of President of the Association of American Soap and Glycerine Producers (Sims II, 1956, p. 5).

In 1938, The Colgate-Palmolive-Peet management felt that a war with Hitler was imminent and only being postponed. With the concern that more vital supplies such as food and weapons would gain preference over its soap imports from Canada, the Colgate- Palmolive-Peet Company acquired Goodwin & Sons in order to produce the Palmolive Soap in England. Only one month after the war was declared, the acquired manufacturing facility began producing Palmolive Soap, which was the leading toilet soap in England (Foster, 1975).

Despite the physical capability to produce Palmolive Soap in the Goodwin & Sons plant facility, a soap rationing was soon imposed on the industry. The rationing restriction conferred licenses for the companies to produce soap according to the UK production of the previous year. So although Goodwin & Sons were entitled to produce an amount of its Brown Windsor and Monogram “G” toilet soap that accounted for 18% of the market capacity, the Palmolive Soap could not be produced. It received no quota as it was an imported product from Canada. This limitation would have caused the Lux soap brand by Unilever to take over the market. As a result, Colgate-Palmolive-Peet took the case to the House of Commons and successfully included imports in the quota restriction (Foster, 1975).

The war took its toll on the Colgate-Palmolive-Peet plants. One of the first German bombs destroyed the Colgate Dental Cream factory in London. The company was able to start producing again six months later in other rented premises that eventually became the British headquarters. A retaliation air strike by the British Royal Air Force in 1941

70 demolished the Palmolive-Ketels soap plant in Hamburg. The Hamburg plant was later reconstructed by the company’s own employees (Foster, 1975).

Sales in Europe after World War II flourished. Palmolive Soap had remained a market leader, while other Colgate products obtained market leadership in their respective categories due to good advertising and promotion. Such products included “Colgate Dental Cream, shave creams, Ajax cleanser, powdered detergents, liquid cleanser and toilet articles” (Foster, 1975, p. 21). Although prior to World War II the Palmolive Soap was Colgate’s main product, “it was Colgate Dental Cream and Powdered Detergents that dictated new subsidiaries and new plants in the Fifties and Sixties” (Foster, 1975, p. 22).

Four major plants in Manchester, Hamburg, Anzio and Compiegne along with another plant in France and other smaller plants in Denmark, Switzerland, Spain, Greece, Belgium, Portugal, and Ireland supplied products to all of the countries in Europe. New plants such as the ones in Malaysia and Thailand were not even designed to produce Toilet Soap. Consequently, whenever the production of Palmolive Soap or other brands were desired, the company would contract local soap producers (Foster, 1975).

After World War II ended in 1945, detergent substituted soap in the industry, and the leadership gap between Procter and Gamble and Colgate-Palmolive-Peet, which was slow to adjust, increased (Ingham, 1983, p. 181). Colgate’s best known products after the end of WW II were the Fab detergent and Ajax Cleanser, introduced in 1947 (Schusteff, 2005). Furthermore, in 1955, P&G released its Crest toothpaste that included fluoride ingredients and obtained endorsement from the American Dental Association in 1960. Crest toothpaste became America’s bestselling toothpaste and ended the 80 year consecutive leadership Colgate had held with its dental cream (Ingham, 1983, p.181).

In 1953 the company opted to shorten its name in a stockholder meeting from The Colgate-Palmolive-Peet Company to The Colgate-Palmolive Company. In a 1956 speech addressing 150 years of Colgate and the future, President Sims II, notes:

There are 29 subsidiaries and three branches in 32 foreign countries, and another 100 countries are supplied by our export departments in the United States, Canada, England, France, Australia, and New Zealand…our subsidiaries have a great deal of autonomy. Each company handles its financing, purchasing, production, sales, advertising, administration, director’s meetings and declaration of dividends. It is like being in business for themselves. We give them the rules of the game and they play it. Our contacts are mostly to make suggestions and to assist in planning the budget and the sales and advertising programs…. These companies are self-

sustained and separately incorporated – usually under local laws… [and with] general managers who are native to the country… The operation is as close to being completely ethnic as possible (Sims II, 1956, p. 16). In 1957, The Colgate-Palmolive Company employed 14,700 employees in foreign plants and 9,200 employees in the United States. It attained global sales of $507 million composed of 53% from domestic and 47% from foreign sales. “The sales of synthetic detergents, dental cream, and toilet articles, [was] greater than those of soap” (Hardin, 1959, p.77).

4.2.12 Period of Diversification George Lesch became President of The Colgate-Palmolive Company in 1960 (Colgate.com, 2015), when the world-wide sales were $576 million. US sales and earnings had declined and now accounted for 47% of global sales (Foster, 1975, p.23). It was expected that through his international experience, Lesch would be able to improve the condition of the domestic operations. Lesch faced the task to build a stable set of new products in order to compensate for the decline of the company’s traditional merchandises.

Under Lesch, in the 60s, the company began a comprehensive new product development program that launched brands such as the “Cold Power Laundry detergent, Palmolive dishwashing liquid and Ultra Brite toothpaste” (Schusteff et al., 2005, p. 2). In order to help increase the pace of new product innovation, a state of the art global research center opened in New Jersey in 1962 (Colgate.com, 2015). In 1963, Colgate-Palmolive also successfully introduced a food wrap called Baggies in an attempt to diversify beyond their traditional and competitive business, and into other segments (Schusteff et al., 2005). The company reached the 1 Billion sales mark in 1967, with sales that grew between 8-9% annually throughout the decade under Lesch’s leadership (Schusteff et al., 2005).

According to David Foster, who assumed presidency in 1970 and became the CEO in 1971,

Franchises of market leaders like Palmolive Soap, Ajax Cleanser and Colgate Dental Cream had received severe setbacks, caused by better competitive formulations… and some particularly serious blunders on part of our marketing and advertising people. We had no new products, and if we had, any investment in them would have come straight out of the now declining profits… To afford them, and to reverse the earnings trend, cost savings had to be made and task forces were formed to look at every aspect of our business. Risks were weighted and then taken. Formulations, sacred for years, were changed. Suppliers were asked to set up joint research programs to seek out new compounds that could cut costs or, more importantly, build new products that would answer new consumer needs… New Product investment funds were built from these cost-savings, first here

in the U.S. and later abroad when it was seen that new products were desperately needed there as well. New product groups, reporting directly to the general manager, were set up in all large and medium-sized subsidiaries. New U.S. products like Ultra Brite, Ajax Cleaners, Palmolive Liquid, Colgate Dental Cream with MFP, and Cold Power were adapted to foreign markets, and even their advertising went with them (Foster, 1975 p.24). A few acquisitions were made in the 1960s in order to complement the line of products of the Associated Products Division. The Colgate-Palmolive acquired “Sterno Canned Heat, pre-moistened towelettes from Canaan Products and Reefer-Galler moth chemicals” (Foster, 1975, p.24). Colgate-Palmolive further acquired Lakeside Laboratories to enter the drug market, however it was not capable of developing it successfully due to its limited size and scope, and sold it in 1974, while the purchased Wildroot Company “died on our doorstep” (Foster, 1975, p.24). According to Foster,

It was obvious, in the seventies, that in the U.S. many of our conventional categories, like toilet soap, toothpaste and detergents, were not going to grow much faster than population or new home growth. They had reached an in-home incidence that could not be increased. Also, in these and other conventional categories, we came up against P&G and there is no denying its marketing and technical ability. We knew we had to grow faster than population growth in the U.S. to achieve our goals. We would maintain our high level of activity on internally produced new products, but we would look at broadening the base of our consumer-oriented business by several well-chosen acquisitions (Foster, 1975, p.24). During the 70s, a widespread environmental concern over the phosphates and enzymes present in detergents also encouraged Colgate-Palmolive to diversify its business beyond detergents. “Foster instituted a strategy that emphasized internal development via a specialized new venture group; joint ventures for marketing other companies’ products; and outright acquisitions of business in which Colgate could gain a marketing advantage over Procter & Gamble” (Schusteff et al., 2005, p. 2).

In 1971, Colgate-Palmolive “began selling razor and blades from the British Wilkinson Sword company” (Schusteff et al., 2005, p.2). In 1972 The Colgate-Palmolive Company introduced Irish Spring deodorant soap (Schusteff et al., 2005), and acquired The Kendall Company of Boston that made “hospital products, bandages, non-woven fabrics, sporting goods, textiles and tape coatings for industrial piping”(Foster, 1975, p. 24). In 1973, the company acquired Helena Rubinstein, “one of the four internationally based U.S. cosmetic houses, with its accent on skin treatment lines” (Foster, 1975, p. 24). President Foster described,

Our next objective was to get into the participant sports field, just as Kendall, with subsidiaries in Southern Atlantic, Nelson Knitting, Bike and

Victoriaville Hockey Sticks took us into team sports. We started with golf and acquired Craigton, Penfold and Morton-Knight in the United Kingdom to give us a complete range in the United Kingdom and Europe. Next we looked to the United States market and RAM became our golfing partner here. Tennis was the next obvious consumer sport to enter and last year [1974]; we reached an agreement with the Bancroft Racquet Company (Foster, 1975, p.25). Besides Kendall, another major acquisition was Hill’s Pet Nutrition (Colgate.com, 2015), a subsidiary of the acquired Riviana Foods Inc.

Although Foster’s diversification initially improved company earnings, US sales, market share and profit margins began to slow by the end of 1974 resulting primarily from an economic recession and advertising cuts. Table 4.12 displays the yearly decrease of Colgate- Palmolive’s advertising to sales ratio. The advertising to sales ratio of the direct competitors is included for reference.

Year P&G Lever Brothers Colgate-Palmolive Sales Weighted Average (%) (%) (%) (%) 1965 10.9 19.7 23.8 13.9 1966 10.9 18.4 22.4 13.4 1967 11 17 22.3 13.3 1968 10 14.8 23.7 12.5 1969 9.2 12.6 23 11.4 1970 8.3 12.4 22.4 10.6 1971 7.8 13.4 20 9.9 1972 7 12.3 12.1** 8.4 1973 6.3 12.4 12.2 7.7 1974 5.5 12.7 4.5* 5.7 **The decrease here was due to a large increase in sales because of Colgate’s acquisition of Kendall Company *The decrease here was by corporate design Table 4.12. Firm Advertising to Sales Ratio (1965 - 1974). Source: Cox, 1976, p. 50 Colgate’s expenditure in advertising in absolute terms was also lower than that of P&G, which was the leading advertiser in the United States in 1974, with a total expenditure of $325 million (Cox, 1976, p. 49).

According to Schusteff et al. (2005: 3), “Colgate was consistently losing the marketing battle in personal care products to Procter & Gamble. It had no leading brands and few successful new product introductions because of reduced spending for research and development”. New products created to fulfill local needs in Europe, Latin America, and Asia, however, enabled Colgate-Palmolive to retain its leadership abroad (Schusteff et al., 2005).

Table 4.13 presented next, shows the research and development expenditure for the Big 3 in the Soap and Detergent Industry. Colgate-Palmolive spent in research an amount similar to Unilever, yet seven to ten times less than Procter & Gamble.

Year P&G Lever Brothers Colgate-Palmolive* 1968 22,290,000 3,945,594 3,769,200 1969 27,111,000 4,308,724 3,449,400 1970 30,532,000 4,304,651 4,140,100 1971 32,387,000 4,438,400 4,269,100 1972 42,847,000 3,940,964 5,011,600 1973 53,542,000 3,716,211 5,292,600 1974 51,788,000 3,101,974 --- *Colgate-Palmolive data are based on budget amounts rather than actual expenditures. Table 4.13. R&D Expenditures for Soap and Detergent Products, 1968 - 1974. Source: Steiner, 2013 In 1979, Colgate-Palmolive employed 56,000 employees world-wide with a sales of $4.5 billion. At this time, the company was a runner-up in sales leadership in the toothpaste, in the soap and detergents, and in the shaving cream segments, all behind P&G (Ingham, 1983, p.181). After successive market failures, acquisitions that yielded more losers than winners, and shortcomings with the Board of Directors, Foster was succeeded by Keith Crane (Schusteff et al., 2005).

4.2.13 Restructuring During the eighties, Colgate-Palmolive faced a few lawsuits. In 1981, the company had to pay United Roast $950,000 for violating terms in its marketing of United Roast’s soy bean snack. Furthermore, in 1982, the US Federal government sued Colgate for alleged job discrimination, in which Colgate had “failed or refused to hire people between the ages of 40 and 70 since 1978 and had also deprived employees in that age group of opportunities for promotion” (Schusteff et al., 2005, p.4).

Under Crane, Colgate-Palmolive sold many of the acquisitions Foster had made. Crane sold the Hebrew National Kosher Foods, Ram Golf, and Bancroft Racket Company, the Mission Hills Country Club, and ended other sporting sponsorships.

Crane quickly instituted a new management structure consisting of several group vice-presidents, reunited all domestic operations under one group, and realigned division managers in an attempt to promote a more cohesive organization. Consumer advertising and product research were given renewed emphasis to support the company’s basic detergent and toothpaste lines (Schusteff et al., 2005, p. 4). Although his advertising emphasis for major brands temporarily improved market share, it negatively affected all other products that had received no attention. The focus on product

75 research was also harmed as new products never made out of the test market stage. Crane was succeeded by Reuben Mark, who became President in 1983 (Schusteff et al., 2005).

During the mid-1980s, Colgate began a turn-around process, as it envisioned itself as “…the best truly global consumer products company” (Colgate.com, 2015). Colgate decided to achieve this goal by focusing on its core categories. Although the company regrouped its business into three groups in the late 1980s and into two groups in 1990, it was only in 1997 that it redefined its business segments into the ones that still exist today: Oral Care, Personal Care, Home Care; and Pet Nutrition (Colgate.com, 2015).

The business units were also organized so that key executives would manage them and address product development plans in domestic and international markets within the major categories (Schusteff et al., 2005). In all segments but Pet Nutrition, Colgate competed on a geographic basis, with regional managers responsible for the financial results in each of four operating divisions: North America, Latin America, Europe, and Asia/Africa. Pet Nutrition, however, competed on a worldwide basis (Annual reports).

Colgate also developed a “comprehensive global training program that addresses every functional aspect of [the] business”, and implemented other programs that recognize values, innovation and achievements of its employees around the world (Colgate.com, 2015). Reuben Mark emphasized employee motivation and involvement in the decision making process along with other initiatives to reduce production cost and improve new product development. Colgate-Palmolive enjoyed first-to-market with its gel toothpaste, a pump-type dispenser, and with the introduction of a Palmolive automatic dishwashing liquid. It further gained market share “with new and improved versions of its Palmolive and Dynamo detergents and Ajax cleaner” (Schusteff et al., 2005).

The company continued to expand in the late 1980s and in the 1990s through some acquisitions directly related to its main categories. It engaged in a joint venture with the Hong Kong Company, Hawley & Hazel in 1985, and acquired it in 1990 (Colgate.com, 2015). Hawley & Hazel, however, had a toothpaste brand called Darkie that portrayed a black-faced caricature in its logo. To avoid further complications with activists who criticized Colgate- Palmolive for racism, the company changed the brand name to Darlie and altered the logo (Swasy, 1993, p. 264).

In 1987, the company acquired the Softsoap brand and liquid soap business from Minnetonka Corporation. In 1988, Colgate-Palmolive acquired the French manufacturer, Cotelle S.A., which produced liquid bleach and other household products, as well purchased Klorin, the Scandinavian leading producer of bleach (Colgate.com, 2015).

In 1988, Colgate-Palmolive sold-off its Kendal subsidiary and other health related businesses to focus on its global consumer products. The sale enabled the company to engage in new related investments including the acquisition of Vipont Pharmaceutical, which manufactured oral-hygiene products. Colgate-Palmolive remained behind Procter & Gamble in the toothpaste segment, yet it captured 40% of the global toothpaste market share (Schusteff et al., 2005).

In the 1990s, while Colgate-Palmolive attempted to boost its new product development program that delivered a few new products every year, the company performed some major acquisitions. In 1990, Colgate-Palmolive acquired Javex bleach in Canada. Mennen Company was acquired for its leading deodorant and antiperspirants brand such as Speed Stick. In 1991, Colgate acquired Murphy Oil Soap. In 1993, Colgate acquired S.C. Johnson’s brands of liquid soap in Europe and the South Pacific promoting Colgate’s liquid soaps to become a global leader in that category. Furthermore, in 1995 Colgate-Palmolive acquired Kolynos, an oral care giant in Brazil, and later in 2004 purchased the Swiss-based company, Gabba, to strengthen its global position in the oral care segment (Colgate.com, 2015). In 2006, Colgate-Palmolive also purchased Tom’s of Maine, a company that led the natural ingredients personal care market (Annual report).

Colgate-Palmolive also grew internally establishing new facilities. It opened a leading edge liquid detergent plant in Ohio in 1988 and a technology center to develop manufacturing techniques in New Jersey, in 1989. It made its “single largest capital investment”, consisting of $80 million, when it constructed a cutting-edge manufacturing plant for Hill’s Pet Nutrition that opened in 1991. In 1994 it completed the construction of a modern oral care facility in China. The economic and political changes in the 1990s also resulted in the rapid opening of new subsidiaries in the new market economies across Eastern Europe and within new emerging markets including Russia, China, Cambodia and Vietnam (Colgate.com, 2015).

In 1991, Mark also restructured the company reducing 8% of the workforce and reconfigured 25 factories throughout the world in order to achieve superior profitability and

77 gross margins similar to those of industry leaders. Such actions enabled Colgate-Palmolive for the first time to introduce several products within a short time span, and to increase its gross margins from 39.4% in 1984 to 48.4% in 1994. The savings and cost reductions were reinvested in research, development, and advertising, further helping Mark increase sales through roll-out of new products. While soap and detergents had traditionally been the categories where Colgate made most profit, Colgate’s leading profit generator in the 1990s was Hill’s Pet Nutrition, which obtained gross margins between 55-60% and achieved an annual growth rate of 14.6% between 1989 and 1994 (Schusteff et al., 2005). In 1995, Mark performed another organizational restructuring, reducing the workforce by more than 8%, and reconfiguring or closing 24 factories (Schusteff et al., 2005).

Excluding the United States, Colgate Total was launched globally in 1992, and became a major success. The product also gained quick market leadership upon its release in the United States in 1997. The later introduction in the US resulted from Colgate’s decision to wait for approval by the Food and Drug Administration concerning the benefit claims of Colgate Total (Schusteff et al., 2005). Once approved, Colgate Total became the first toothpaste to have ever been endorsed by both FDA and the American Dental Association. Due to Colgate Total, Colgate-Palmolive regained its global leadership in the oral care industry (Colgate.com, 2015). In 1998, the Total Fresh Stripe was introduced to the market, also with FDA approval (Schusteff et al., 2005). In 1999, Palmolive Spring Sensations was introduced in the US, boosting hand dish liquid sales (Colgate.com, 2015).

In the new millennium, Colgate-Palmolive continued introducing new products to the market under Mark’s leadership. In the year 2000, Colgate introduced the novelty of 2in1 toothpaste and mouthwash into the market along with the Colgate Actibrush battery-powered toothbrush and other oral care products such as Simply White gel and Total Plus Whitening toothpaste. In the Pet Nutrition business category, Colgate-Palmolive introduced in 2002 a line of premium pet food made with natural ingredients, Hill’s Science Diet Nature’s Best (Schusteff et al., 2005).

Unable to compete with Procter & Gamble in the detergents segment, Colgate- Palmolive began to divest its detergent business in certain markets. It sold its detergent business in Mexico to Henkel KGaA in 2001, its European detergent brands to P&G in 2003, and also liquidated its detergent business in Ecuador and Peru in 2004 (Schusteff et al., 2005). In 2003, Reuben Mark remarked that “P&G’s strength in the detergent category made

78 any further effort by Colgate to build share unprofitable”, and that it would eventually sell all of Colgate’s detergent laundry business (Pepper, 2005, p. 43).

Even though The Colgate-Palmolive Company reached $10 Billion in sales for the first time and had a year on year 7% revenue increase in 2004, its profits fell by 7% to $1.33 Billion resulting from intensified global competition, especially from P&G, causing Colgate- Palmolive to increase its spending in advertising. In 2005, for instance, P&G acquired Gillette further strengthening its portfolio and increasing the competition with The Colgate- Palmolive Company. Even though the cost of raw materials and packaging increased, the rising power of retailers such as Wal-Mart kept the cost from being transferred onto the customer (Schusteff et al., 2005).

Although in 2003 Colgate-Palmolive had begun restructuring activities to strengthen its geographical operations by regionalizing and streamlining its manufacturing facilities, in 2004, the company launched a four-year restructuring program to transform its businesses into more global and streamlined operations with a focus on its core businesses. In the 2004 Restructuring Program, the company’s supply chain was centralized and automated, which resulted in the closure of approximately one-third of manufacturing facilities along with the shutdown of warehouses. The toothpaste production that was previously done in five different sites in Europe, for instance, was consolidated into one state-of-the-art manufacturing facility in Poland. Business support functions such as purchasing were also centralized. Savings from the 2004 Restructuring Program enabled building initiatives in sales, marketing and new product development for markets with high-potential (Annual Reports).

In 2012, Colgate-Palmolive began another four-year restructuring, a Global Growth and Efficiency Program, aimed to sustain worldwide growth. The focus of the 2012 Restructuring Program was to make Colgate-Palmolive as global as possible. The clustering of single-country subsidiaries into efficient regional hubs, and the expansion of proven shared business services and streamlined global business functions were planned to strengthen Colgate’s operations, simplify and standardize work practices. Such actions would enable global information exchange for improved and faster decision making, would increase efficiency and reduce the company’s cost structure (Annual Reports).

In 2013, Colgate-Palmolive was considered a global company that marketed its products in over 200 countries and territories with an employee count of 37,400. Global sales

79 of $17.42 Billion was composed by 29% from Latin America, 19% from Europe and South Pacific, 18% from North America, 14% from Asia, and 7% from Africa and Eurasia. The contribution according to its core categories were 46% from Oral Care, 21% from Personal Care, 20% from Home Care, and 13% from Pet Nutrition (Annual Reports).

4.3 PROCTER & GAMBLE HISTORY

4.3.1 Procter and Gamble Partnership In 1819, when James Gamble was still a boy, he moved to the United States from Ireland, which suffered from a famine (Tucker et al., 2005). When he arrived with his father, a Methodist who worked in the manufacture of soap, the population in Cincinnati was nearly 11,000 people (Lief, 1958). Having worked with and learned from his father, James Gamble ventured into his own business, yet quickly entered a partnership establishing Knowlton & Gamble in the manufacture of soap and candle. By 1833, through his economical characteristic that reflected his religious principles, James Gamble felt enough security to propose to one of the daughters of Alexander Norris. Alexander Norris had moved from Ireland with his four daughters in 1830 and had become a Cincinnati chandler (Lief, 1958).

William Procter had learned his trade in England under an indenture where he committed to serve his master, a shopkeeper, for seven years, on payment of 20 pounds and the pledge of being taught “The art of a Mercer, Grocer, Chandler & Et” (Lief, 1958, p. 17). William Procter then began working for a woolen shop, where he gained the trust of his employers. With time, William Procter decided to open his own business in London, where he was credited by his previous employers with store goods. Unfortunately, the first morning after his shop opened, he discovered that the store had been robbed and all the merchandise taken (Lief, 1958), leaving him “$8,000 in debt – a huge sum in 1832” (P&G.com, 2015). Instead of restarting at a smaller scale in London, William Procter borrowed money and moved to America, where recurring tales of success were told and where his expenses would be diminished. William Procter and his wife arrived to Cincinnati in 1832 from England, which suffered from a cholera epidemic. Although his initial intention was to reach Louisville, he remained in Cincinnati to bury his wife and to start a business. William Procter rented a vacant storeroom to work in candle making, which was the quickest way for self- support (Lief, 1958). After all, soap and candle manufacturing utilized little machinery and consequently required relatively small investment capital (Dyer et al., 2004, p.15). The following year, William Procter married one of Alexander Norris’ daughters (Lief, 1958).

During the early 1830s, Cincinnati had grown to 25,000 people and became known as “Porkopolis” due to its meat industry. The city developed into a hub with products travelling along the Ohio River. About a dozen chandlers were present in Cincinnati, most of which also boiled soap and had local sales. Both brothers-in-law grew their respective businesses, yet Procter moved slower due to his obligations as a father in 1834, and due to the payments he continuously made to settle his debts in England. By 1837, Procter’s business assets were worth $3,000 and he had somewhat branched out along the river and earned the reputation of “full weight and correct tare”, mainly as a wholesaler of soap, but also selling his own candles (Lief, 1958, p.19). One of his sources of soap was Knowlton & Gamble.

James Gamble and William Procter were drawn together into a partnership by their father-in-law, Alexander Norris, who looked into the welfare of their families. Although William Procter (36 years old), had been doing somewhat better in candle making than James Gamble (34 years old) in soap making, Alexander Norris suggested that they were practically in the same trade. Together their business would be strengthened and would be better capable of withstanding poor economic conditions. James Gamble split with Hiram Knowlton in 1837, the two bothers-in-law set up a 50-50 partnership for a fifteen year venture, and established Procter & Gamble with an initial firm capital of $7,192.24. The first time Procter & Gamble’s name appeared together was in a letter to a consulting chemist and instructor, Campbell Morfit, expressing the desire to “acquire a knowledge of chemistry” and requesting all information that could be given concerning lectures and ways in which they could profit from them (Lief, 1958, p. 19).

4.3.2 Early Procter & Gamble By 1840, there were sixteen competing firms in soap and candle manufacturing in Cincinnati. Their average annual sale was $20,000, yet such value was pulled down by smaller firms, which included Procter & Gamble. In order to grow in the candle and soap business, William Procter and James Gamble only withdrew from the business profits what they deemed essential for their personal needs, and reinvested the remaining sum in the business. In fact, instead of withdrawing money from the business at one apprehensive moment, they sold their real estate and James Gamble mortgaged his home property (Lief, 1958).

Whereas in 1841 the candle and soap industry output was worth $323,000, one tenth of the pork packers’ output, in 1851 the candle and soap factory output surpassed the value of

$6,000,000. By this time, Cincinnati consisted of 25 candle and soap producers. Sales volumes indicated that lard oil was the leading article closely followed by candles. Soaps were one-third, and glycerin was one-tenth the sales volume of candle (Lief, 1958).

In 1850, Procter & Gamble began producing fatty acids on a large scale. Their product offerings included Star, Adamantine & Tallow Candles; Rosin, Palm, Oleine, Toilet & Shaving Soaps; Pearl Starch, and Lard Oil (Lief, 1958, p. 23). During this decade, Procter & Gamble expanded its staff from a few factory helpers to eighty employees in order to meet a growing demand of orders that could reach a total of 48,000 pounds a day (Lief, 1958, p.29).

William Procter and James Gamble had focused their works in different parts of the company. William Procter was more adept with sales and finances, while James Gamble attended the factory work. James Gamble was progressive and as soon as better work methods became feasible, he would introduce them in the factory. Although they cared for different parts of the company, both regularly met on Saturday nights and pushed each other for updates about the company, which in 1859, was “probably engaged more extensively in manufacturing operations than any other establishment in our city… its sales have largely exceeded $1,000,000 yearly” (Lief, 1958, p.31).

In 1851, at the age of 17, William Alexander Procter joined his father William Procter and his uncle James Gamble in the company since his father believed that he would learn more in the business than at college. William Alexander Procter rotated through the various departments for basic training, was placed as a manager of star candles and later of lard oil. In 1857, William Alexander Procter was taken into partnership, receiving 10% interest in the net profits. This same year, his brother George Procter also joined the company after returning from Kenyon College to work as a salesman. Figure 4.3, shows a family tree of the Procter and Gamble family members who worked at P&G.

Figure 4.3. Years the Procter and Gamble Family Members worked at P&G. Source: Lief, 1958 & Moody’s

During the 1850s, Procter & Gamble’s Moon and Stars emblem was elaborated. It started with a tally mark in the shape of a cross, which became a star, followed by a cluster of stars that were then encircled. Although it is unclear how the symbol developed, the design was located on the sides of the shipping boxes containing Procter & Gamble products. Considered senseless, the design was ordered to be discontinued; however complaints from re-sellers, who thought that the product had been altered, encouraged the emblem to be restored. The evolution of the established symbol throughout the decades is depicted in Figure 4.4.

Figure 4.4. Moon-and-stars Evolution. Source: Dyer et al., 2004, p. 280

William Procter and James Gamble realized the value of the emblem and established the Moon and Stars symbol for Procter & Gamble as a sign of quality.8 It also became a symbol of integrity when Procter & Gamble refused to short-weight candle shipments and began to advertise the Star and Adamantine Candle deficiency in weight, a practice that competitors had begun to adopt. Procter & Gamble’s positive reputation and increasing sales

8 The Moon and Stars symbol was removed from all product packages in 1985 due to rumors of its association to Satanism (Tucker et al., 2005, p. 5).

83 also enabled it to improve its bank credit. The company did not require a second party endorsing its bank notes, and suppliers paid their own bills with Procter & Gamble invoice orders instead of collecting to pay with cash (Lief, 1958).

Within its company, P&G also gained a reputation for caring about its employees, who “were treated like family” (Swasy, 1993, p.17). P&G was known to come to the aid of its employees when needed. For instance, an employee who missed work in order to care for his wife and children, who had become sick from a cholera outbreak that occurred in Cincinnati in the 1850s, continued to receive pay (Swasy, 1993).

Cincinnati also expanded over the 1850s as its trade intensified and its population grew beyond 100,000 people. Trade along the Ohio River increased as railroads expanded trade by connecting Cincinnati to Sandusky, Cleveland and to other spreading networks in the Mid-Atlantic States. The California Gold Rush also increased shipments to the West (Lief, 1958, p.23).

In 1860, James Norris Gamble, who was twenty-four years old and only two years younger than William Alexander Procter, entered the company. Prior to joining Procter & Gamble, James Norris Gamble graduated from Kenyon College, obtained a master degree, and enrolled in a college chemistry course at the University of Maryland to learn analytic and applied chemistry from Prof. Campbell Morfit (Lief, 1958). With the leading expert on soap and candle chemistry, James Norris Gamble began delving scientifically into the art of soap making. Through a systematic approach, which he continued at P&G, he began periodically analyzing Procter & Gamble’s and competitor’s soaps. One notebook entry describes that “Colgate & Co’s Family Soap, obtained from Messrs. Colgate & Dutch St New York April 6, 1858” was “still fresh when used for analysis” (Dyer et al., 2004, p. 17).

Soon after James Norris Gamble joined the company, he was sent with his cousin, William Alexander Procter, to secure rosin stock as a preparation for a possible American Civil War. Procter & Gamble also secured different sources for lard as increasing indications of war appeared. Once the American Civil War broke out, prices of commodities, along with rosin soared but Procter & Gamble was well prepared. “Procter & Gamble alone had an ample supply, almost enough to enable it to fill the needs of the Union Armies of the West” (Lief, 1958, p. 34).

During the War, Procter & Gamble gained Federal Government contracts to supply thousands of boxes at a time of soap and candles to the Union Army. In order to complete such requests, the company extended its work hours and included night shifts. Occasionally, the martial law was declared in Cincinnati forcing establishments to close, however, Procter & Gamble alone was permitted to maintain its factory open. With the war lasting a few years, the cost of lard increasing and the rosin inventory running low in 1863, Procter & Gamble changed the production of candles from lard back to tallow and James Norris Gamble began experimenting with different soap builders. In 1864, James Norris Gamble became a partner in the company.

4.3.3 Second Generation Procter & Gamble At the end of the American Civil War in 1865, the company was well positioned for a period of growth. The founders, now in their mid-sixties, opted to leave the company direction to the second generation. In 1867, Procter & Gamble was worth $800,000 with each founder controlling 35%, William Alexander Procter 12%, James Norris Gamble 10%, and George Procter 8% (Lief, 1958, p.38). Saturday-night updates with the two founders at William Procter’s house continued, and monthly conferences at the Gamble house were conducted with all partners to address challenges and direction. In 1868, William Procter’s third son, Harley Procter joined the company as a salesman (Lief, 1958, p.38).

Besides undergoing a series of plant enlargements after the war, P&G also introduced new machinery such as the foot-press for stamping soap bars. Although hardly necessary, Thomas A. Edison was hired as a mechanic and introduced the telegraph to improve communication between the factory and the office, which were two miles apart.

The soap and candle trade greatly changed in the 1870s. More people began to use soap due to more frequent washing promoted by greater hygiene awareness and the installation of public waterworks and household plumbing, which accompanied the urbanization trend. By this time, “almost 300 soap manufacturers, some local, some operating over a broad interstate area, competed for this greater consumption” (Lief, 1958, p. 41). In an attempt to alter people’s behavior and ensure that a specific, rather than a generic soap was requested, trademarks were adopted. Although Babbitt had been using soap wrappers for several years, it became a widespread practice.

The 1870s was also a turning point for the sales of soap, which surpassed the sales of candles. An overwhelming amount of soap varieties including “soft white soaps made of

85 tallow, whale oil, and potash lye, toilet soaps of quick-frothing coconut oil and soda lye, with or without tallow, and rosin laundry soaps among others” flooded the market (Lief, 1958, p.42). Many adulterated soap products also appeared. Among them were counterfeit products that resembled P&G’s Moon & Stars design, which the company contested in court and won in 1875.

William Alexander Procter was basically head of the business, James Norris Gamble cared for the factory works and Harley Procter took over sales management. James Norris Gamble was an advocate for ensuring the quality of P&G goods and improving operations. He equipped the factory with machinery that both lightened labor and increased operating speed. James Norris Gamble had two adopted daughters and no sons, thus he was pleased when his two brothers, William Gamble and David Gamble left their jobs to work with him in the factory creating a chance for a Gamble succession. Even though Procter & Gamble was a family business, family members were maintained on payroll according to work and merit. George Procter for instance, grew tired and consequently renounced his junior partnership.

4.3.4 Ivory Palace In 1878, “soap accounted for less than a fourth of the company’s income” (Lief, 1958, p.4). With the entry of William and David Gamble in the company, James Norris Gamble gained more time to focus on soap development. This same year, James Norris Gamble came in contact with an individual who had made a formula for making soap from vegetable oils without the use of the expensive olive oil. James Norris Gamble recalls that

as [the individual] was not doing very much in the business, [he decided] to sell out their rights. We bought them for a very moderate sum and proceeded to make a soap according to the prescription, but after a little experience we changed it considerably (Lief, 1958, p. 49). Through reverse engineering then a trial and error approach, James Norris Gamble developed a formula for “Procter & Gamble’s White Soap” (Dyer et al., 2004). The name was changed to Ivory Soap in 1879 when Harley Procter read in the Old Testament, “Psalms 45:8: ‘All thy garments smell of myrrh, and aloes, and cassia, out of the ivory palaces whereby they have made thee glad” (Lief, 1958, p.6).9 Two years later, Harley Procter secured an advertising budget of $11,000 for Ivory Soap, and became a partner at P&G (Lief, 1958, p.9).

9Ivory was registered on June 26th, 1906. (Berriman, 1911)

Such budget would help Ivory compete with the hundreds of brands that had turned to advertising and crowded the newly emerging national marketspace. As the first magazine ads appeared, Babbitt and Sapolio were singled out as the most successful ink advertisers; however, so much promotional advertising was done with bogus claims that according to the Soap Maker’s Journal, “The good old days of simplicity and honesty in the trade” had ended (Lief, 1958, p. 52).

P&G was unenthusiastic with advertising expenditures as much of its capital was tied up in several issues. P&G had been growing a fund in case it lost a suit against Tilghman for a glycerin recovery patent it licensed in 1858. At the time, refined glycerin could be retailed by American pharmacists in bottles for $1.50 a pound; however, its high recovery cost led P&G to discard it in the sewer. Once shown the glycerin recovery apparatus, P&G obtained the license and modified it for proper operation to further increase its factory efficiency (Lief, 1958, p. 30). Not only did the suit eventually cost P&G a total amount of $260,000 for back- pay royalties and damages, but a glycerin extraction tank also exploded and destroyed some of the company’s expensive equipment.

Despite the difficulties, advertising made Ivory Soap a best seller. In 1882, Harley Procter developed two slogans for Ivory that became widely known. The first slogan was created based on the report of a prominent New York chemical consultant that upon Harley’s request, analyzed the purity of Ivory and of three other leading brands of imported castile soap. From the report, the slogan “Ivory Soap is 99 44/100% pure” was created (Lief, 1958, p. 54). It promoted that Ivory “may be relied upon as entirely safe to use” in a market replete with adulterated and dangerous soaps (Lief, 1958, p. 54).

The second slogan that distinguished Ivory was that “The Ivory Soap will ‘float’” (Lief, 1958, p.11). The floating soap was beneficial as “people sitting in a bathtub or washing clothes in a basin could easily find their soap atop the water rather than having to fish around for it underneath the surface” (McCraw, 2009, p.36). The success of the floating feature, however, seems to have been accidental as interest in it was only discovered after customers began requesting “more of that floating soap” (Lief, 1958, p.7). Upon investigation, the Gambles deduced that a worker must have gone to lunch and unintentionally left a crutcher

87 turned on, thus inserting more air in the mix and enabling the soap to float.10 From there on, the process was adjusted to make all Ivory cakes float (Lief, 1958, p. 7).

Such slogans were enhanced by artists that were handpicked by Harley Procter to design Ivory advertisements in magazines (Lief, 1958). Although P&G tentatively entered magazine advertising and sought the right advertising pitch during the first few years, by the 1890s, it ran full page advertisements that were often associated to picture of babies in practically all major magazines in circulation (Dyer et al., 2004). In 1883, Harley Procter also began to use large billposters for P&G, a practice that although was utilized by entertainment groups, had never been used by industrial advertisers (Dyer et al., 2004).

Harley Procter also innovated for Ivory Soap in other ways. A notch was made in the middle of a laundry-size bar enabling them to be easily divided. The sale of individually wrapped cakes was extended to include sales of a six-pack and one dozen-pack at a time (Lief, 1958). Furthermore, in 1885, a time when stores were not self-service and storekeepers could easily sway customers to accept substitute products, P&G began experimenting with promotional marketing initiatives. By mass mailing cake samples to customers, an attempt was made to make a “patroness of [the customer] for the Ivory Soap”, in which they would specifically demand Ivory in the grocer shop (Dyer et al., 2004, p. 36).

In 1883, P&G employed about five-hundred people in its busy office and factory, and produced 20,000 bars of soap and 100,000 candles a day (Lief, 1958, p.56). P&G purchased a small soap factory a block away to run as a subsidiary, and desired to build a modern factory close to the railroad tracks in order to reduce existing expenses. The company had a cost of $60,000 a year transferring goods from the factory to freight stations where they would be shipped by railroad, which now accounted for 90% of all goods shipped (Lief, 1958, p. 58).

On January 7th, 1884, a fire started in the lard-factory, spread to the candle works and consumed a large part of the soap operations. All that survived from the fire was the north soap house and the recently purchased subsidiary. Instead of grieving over the loss, William Alexander Procter rushed to make calls ordering all the red oil he could find before prices increased once trade centers found out about the losses P&G had incurred. Such purchases greatly reduced the remaining available red oil supply in the market increasing its price and

10 Evidence from James Norris Gamble’s Soapmaking Journal, however, also suggests that P&G had begun experimenting with floating soaps as early as 1863 (Dyer et al., 2004, p. 24).

88 enabling P&G to profit from the surplus orders. Insurance covered $209,000 of the losses, however, instead of rebuilding the factory, Procter & Gamble decided to build a modern plant in a fifty-acre land in an area between two railroad tracks. Such investment would require $1,000,000, which was obtained by a bank loan Harley Procter secured from the Mercantile Bank in New York (Lief, 1958, p.52).

P&G committed itself to mass producing the branded Ivory Soap, which sold as laundry and toilet soap in the new Ivorydale factory. Once construction for Ivorydale was completed, Procter & Gamble “had twice the capacity of all other Cincinnati producers combined” (Lief, 1958, p. 71). The new modern factory had the capacity to produce 400,000 cakes of Ivory a day (Lief, 1958, p. 66), and by 1890, contained 10 miles of railroad track within its plant. Ivorydale “marked the conversion from batch manufacturing, in which facilities adapted continuously to fluctuations in the price and availability of various potential raw materials, to dedicated plant, which regularly made fixed products in vast amounts” (Dyer et al., 2004, p. 33). As the plant expanded, operations were continuously integrated.

Procter & Gamble was in the vanguard of other practices. In 1887, P&G wrote to its customers, “There is much progress in soap making as in anything else, and we aim to keep ourselves in the forefront always” (Lief, 1958, p. 73). In product quality, P&G hired Harley James Morrison, a chemical engineer who was nephew of the Procter brothers, to assure excelling and uniform product quality (Lief, 1958, p. 73). With Harley Morrison, the company’s first laboratory and “one of the first corporate labs in the field of consumer goods” was established in 1890 (Dyer et al., 2004, p. 49). In this lab, “Morrison’s first challenge was to replace this reactive, trial-and-error mentality with a more sustained scientific outlook” (Dyer et al., 2004, p. 49). In sales, Harley Procter devised a contract-price system that prevented wholesalers and dealers from cutting prices and competing with each other, a legal practice at the time. Other promotional activities were also developed, and included exchanging wrappers for drawing books or souvenirs, and public competitions spurring the creation of Ivory images, verses, and sculptures (Lief, 1958).

Unlike other aggressive advertisers such as William Wrigley, who used intuition, at P&G advertising was done in an analytical form. The impacts of specific marketing initiatives were studied in detail, and “point-by-point, the data was teaching sales and advertising people how to sell Ivory efficiently and effectively” (Dyer et al., 2004, p. 39). Furthermore, while many soap manufacturers turned to advertising agencies from the start,

P&G dealt with advertising largely internally and hired “its first advertising agency [only] in 1900 to promote both Ivory and Lenox” (McCraw, 2009, p. 37).

Through its advertising, Procter & Gamble gained public appraisal. Newspapers such as the Boston Transcript, the most respected newspaper in Boston, reflected public opinion that “both Ivory and P&G had acquired a personality. They were nationally famous and liked” (Lief, 1958, p. 67).

The 1880s was a period of labor unrest at many American companies; however Procter & Gamble took interest in improving the conditions of factory personnel, who had been largely neglected by the American industry (Tucker et al., 2005). James Norris Gamble relates that the philosophy of Ivorydale was to make it a better place to work. “Among the reasons that worked most in its favor was that with better lighting, better air, better buildings, better surroundings generally, better man would come to us and those we had would do better work” (Lief, 1958, p. 77).

In 1883, third generation, William Cooper Procter, was called upon by his father to join P&G one month before graduating from what is now Princeton University. He began working at the factory and learned the business from the ground up (Tucker et al., 2005). William Cooper Procter concentrated much of his efforts towards improving the conditions for factory personnel and helped P&G become “the first company to offer comprehensive benefits to employees” (Swasy, 1993, p.17). He convinced the partners, for instance, to give factory employees year-round Saturday afternoon off without wage loss, a radical idea in 1885 (Lief, 1958). Despite such endeavor, the company faced “14 strikes over the next two years” (Tucker et al., 2005, p. 3). In 1887, William Cooper Procter implemented a profit- sharing plan, one of the first in the US, as means to improve efficiency and to develop a new relationship that would align employer and employees interests (Lief, 1958). According to him, profit sharing would create “perfect loyalty to the Company and mutual respect and confidence between workers and management” (Dyer et al., 2004, p. 46). In the same year, William Cooper Procter gained 5% partnership and all other partners had their shares proportionally reduced. William Alexander Procter previously owned 25%, Harley Procter 25%, James Norris Gamble 25%, founder James Gamble 17%, and David Gamble 8% (Lief, 1958, p. 79).

4.3.5 Incorporation The Procter & Gamble Company became a “growing leader in a field of 432 soap manufacturers (Lief, 1958, p. 80). When it incorporated in 1890 and authorized an original amount of $2,250,000 in stocks (Moody’s), it was already the largest soap manufacturer in the US and was positioning itself for a period of further growth (Dyer et al., 2004, p.45).

William Alexander Procter became President, James Norris Gamble Vice-President, David B. Gamble Secretary-Treasurer and William Cooper Procter General Manager. Although Harley Procter sporadically attended some meetings, he retired to enjoy life. By 1895, as the active role of the Gambles decreased, the company leadership was basically under William Alexander Procter and his son, William Cooper Procter. The company leaders since the incorporation of P&G in 1890 are listed in Table 4.14.

1. William A. Procter (1890 – 1907) 2. William Cooper Procter (1907 – 1930) 3. Richard Deupree (1930 – 1948) 4. Neil McElroy (1948 – 1957) 5. Howard Morgens (1957 – 1974) 6. Ed Harness (1974 – 1981) 7. John Smale (1981 – 1990) 8. Ed Artzt (1990 – 1995) 9. John Pepper (1995 – 1999) 10. Durk Jager (1999 – 2000) 11. Alan Lafley (2000 – 2008 & 2013 – Present) 12. Robert McDonald (2008 – 2013)

Table 4.14. Leaders at P&G since Incorporation. Source: Dyer et al., 2004. Procter & Gamble leaders have led the company for an average term of 10.4 years since incorporation; however the terms have become significantly smaller since the 1990s.

During the 1890s, the company observed increased profits and further expansion under William A. Procter, who continued to lead the company for 17 years after its incorporation. Procter & Gamble purchased acreage in Kansas City for a new factory and ventured into cottonseed-oil crushing mills. The company also began production in other cities and obtained tank cars to economically transport the raw material to Cincinnati. With the advent of colored printing in Europe in the beginning of the decade, Procter & Gamble began inserting colored Ivory advertising in magazines (Lief, 1958, p.92). In fact, “in 1896, P&G ran the first color ad that ever appeared in a U.S. magazine” (McCraw, 2009, p. 37). Having captivated readers and enhanced Ivory’s prestige, P&G urged local printers to go

91 abroad and learn about four-color printing so that it could be performed locally (Lief, 1958, p.92).

4.3.6 Third Generation As the years passed, more of the decisions were left to William Cooper Procter. Although Ivory had been performing well, Lenox lost ground to a Naphtha soap called Fels- Naphtha. Many housewives had also shown a preference for powdered soap, a product that P&G resisted. When P&G introduced its own soap powder in 1897, a price war among competitors started and P&G quietly withdrew believing the entry time was not right. A few years later, in 1903, P&G purchased Schlutz’s brands obtaining Schultz’s Star Soap, and a washing powder that enabled P&G to enter soap powder production. Regardless of promotional attempts to counter market share losses by Lenox against Fels-Naphtha, Lenox lost ground, so P&G turned to its laboratory to release a better product. In 1904, P&G White Naphtha Soap was formulated and the Kansas City Factory construction was completed.

In 1900, Cincinnati produced one sixth of the total soap output in the United States closely followed by St. Louis and Chicago. As described by Cincinnati Enquirer “competition of soap manufacturers is sharp. There is no other article more universally advertised… the large companies in the country and abroad spend annually thousands of dollars in getting names of their brands well known to the public… phrases used in advertising have become bywords and slang expressions”, and among these competitors, P&G was praised as having the largest soap factory in the world (Lief, 1958, p. 83).

In 1902, P&G purchased Buckeye Cotton Oil Company in Mississippi and within three years, Buckeye owned 8 cotton-seed mills. The cotton-seed mills were the foundation for Crisco, a new product that P&G would introduce into the American kitchen in 1911. In 1907, P&G was approached by E.C. Kayser who had been developing a hydrogenating oil procedure for several years (Lief, 1958, p. 105). P&G acquired the rights to the Kayser patent in the US, and built a hydrogenation plant. P&G also acquired McCaw Manufacturing Company in 1909 as a facility to produce lard compound. Although P&G initially marketed its lard compound under the Flakewhite brand, once an all-vegetable shortening was fully developed, it introduced Krispo, which was renamed Crisco due to trademark restrictions.

As Crisco was unlike any other product in the market, P&G had to instruct housewives on its uses. Crisco was one of three primary solid cooking fats among with butter and lard, yet it was considered more easily digestible and consequently “better than butter

92 and with greater utility than lard” (Neil, 1913, p. 10). In order to launch Crisco successfully, P&G developed eight alternative plans, and after “tallying up results and measuring the varying impacts against each other”, selected the most promising plan for a national launch in 1912 (Dyer et al., 2004, p. 52). P&G worked to build Crisco into culinary vocabulary through a series of “carefully sequenced campaigns, in which activities like advertising, sampling, and premiums unfolded in precisely coordinated stages” (Dyer et al., 2004, p. 54). P&G sought to change American woman’s cooking habits by giving them recipes that utilized the product, so an experimental bakery was set up at Ivorydale to test and create new recipes. Meanwhile, seven cooking-schools toured the US demonstrating the better results from cooking with Crisco (Lief, 1958, p.107).

Although Procter & Gamble made progress with Crisco shortening, the company resisted any changes to Ivory. Ivory sales increased, however, it did not keep up pace with the population growth. Procter & Gamble’s competitors had also flourished from the increased per capita consumption. P&G vehemently thought that “It [was] impossible to make a better product”, and consequently secluded itself from market opportunities. While P&G focused its efforts on discovering new ways to use Ivory through initiatives such as compiling a booklet with select new ideas for “unusual uses of Ivory Soap” (Lief, 1958, p. 116), competitors invaded the market, such as the Lever Brothers with Lux Flakes. The Lever Brothers also obtained controlling interest of the Dominion Soap Company in Canada, spurring P&G to build its first international factory in Ontario, Canada, in 1915.

In 1915, William Cooper Procter instilled a revolutionary comprehensive sickness- disability-life insurance and pension system. Despite his continuous commitment to employees, the Kansas City factory faced a strike with wartime unrest. Shown the list of employee demands, William Cooper Procter was surprised to see that it included ending his profit-sharing plan, which had suffered many adjustments since its initial implementation in 1887, one of which was its association to company stocks through an employee-stock- purchase program in 1903. William Cooper Procter wrote: “The easy way—and the one that would cost the company least – would be to abandon the Profit Sharing, etc., and stop trying to help them help themselves; but, of course, I can’t do that” (Lief, 1958, p.124). As a result, he created an Employees’ Conference Committee that went into effect in 1918 and focused on increasing the communication between employees and management (Feis, 1928, pg. 52). The Conference Committee, however, “has not had a significant existence [as] the men see no vital issue to press, and are not goaded by a sense of injustice” (Feis, 1928, p. 95). An

93 example is depicted in a report where employees express, “We want the eight-hour day, but it is our unanimous decision that we don’t want to say what you shall pay us…You have always treated us right and we know you are going to keep doing it” (Lief, 1958, p. 125).

Richard Redwood Deupree came in close contact with William Cooper Procter in the administrative committee as a sales manager (position acquired in 1917), where major policy decisions were made. Their business contact developed into a close friendship and Deupree became William Cooper Procter’s right hand man. Richard Deupree had started in the company as a clerk in 1909, was selected as part of the sales force to pitch Amber Soap Flakes, and in two years became manager of flake sales. Through his proximity to William Cooper Procter, Deupree absorbed the company’s traditions and the concept of continuity of management reflected in William Cooper Procter’s words of “reputation and character… standards ….ideals of honesty… justice and affection in dealings with its people…” (Lief, 1958, p. 126).

As the United States entered World War I in 1917, the company had stocked up on raw materials and begun saving for special war expenses (Lief, 1958). 11 William Cooper Procter also obtained $25,000,000 financing as he realized that “the great advance in the cost of everything necessitates a greater amount of money to carry on the business…as it is possible [that] the country may forbid financing of such large amounts in the future, as they had done in England… [he wanted] to be ahead of such action” (Lief, 1958, p. 122).

Once the war finished, Ivory remained the “largest-selling bath and toilet soap in the United States”, however it had lost market share to competitors that were gaining strength (Lief, 1958, p. 145). Palmolive captured male and female interest by sampling army canteens among other locations with romantic ads. Colgate’s Cashmere Bouquet Toilet Soap introduced back in 1872 was faring well, and Lever’s Lux Toilet Soap also thrived (Lief, 1958, p. 130). After much resistance, P&G introduced Ivory Soap Flakes in 1918, but further changes to Ivory remained slow. It was only in 1922 that the company turned to another ad agency in an attempt to revamp the brand.

Having lost ground to other companies by resisting the trend of perfumed beauty soaps, in 1922, Procter & Gamble instituted the products-service department to test product performance in the consumer’s perspective. As little research existed on product acceptance,

11 Many P&G employees served in World War I, and were honored by Procter & Gamble in the book, “Honor Roll: The Procter & Gamble Company – 1920” (P&G, 1920)

94 the company began to devise its own market research procedures in the development of Camay Soap. Although “probably no company was doing market research at this time except for sales promotion” (Lief, 1958, p. 153), and “no company had undertaken market research before in a sustained, rigorous applied way” (Dyer et al., 2004, p. 58), P&G began growing its market-research department and learning what the housewives wanted (Lief, 1958, p. 153). The Market Research Department was set up in 1925 and “gradually developed a set of market research tools” that did not exist at the time. One recognized trend was the desire for faster sudsing, which would later lead to the development of granules.

Significant changes also occurred to the company’s supply chain after World War I. In 1919, the direct selling initiative that had been implemented in 1913 at New York was expanded onto New England. On July 1st, 1920, the company announced its intention to sell directly to distributors throughout the United States. Although P&G hoped to maintain its relationship with wholesalers by offering favorable discounts for purchases in quantity, wholesalers strongly resisted the change. Many thought that P&G would fail in its attempt to change the traditional trade practices and that the result would be disastrous, possibly leading the company to bankruptcy.

P&G overcame the challenge and became the “first major consumer goods producer to bypass the jobbers and set up direct sales to retailers” (Dyer et al., 2004, p. 56). In less than one year, the company was aligned with 75% of the country’s grocers, and wholesalers restarted purchasing from P&G. With the change, warehouses were built, truck store-delivery became more widely used, and salesman started to help grocers organize their promotions and displays (Lief, 1958).

The company divided the country into regions of about 200,000 people that were controlled by a supervisor overseeing ten to fifteen men. Although initial sales estimates were produced and sent to Cincinnati for review to enable production planning, the approximate figures could be further improved. As P&G began to predict sales based on the past year’s results, advertising and promotional impacts, growth potential, the competitive scenario, and business trends, an Economic Research Department was developed (Lief, 1958). One element demonstrated was that “a comparison of forecasts of sales with actual production shows remarkably small margin of error” (Feis, 1928, p. 101).

Although greater integration among departments occurred due to the intertwined efforts of direct sales, the most important contribution of direct sales was that it enabled the

95 typical cyclical business to be stabilized. Factories began producing to match a fairly stable yearly soap consumption rather than to fulfill jobber orders, which oscillated according to the price of raw materials. In 1923, after two years thoroughly testing the new sales policy, the stabilized yearly production permitted William Cooper Procter to announce a guarantee of employment policy for profit sharers (Feis, 1928, p. 101). This was a policy that “guarantees a full pay for full-time work for not less than forty-eight weeks in each calendar year” (Lief, 1958, p. 139). According to William Cooper Procter, “the fact that we are going to increase the contentment of our employees, to solidify their interest in the company” was of greatest importance (Lief, 1958, p. 139).

In Deupree’s opinion, “guaranteed employment forces you to know your business. Anything that does that forces a better control and direction of the business” (Lief, 1958, p. 142). Procter & Gamble also increased the amount of seats on the board from nine to twelve in order to receive one representative from each national factory. “No other large corporation in the country had labor sitting with management on its board” (Lief, 1958, p. 133). As a consequence of William Cooper Procter’s focus on the welfare of the employees, a higher number of applicants became interested in working for the firm that ensured employment and provided many other benefits. Procter & Gamble’s turnover rate significantly decreased and became much lower than the industry benchmark (Feis, 1928). Since 1918, P&G also began recruiting talented students from university campuses to fill openings in its expanding business.

Expansion in the 1920s, after World War I, was propelled through the suitability of hull fibers from the Buckeye plant as raw material for papermaking. P&G acquired two chemical-dissolving units in 1920 to produce cellulose paper. By this time William Cooper Procter wrote in a letter to his sister, “I think everything is working out all right, but the business and organization was in bad shape two or three years ago…. I am not yet quite through with the job, and when I get through, I want to put in shape where it won’t easily go upon rocks” (Lief, 1958, p. 160). William Cooper Procter also pointed out that “growth is a condition of life. When it stops, decay begins” (Lief, 1958, p. 160).

In 1927, P&G purchased two soap plants, Waltke Company, founded in 1858, and Globe Soap Company, founded in 1880. Two important brands came with the Waltke purchase, Lava and Oxydol. Oxydol was a dense powdered soap that P&G improved and marketed as granules. Oxydol granules cut into the sales of Chipso, a general-purpose flake

96 introduced in 1921 that had become considered the “largest-selling packaged soap in the country” (Lief, 1958, p. 163). Instead of worrying about cannibalization, P&G opted that it was up for the housewife to decide whether she would prefer granules to flakes or flakes to soap bars (Lief, 1958, p. 163). As a company scientist recalls, “thousands of the steel frames used in the production of bar soap were scrapped because they were no longer needed”, and as flake sales increased, “development work was under way that resulted in making the flake dryers obsolete” (Dyer et al., 2004, p 51).

Under the impression that Camay had been hindered by efforts concentrated on Ivory, P&G opted to hire different ad agencies for Camay and Ivory as well as for Chipso and Oxydol. With this decision, the company decided that each brand had to fight for its existence in the market. Although certain cannibalization would occur, managers thought it was better to lose to another internal brand than to a competitor’s brands (Lief, 1958).

4.3.7 Deupree Leads P&G By the 1930s, P&G had developed the culture of a “stodgy, tradition-bound, parochial firm – stiff and formal, almost military. Job applicants were given batteries of exams, including psychological tests”, and when hired, were expected to spend their entire careers with the company (McCraw, 2009, p. 38). Managers were promoted from within the company and wore dark suits and white shirts. Concern about the company’s secrets led to the development of strict security. Unionization was discouraged, and the cafeteria was separated by gender. 12 P&G would cut costs anywhere possible. For instance, the use of the elevator for the first floor at the corporate headquarters was prohibited, and sales employees were instructed to park their cars in the streets rather than on paid parking spaces (McCraw, 2009, p. 38). The corporate culture at P&G “reflected the personalities of both Procter and Deupree” (McCraw, 2009, p. 39).

In 1930, William Cooper Procter became Chairman of the company and Richard Deupree became President. When William Cooper Procter died in 1934, Deupree remained at the helm. Deupree constantly encouraged the use of imagination to outsmart competition (Lief, 1958). “P&G was widely acknowledged to be the nation’s most innovative marketer of consumer products and one of the quickest firms in any industry to respond to external changes” (McCraw, 2009, p. 39). Deupree was an advocate for implementing new ideas and

12 “Women ate in a separate part of the cafeteria until the 1960s” (Swasy, 1993, p.22).

97 methods after careful tests demonstrated their effectiveness. Management door was open and company employees spoke their minds due to their sense of ownership in the company.

Procter & Gamble among other companies faced difficult times in the early 1930s due to a country-wide depression (Lief, 1958). By this time, P&G had established its leading position in the soap industry with “more than twice the total U.S. market share of either Lever Brothers or Colgate-Palmolive. The three together accounted for about 80 percent of all domestic sales of soap, with P&G alone at just under 50 percent” (McCraw, 2009, p. 41). Although 16,000 workers lost their jobs in Cincinnati, Procter & Gamble sought to ensure its employees with economic security. Procter & Gamble reduced the guarantee of 48-week full- time employment to 75% of it, and in 1933 instituted a “new standard work week of five eight-hour days, in a share-the-work movement” (Lief, 1958, p.201). With the Wagner act enacted, employees in P&G’s ten plants created independent union groups and the Employees’ Conference Committee was abandoned.13 A further change was the reconstitution of the board in 1935, which removed the three board seats representing factory personnel, however, this “presented no barrier to mutual understanding” and exchange of ideas between employees and managers in the search for progress (Lief, 1958, p.311).

Despite the effects of the depression in the early 1930s, Procter & Gamble prospered and continued to expand. P&G built new factories in Baltimore, Long Beach, and purchased a factory from Hewitt Bros Soap Company in Ohio (Lief, 1958). Between 1890 and 1929, P&G acquired 13 competitors (Dyer et al., 2004, p. 48). In 1930, P&G also acquired a long standing Chicago rival named James S. Kirk & Company, and obtained controlling interest in Thomas Hedley & Co, an English company that had a small percentage of the British market. Although Unilever had obtained increasing strength in the United States, and merged 49 manufacturing companies in Europe, some European companies like Thomas Hedley & Co had resisted Unilever (Lief, 1958).

Deupree demonstrated the innovative thinking he desired at P&G by exploring the use of the “brand-man concept” developed by McElroy, exploring the radio, and encouraging market research (Lief, 1958). The brand-man concept presented in 1931, had a tendency to decentralize decision making as the brand man, his brand assistant and “check-up people”

13 The National Labor Relations Act (NRLA), also known as the Wagner act, was signed in 1935 and addressed the relations between unions and employers in the private sector (www.ourcoduments.gov).

98 among others were focused on specific products, which were to be managed as a separate businesses (McCraw, 2009, p. 45).

P&G’s advertising department had begun acquiring experience with radio as early as 1923 advertising Crisco. Crisco advertising also pioneered in radio network broadcasting, which appeared in 1927. As radio networks began looking for day-time sponsors in the early 1930s, P&G delved into day-time entertainment (Lief, 1958).

Market research provided important lessons for P&G and helped the company achieve what Neil McElroy considered the formula for success, “Find out what the consumers want and give it to them” (McCraw, 2009, p. 46). With the radio, it first demonstrated that housewives wanted to be entertained and not instructed. Although the first daily radio series in 1932 promoting Oxydol was not successful, soap operas (named such due to P&G sponsorship), gained national appeal with Ma Perkins, aired on the NBC network (Lief, 1958, p. 178). Ma Perkins was “eventually proved the most successful of all day-time programs in the history of radio” (Lief, 1958, p. 178). As no one knew how many listeners were tuned, P&G devised a merchandise offer in one of its programs to test radio coverage. The result demonstrated that radio expenditures were paid off by the amount of listeners. The test also showed how active merchandising could have a strong pulling power in the market (Lief, 1958, p. 178).

Another important innovation of the Market Research Department was the creation of a crew of women who would go door-to-door to inquire about consumer habits and P&G products. This group became a powerful resource that enabled the company to gather insights of how to introduce and improve its products in effective ways. Although the door-to-door service was phased out in the 1960s, it was replaced by cheap long distance telephone rates that permitted more cost efficient mass surveys to be conducted (McCraw, 2009, p. 48). The process of obtaining information, which was later computerized, may have changed throughout time, but the essence of incorporating consumer input became a standard process within P&G.

In 1932, P&G signed a contract to obtain the American rights for synthetic detergent patents and the right to explore their use in the household field (Lief, 1958). The agreement developed from a “scouting expedition” by a process engineer who travelled to Europe “to see if [he] could learn anything concerning processes or products of interest to P&G” (Dyer et al., 2004, p. 69). Synthetic detergent had been developed during World War I by the

Germans as a substitute for fat, which was prioritized in food rather than in soap making. Unlike soaps, synthetic detergents were efficient “in the presence of acid used in industrial processes, such as the making of textile finishes”, were more appropriate for cleaning in hard water, and did not create “soap curd or sticky scum” like soap (Lief, 1958, p. 187).

After test-marketing Dreft in 1933, the company released the synthetic detergent to the market. Based on Dreft, Procter & Gamble also introduced Drene as a liquid shampoo. Complaints arose that Drene removed the natural color of the hair, however, researchers solved the issue. Within two years from its first test market, in 1934, Drene was distributed through beauty parlors, drug and department stores and acquired national recognition. With Drene, “P&G no longer was a company confined to soap and shortenings” (Lief, 1958, p. 190).

P&G underwent significant technological progress in the late 1930s and early 1940s. The company’s research program spurred the development of a hydrolyzer and a new continuous process for soap production. “These innovations elevated the ancient art of soapmaking to the rank of modern chemical engineering” and soon became industry standard practices (Lief, 1958, p.209). Procter & Gamble prospered and covered the country with production facilities in locations deemed strategic.

In 1939 P&G was marketing about 200 brands out of which 140 were brands of soap. From this portfolio, 6 brands achieved major sales and share positions: P&G White Naphtha, Oxydol, Ivory, Chipso, Crisco, and Camay (Dyer et al., 2004, p. 64).

4.3.8 World War II In 1940, Procter & Gamble was the first manufacturer outside the explosives industry to be approached by the US Government. The army requested P&G to build and operate a plant to “assemble fuse parts and load propellant charges in shells and bombs” (Lief, 1958, p.212). The government wanted Procter & Gamble’s expertise in “mass production of small units” (Lief, 1958, p.213). More specifically, it wanted P&G’s knowledge filling cartons with powdered soap adapted to filling steel packages with explosives. P&G accepted the project as according to Deupree, “We are willing to do whatever is right” (Lief, 1958, p. 213). Since P&G had no financial interest nor would derive any material profit in the government-owned plant, the company formed a separate business called Procter & Gamble Defense Corporation to which 140 P&G employees were eventually assigned.

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The new entity surpassed expectations and P&G Defense Corporation was given other responsibilities. Since the plant construction was completed three months ahead of schedule and exceeded production estimates within the first few weeks, the secretary of war requested Procter & Gamble Defense Corporation to build and run another plant. P&G pioneered with the use of belt assembly and automatic machinery permitting production with “one-fifth of the workers, [and] one-third of the plant, that would have been required in using previous practices” (Lief, 1958, p.215). Further efficiency studies conducted by P&G demonstrated that capacity at existing US facilities could be increased by 60% at 4% the cost of an initial investment for a new plant. P&G was also given the responsibility to consolidate two plants and run them as the Milan Ordnance Center.

Raw materials became a problem during World War II. The shortage was first felt in the Hedley subsidiary in England, which cut production by 20%. Raw material for the American market had been plentiful since the US produced all of the edible fats it consumed and three quarters of the soap fats it used. The issue occurred when the remaining one-fourth of supply imported from the Philippines was cut-off after the country was invaded by Japan. Rationing for raw materials used in the soap and cooking industry began, while demand for industrial soaps to emulsify rubber, lubricate metals, cleanse textiles and the need of glycerin for dynamite, medicine, among other uses, grew.

A salvage campaign was conceived by a butcher that “urged women to take fats to butcher shops” (Lief, 1958, p. 219). The idea was developed and implemented by the Association of American Soap and Glycerine Producers, whose three largest members were Colgate-Palmolive-Peet, Lever Brothers, and Procter & Gamble. Within months, the 300,000 collecting centers became increasingly busy and the established goals were surpassed. Although the initial campaign was “fats for glycerin for explosives” it later linked fats to medicine due to a greater public appeal (Lief, 1958, p. 220). The campaign, with annual collections that accounted for one-eighth the total supply of tallow and grease, saved the soap industry. The salvage campaign lasted for five and a half years continuing into post-war period until 1948 to address a post-war shortage.

During the war, P&G did not expand and changed many of its tasks due to wartime. Company resources were strained and “the times called for improvisation in the pinch of government controls on chemicals, restrictions on container materials, prohibitions surrounding the purchase of plant equipment, transportation difficulties, and the induction of

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4,454 P&G employees into the armed services” (Lief, 1958, p. 222). In an attempt to better use the limited resources, the company increased vegetable oil recovery from soybeans from 81% to 86% then 98%, and suspended certain brands.

The rationing led P&G to prioritize the brands it felt had more post-war potential. Since it believed granules would overcome flakes, Chipso was suspended during the war and failed to recover after the war. Advertising went heavily to Oxydol and Duz. Although Oxydol granules had to be discontinued during the war, the company continued advertising the brand (Lief, 1958). As a result, “by 1946, some 60% of P&G’s retail soap production was granular, and Oxydol had become the company’s leading brand” (Dyer et al., 2004, p.51).

Drene encountered difficulties due to scarcity of raw material for its packaging. Packaging for Crisco, on the other hand, was changed without affecting the product quality. Although product testing with consumers had been done with Teel dentifrice, advertising for it stopped in 1947 due to the negative impact it had on certain consumer’s teeth.

Despite the reduction in spending in certain products during World War II, in 1945, Procter & Gamble acquired “a housecleaning powder which required no fat” known as Spic and Span (Lief, 1958, p. 238).

4.3.9 Rise of Tide By 1945, P&G had attained market leadership in its key categories, yet it had been “unable to achieve anything like breakout success against Colgate or Lever Brothers”, until the introduction of Tide (Dyer et al., 2004, p. 67).

In 1939, scientist David Byerly had been instructed to abandon a seemingly dead end project for other projects that seemed more promising. Despite the instruction, Byerly continued working on Product X off the books. By mid-1945, when the formula and process were nearly finalized, Byerly and Halberstadt, who knew about Byerly’s work as he oversaw product development research for the soap brands, showed the product to upper management. Given the potential of the product, the company decided to move as quickly as possible, ignore the staged introduction and “bypass both the usual blind tests and the shipping and advertising tests...[which] would give [P&G] almost two years start over Lever and Colgate” (Dyer et al., 2004, p. 74).

Product X was named Tide and was patented in 1946. Tide quickly grabbed consumer attention as an effective all-purpose detergent with the slogan, “Tide will make oceans of

102 suds” (Dyer et al., 2004, p. 76). In 1947, Colgate-Palmolive came out with Fab and in 1948, Lever introduced Surf, however by 1949, Tide was the “No 1 package seller in the United States” and captured a market share greater than 50% in the packaged synthetic detergent market; an “equivalent to a quarter the entire national volume in packaged washing products” (Lief, 1958, p. 246). As P&G pushed Tide as far as it could into the market, as seen in Figure 4.5, it also reduced the number of brands supported in the category (Dyer et al., 2004, p. 80).

Figure 4.5. U.S. Tide Share. Source: Pepper, 2005, p. 28

The growth of Tide coincided with the spreading of automatic washing machines. P&G developed exclusive agreements with washing machine manufacturers to place a box of Tide in each new machine. Even though the US Federal Trade Commission eventually disallowed the exclusive agreements, a strong association between Tide and the new appliances had been created by the consumers (Dyer et al., 2004, p. 77).

In 1948, Deupree became Chairman and Neil McElroy, who had developed the brand- man concept in which the organization was based, became President. Deupree believed that at age of sixty-three, he would soon not be capable of handling the complexity of newer problems and thought that “a youthful viewpoint [was] essential” (Lief, 1958, p.246).

On his part, McElroy believed that liquid soap, such as Lever’s Liquid Lux could catch on. After conducting market research and realizing the market potential of the category, researchers developed the liquid soap named Joy. Every step of the development process required management approval of expenditures. With success in its market testing, Joy was introduced and became a strong contester to Liquid Lux in the liquid soaps category.

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Meanwhile, competitors crowded the detergents field decreasing Tide’s share. Major soap brands like Colgate’s SuperSuds became Blue Detergent SuperSuds, and Lever introduced Rinso Detergent to accompany its Rinso soap. With the growth of competitors, McElroy approved the development of another detergent that would be positioned as a runner-up in the market. Cheer was developed, entered test market in 1950 and became available to two-thirds of the US population within two years. Oxydol was also reformulated as a synthetic detergent in an attempt to counter its severe market share losses; however it recovered to fourth place behind Tide, Cheer, and Colgate’s Fab detergent (Lief, 1958).

Although Tide cannibalized P&G’s own soap brands, P&G was committed to driving Tide as far and as deep in the market as it could. As a result, “between 1951 and 1956, P&G earned nearly a quarter of a billion dollars in profits in laundry, while both Lever and Colgate lost money in the category” (Dyer et al., 2004, p. 83). “By 1952, Tide was six times larger than Unilever’s largest brand and four times larger than Colgate’s largest” (Pepper, 1995, p. 87). Table 4.15, depicts the sales revenues generated by a few top selling detergents from 1954 to 1957.

Company Detergent Brand 1954 1955 1956 1957 P&G Tide $147.6 $158.2 $169.9 $179.8 P&G Cheer $62.9 $65.4 $65.2 $71.0 P&G Dash $0.5 $2.0 $16.7 $22.1 P&G Sum $211.00 $225.60 $251.80 $272.90 Unilever All $27.9 $35.1 $33.6 $35.1 Unilever Rinso Blue $10.2 $21.8 $24.7 $23.6 Unilever Surf $24.7 $18.5 $15.6 $13.5 Unilever Sum $62.80 $75.40 $73.90 $72.20 Table 4.15. Detergents Sales Revenues from 1954 to 1957 ($ Millions). Source: Cox, 1976, p. 54 Competition from outside of the soap industry also developed as synthetic detergents took business from regular soaps. By 1953, the volume of detergents surpassed those of soap, and soap manufacturers became considered leaders in industrial chemistry. The Monsanto Chemical Company developed a low sudsing detergent for tumbler-type washing machines but was unsuccessful in selling it to any of the three soap leaders, P&G, Unilever, and Colgate-Palmolive. With the product at hand and no buyer, Monsanto Chemical Company independently introduced All, which quickly soared to fourth-place in the market replacing Oxydol and causing P&G to release its own low-suds Detergent Dash, and a suds free detergent, Cascade. As P&G and Colgate-Palmolive released their own low sudsing detergents, Unilever purchased All.

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Within one decade, “more than half of P&G’s soap-making equipment [became] idle if not obsolete” as the “company invested as much money in plant and equipment as it had done in its first hundred years” (Lief, 1958, p. 253). P&G invested “close to $300,000,000 in plant and equipment in the post-war decade, to erect and staff new laboratories, and to enhance the welfare of the workers” (Lief, 1958, p. 278).

Synthetic detergents were also a turning point for P&G in its international operations. Deupree stated that “you couldn’t get into Venezuela with yellow bar soap” as you would be offering “more of the same” (Lief, 1958, p. 263), however, detergents enabled P&G to venture abroad through its overseas division, which had been created in 1945 to oversee the international subsidiaries. While an attempt existed to promote local employees in the subsidiaries, the company also made it a policy to seek within its entire organization the best man for the job.

Initially, P&G opted to replicate the US model of policies and procedures adapting them abroad only as needed. Issues arose, however, due to distinct local needs and different environmental conditions. For instance, in England the formula for Drene caused it to crystalize in the country’s cold bathroom temperatures. On the other hand, P&G also experienced problems when trying to be too accommodating. For example, a strengthened Drene shampoo for the Cuban market due to the assumption that hair and scalp was oilier in subtropical regions was a mistake.

By 1955, the consumption of soap and detergents combined in the 15 countries in which P&G conducted business overseas matched that of the United States. Lingle, Vice President of overseas division, described a situation where in the “United States we are the champs and others are the challengers; in other countries we are the challenger, faced with strong, alert international competitors” (Lief, 1958, p.268). In 1956, Fortune magazine described P&G as having “a penetration unequaled by any other manufacturer of anything” referring to the fact that 95% of households in the US used at least one P&G product (Dyer et al., 2004, p. 89).

4.3.10 Golden Age at P&G In the 1950s, P&G changed its focus from radio to TV advertising. Procter & Gamble had ventured onto TV as early as 1939 when it co-sponsored the first telecast of a major league baseball game with Socony Vacuum and General Mills. In the 1940s, The Procter & Gamble Productions Inc. was created to help contract scripts, hire talents, and to produce

105 shows and commercials for the radio; however in the 1950s it turned its efforts to TV, which became increasingly popular. P&G “was credited in the television trade with causing a revolution in programming” through its fifteen-minute episodes every afternoon, which later became half-hour then one-hour long (Lief, 1958, p.271). By 1955, with the decreased radio audience, P&G gave-up on its radio advertising. According to Printer’s Ink, in 1957, P&G outranked General Motors and spent a total of $57,000,000 in major media advertisement, 82% of which went to television (Lief, 1958, p.277). In 1970, P&G alone would contribute to “one-tenth of the networks’ total revenues” (Dyer et al., 2004, p.99). P&G produced award winning TV serials and created well-praised TV commercials that, according to a 1957 Census, would deliver 79,000,000 daily selling messages to 42,000,000 television homes in its daytime program alone (Lief, 1958, p.277).

Television advertising greatly helped P&G introduce new products and keep them in the consumer’s mind. This was especially important since “more than half the company’s volume in household items was in brands not on the market a decade before” (Lief, 1958, p.280). President McElroy had a saying which represented the spirit of the organization, “move ahead by being dissatisfied” (Lief, 1958, p.298). In response to a columnist who wrote that she could not remember “ever using [Crisco] that wasn’t a new and improved type”, P&G responded:

We happen to be in one of the most competitive businesses there is…. We don’t keep on improving our products just because we enjoy it (although it does give us a pleasant feeling of satisfaction). The fact of the matter is that we want to maintain our position of leadership in this fast-moving field and that means constantly searching to find ways of making our products better (Lief, 1958, p.307). Concerned that P&G had to find additional sources of revenue to maintain the growth pattern of doubling the business every 10 years since 1905, Howard Morgens devised a plan to reorganize the company into “divisions, each based around a different business” (Dyer et al., 2004, p. 91). Morgens succeeded McElroy as President when McElroy was appointed to become Eisenhower’s Secretary of Defense in 1957. Although McElroy left presidency at the early age of 53, P&G’s principle of continuity of management enabled the company to continue its expansion initiative with a capable individual guided by the philosophy that

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“research and testing minimized the risks associated with expansion” (Dyer et al., 2004, p. 88). McElroy returned two years later and replaced Deupree as Chairman.14

Morgens believed that it would be difficult for the company to grow by slightly increasing its market share in sectors where it competed, so a new multi-divisional structure would enable P&G to grow into new business lines, done through the concept of related growth (Lief, 1958). Figure 4.6, displays the technology evolution that P&G underwent through related diversification since its foundation in 1837.

Figure 4.6. Technology Evolution. Source: Sakkab, 2002, p. 39

To help the development of the different areas, P&G set up 6 divisions, which were a “type of specialized organization-within-an-organization”: The Buckeye Cotton-oil Division,

14 Deupree had been appointed in 1946 by President Harry Truman as the “first executive chairman of the Army-Navy’s Munitions Board” in the organization of Cold War efforts (Converse, 2012, p. 72).

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Buckeye Cellulose and Specialty Division, Overseas Division, Toilet-Goods Division, Food Division, Soap-Detergent Division (Lief, 1958, p. 289).15

The Soap and Detergent Division was by far the largest division in Procter & Gamble. “Very few soap brands that had been in existence fifty years before remained on the market”, however improvements provided by constant research enabled Personal Ivory, a form of Ivory to survive (Lief, 1958, p.296). On Ivory’s 75th birthday in 1954, Personal Ivory “outsold all other toilet soaps, including Lever’s Lux and Lifebuoy, Armour’s Dial, P&G’s own Camay, and Colgate’s Palmolive and Cashmere Bouquet” (Lief, 1958, p.296).

The Toilet-Goods Division grew primarily in dentifrices and shampoos. After intensive testing and a thorough go-to-market preparation, Gleem toothpaste was successfully introduced in the US market in 1952. Gleem toothpaste quickly became the second largest- seller, behind the well-established Colgate Dental Cream (Lief, 1958, p. 262). In 1959, Colgate Dental Cream had a 32% market share, Gleem had 20.3%, Pepsodent by Unilever 11.5%, and Crest was fourth (Dyer et al., 2004, p. 153). Crest was developed through a partnership with Indiana University and was introduced in 1955. In 1961, Crest surpassed Colgate Dental Cream and obtained leading market position after it became the first brand to receive endorsement by the American Dental Association in 1960 (Dyer et al., 2004, p. 93).

P&G had introduced several shampoo brands in the 1940s, such as Prell in 1946 and Shashta Cream shampoo in 1948, however success in the field came through Head & Shoulders, which was test marketed in 1961. “By the late 1960s, P&G had consolidated a dominant position in the U.S. Shampoo market, anchored by Head & Shoulders with a 25 percent share, and Prell with 22 percent” (Dyer et al., 2004, p. 94). P&G also entered the permanents market due to its previous knowledge with shampoos and hair. Some products such as Lana and Wondra failed in the test market, and Pert loss popularity due to the constant development of permanents, however, Lilt, which was introduced in 1949 grew to the “No. 2 position in this undulating market” (Lief, 1958, p. 258).

In 1954, a small Exploratory Development Division was set up to look for opportunities that would enable P&G to enter new businesses in consumer goods. Acquisitions were intended to incorporate small companies with “some technological

15 The Buckeye Cotton-oil and Buckeye Cellulose and Specialty Divisions were consolidated as the Buckeye Cotton Oil Company in 1955; however, for administrative purposes they were considered two separate divisions (Lief, 1958, p. 293). The Exploratory Development Division was created in 1954, and the Paper-Products Division was created in 1956.

108 connection to existing business”, that made products that “could significantly be improved by applying P&G’s technologies and know-how”, and that had a “low-cost, high volume units that were bought from retail outlets” (Dyer et al., 2004, p. 94). After each acquisition, P&G would place its personnel in the company to learn about the business and institute P&G’s systems and processes, thus Procterizing the company (Dyer, 2004, p.95).

When the Foods Division was created in 1955, foods accounted for “25% or more of the annual sales” (Lief, 1958, p.289). Company extensions in the food field had prospered with new shortening brands such as Golden Fluffo, which became a second national edible brand. P&G entered the bulk-shortening market with Pertex, a meat-and-vegetable oil blend for restaurant frying, and Selex, a bulk-shortening used for baking. P&G also entered the instant shortening segment with Whirl. Since many “busy housewives were buying shortening already mixed with the flour, sugar, and other ingredients”, P&G supplemented its business by entering baking mixes (Lief, 1958, p. 293). In 1956 the company acquired Nebraska Consolidated Mills, owner of Duncan Hines brands. P&G also acquired Hines-Park Foods, Inc., and Duncan Hines Institute, Inc. (Dyer et al., 2004, p. 94).

In 1955, P&G acquired W.T. Young, Inc., which processed Big Top Peanut Butter and salted peanuts, and in 1956 introduced a second peanut butter brand called Jiff. The entry into peanut butter came about from the company’s experience supplying peanut butter processors and from its knowledge in crushing peanuts for its oil.

Important acquisitions in Procter & Gamble’s history occurred in the following years. In 1956, P&G acquired Charmin Paper Mills, Inc., which became its own division. In 1957, P&G bought Clorox adding household bleach and disinfectant to the Soap and Detergents division, and in 1963 it acquired Folgers Coffee.

Clorox was divested in 1967 after the company was charged and lost in the Supreme Court for violating the Clayton Act.16 Once the company discovered that the Federal Trade Commission would also seek a divesture of Folgers, P&G signed an agreement in which it was allowed to retain the second largest coffee company in the US provided that

16 The Clayton Antitrust Act was an amendment to the Sherman Antitrust Act, and sought to prevent anticompetitive practices (britannica.com)

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for seven years, P&G could not acquire, without prior consent of the FTC, any business in the United States that made household consumer products sold primarily in grocery stores. The company was further required to sell its Folgers coffee plant in Houston within the next five years to a purchaser approved by the FTC and was prohibited from acquiring any coffee business within the next ten years (Dyer et al., 2004, p. 107). Insiders at P&G confirmed that these “rulings had a chilling effect on management’s attitude about acquisitions” (Dyer et al., 2004, p. 107). Although other consumer good companies ventured into fully unrelated fields to avoid antitrust laws, which prohibited acquisitions in the same segment, P&G concentrated its efforts on in-house development and made no major purchases in the late 1960s or in the 1970s, opting to digest the acquired businesses.

The Paper Division created by Charmin Paper Mills drove much of the company’s growth in the 1960s and 70s. P&G had become interested in Charmin Papers due to its experience with cellulose through its Buckeye business. At the time acquired, Charmin was a regional competitor with 1,200 employees in a market where Scott Paper and Kimberly-Clark were industry leaders. According to P&G employee, progress was initially slow due to “the lack of good technical background” in the business (Dyer et al., 2004, p. 122). The Paper Division had six years of mediocre results until the company decided to commit by placing Ed Harness in charge, pulling other talented individuals from the Soap and Detergent Division and increasing investments. The business would either be improved or be sold.

Although P&G introduced a successful facial tissue called Puffs in 1960, which surpassed Scotties and became the number 2 brand after Kleenex, other products failed to gain adequate earnings. The toilet tissue Bounty successfully entered the market, but “wasn’t big enough to support expansion” (Dyer et al., 2004, p. 126). The breakthrough innovation that enabled the paper division to expand was the development of the CPF manufacturing process, which not only reduced cost, but also created a “softer and more absorbent tissue” structure (Dyer et al., 2004, p. 126). A reformulated Charmin toilet tissue was launched and “within two years, Charmin was the top-selling bathroom tissue in its marketing area” (Dyer et al., 2004, p. 129).

Meanwhile, the paper division had also been working to develop affordable disposable diapers. At the time, cloth diapers were the norm and P&G sought to position its offering as a convenience item. Several of the company’s divisions were involved in the

110 development process of the product. The pilot test in 1958 produced mixed results, although mothers liked the disposable diapers, they found them too expensive. Another issue was that parents purchased the diaper for a relatively short period of time because the child would grow. As a result, P&G opted to reposition the disposable diapers as a mass market product that would help reduce unit costs. Pampers was released in 1961, and the processes developed for its mass production was considered to have “provided the company with a running start of at least four years” (Dyer et al., 2004, p.135). By 1969, Pampers “had become P&G’s second largest brand, after Tide”, and in 1970, it controlled 92% of the market (Dyer et al., 2004, p. 134, p. 136).

In 1970, Procter & Gamble had a leading position in all of its major businesses. Tide led in laundry detergent, Head & Shoulders in shampoos, Crest in dentifrice, Crisco in shortening, Pampers in disposable diapers, and Charmin in toilet tissues (Dyer et al., 2004, p. 110). Procter & Gamble, however, was soon caught off-guard in a series of market shifts.

4.3.11 Emergence of Problems During the 1970s, environmental consciousness began to spread and the public began to blame detergents for significant water pollution. P&G contested, affirming that the algae proliferation resulting “from untreated sewage and fertilizer runoff were a far bigger problem than phosphate from detergents” (Dyer et al., 2004, p. 109). When several cities banned detergents with phosphates in 1972, P&G stopped selling its detergents in those cities; however, it eventually “spent more than $130 million searching for a phosphate replacement” (Dyer et al., 2004, p. 109). Ed Harness believed that the phosphate controversy was “a massive distraction” (Dyer et al., 2004, p. 109). Smale accounted that it “had an effect of diminishing the productivity of our R&D work in [cleaning products] for a decade… [It wasn’t] until the [19]80s that we really started to come up with some very significant product development… in the broad cleaning products area” (Dyer et al., 2004, p. 109).

P&G was caught off-guard in the shampoo segment. Hairstyles changed and consumer’s habits were altered with the emergence of blow driers. R&D Director, Cecilia Kuzma accounts that P&G “spent an awful lot of time on how to develop superior cleaning – how to keep hair cleaner longer – when… ‘cleaner longer’ was no longer a need” (Dyer et al., 2004, p. 112). In 1974, Johnson and Johnson’s Baby Shampoo surpassed Head & Shoulders. In an attempt to create shampoos addressing hair fullness and perfumed hair, researchers developed Pert and Rejoice, however, “consumers displayed little brand loyalty” (Dyer et al.,

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2004, p.111). Although Pert initially had a rapid rise capturing 6% market share, it quickly dropped to 1.9% (Dyer et al., 2004, p. 268).

In 1976, Procter & Gamble released Luvs, a diaper with an hourglass shaped pad and an elasticized waste. The company introduced a second brand believing that such premium features could not be incorporated into the high-volume Pampers. In 1978, Kimberly-Clark introduced Huggies, a technological superior diaper with “an hourglass shape that fit better, offered better absorbency, and featured an improved tape fastening system – all for pennies more than Pampers” (Dyer et al., 2004, p. 232). Even though in the early 1980s Pampers combined with Luvs “had nearly half of the worldwide disposable-diaper volume and more than twice the share of Huggies”, the situation deteriorated as hourglass shaped diapers appeared around the world (Dyer et al., 2004, p. 233). P&G had placed the superior technology in Luvs, which was a “small North American and European” brand, yet Pampers was its global brand (Dyer et al., 2004, p. 233).

After attempting to improve Pampers for six years, P&G realized that incremental changes would not suffice. In 1984, the company committed to “investing $500 million to upgrade its production system and an additional $225 million for advertising and promotion” (Dyer et al., 2004, p. 234). In the meantime, rivals expanded to niche markets such as wipes and pull-up training pants, which became the focus for competition in the 1990s (Dyer et al., 2004, p.237). Kimberly Clark had basically no competition for nearly a decade in the training pants market, which was a highly profitable segment with sales around $500 million a year (Pepper, 2005, p. 45). Furthermore, Huggies’ market share in the US increased from 7% in 1980 to 32% in 1989, while P&G’s market share in the same period dropped from 70% to 48% (Dyer et al., 2004, p. 232).

The toothpaste Crest, which had become a market leader, also suffered market share losses. Crest’s market share dropped from 42% in 1979 to 28% in 1985 (Dyer et al., 2004, p. 348). In 1986, toothpaste with baking soda was introduced in the market. P&G believed that baking soda did not provide any therapeutic benefit and consequently resisted releasing its product. It was only after P&G realized that baking soda appealed to millions of consumers six years later, that the company released its own baking soda product (Pepper, 2005, p. 50). Crest would eventually lose its leadership position in 1997 after the US release of Colgate Total. Although the all-in-one Colgate formula had been introduced abroad in 1992, it was only launched in the US five years later when it became the first and only toothpaste in the

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US with approval from both, FDA and the American Dental Association, for its comprehensive therapeutic benefits (Dyer et al., 2004, p. 349).

Rely tampons, introduced in 1974 as female super absorbent tampons marked P&G’s entry into female care products. The Center for Disease Control found a “statistical association” between individuals afflicted with Toxic Shock Syndrome (TSS) and the use of Rely tampons. The Rely crisis thus prompted P&G to discontinue the brand in 1980 (Dyer et al., 2004, p. 114).

Pringles was launched in 1968, and pushed by TV advertisement, captured 15% of the market in 1975. Complaints about the flavor and texture, attacks to the synthetic nature of Pringles, and the FDA requirement that Pringles be labeled as dehydrated potatoes, caused market share to drop to 4.3% in the end of the decade. In fact, the CEO announced that if Pringles could not resume profitable growth by 1984, it would be discontinued (Dyer et al., 2004, p. 187).

The development of Olestra, considered one of the company’s biggest flops, began in 1971. Olestra was supposed to be a substitute for fat in snacks and crackers such as Pringles and Ritz, however after 25 years of research and a cost of $250 million, when it finally gained FDA approval, “no product containing olestra ever caught on in the market” (Tucker et al., 2005, p. 6).

Procter & Gamble also encountered difficulties during its entry into Japan in 1972. It took 15 years until P&G obtained its first annual profit in the country. Many mistakes can be accounted for P&G’s struggle in Japan, yet most are rooted in the company’s arrogance. Artzt has stated that P&G “stormed into the Japanese market with American products, American managers, American advertising, American sales methods and American promotion strategy… it was a near disaster” (Dyer et al., 2004, p. 219).

Other developing trends also demonstrated the complex situation P&G would encounter in the 1980s. Increasingly fragmented viewership due to cable and satellite TV posed a challenge to the efficiency of the company’s TV advertisements and soap opera sponsorships (Dyer et al., 2004). “Television viewership fell from 92 percent to 67 percent in the mid-1980s” (Tucker et al., 2005, p. 5). Tough economic times subsequent to the energy crisis in the 70s and its after effects, and the recession in 1981-1982, resulted in a downward pressure on prices, and the migration of consumers from branded items to private labels and

113 generic brands. The introduction of bar code and scanners also began to shift the balance of power from manufacturers to retailers, which did not further need to rely on the manufacturers for data on consumer purchasing patterns (Dyer et al., 2004, p. 180).

4.3.12 Restructuring Smale succeeded Harness as CEO in 1981 and focused on repositioning P&G in the complex environment by reducing costs, accelerating innovation, and resuming “acquisitions to broaden the company’s portfolio and hasten growth” (Dyer et al., 2004, p. 182).

In an attempt to reduce costs and become a low-cost consumer products manufacturer, spending was redirected towards automation and cost savings. It is estimated that “10% of the salaried workforce was trimmed during the early 1980s” (Dyer et al., 2004, p. 183).

An effort was made to increase new product introductions by R&D. The last mega hit the company produced had been Pampers back in 1961. Both “major new product initiatives of the middle and late 1970s” had undergone problems. Relay became a crisis, and Pringles had an uncertain future as it struggled to become profitable (Dyer et al., 2004, p. 184). “By early 1983, [P&G] had twenty-two new products in test markets – a record total – including some that departed from tradition by lacking distinctive performance advantages” (Dyer et al., 2004, p. 184). P&G released an overwhelming amount of product upgrade and brand extensions, however, the company’s biggest bets were on Duncan Hines soft cookies and Always sanitary pads.

Although P&G successfully developed a soft cookie and applied for a patent in 1979, the product only became ready for the market four years later. Competitors, such as Nabisco, introduced a similar cookie in their established distribution system a few months after the release of P&G soft cookies. As P&G began suffering from an estimated annual loss of $100 million in the cookie business, it pulled out of it in 1987 (Dyer et al., 2004, p. 185). Unlike the traditional lengthy market testing done by P&G, Always was released in 1983, one year after test market, and became a success. By 1990, Always was the “top sanitary napkin, with over one-fourth of the market” (Tucker et al., 2005, p. 5).

P&G’s pursuit for acquisitions in the 1980s occurred at the same time the Reagan administration relaxed the enforcement of antitrust laws. P&G entered the beverage industry in 1980 by acquiring Crush International Limited and became “the sixth-biggest soft drink maker in the United States” (Dyer et al., 2004, p. 192). In 1981, P&G acquired Frostproof’s

114 citrus processing business. P&G also entered the over-the-counter (OTC) remedies and prescription drug market in 1982 when it purchased Norwich Eaton Pharmaceuticals. In 1985, P&G purchased the “OTC lines of Monsanto’s pharmaceutical subsidiary, G.D Searle & Co”, and acquired Richardson-Vicks Inc. (RVI) through a friendly bid, as RVI avoided a hostile takeover from Unilever (Dyer et al., 2004, p. 194).

Smale abandoned some long-standing P&G policies and practices through his efforts to reposition P&G. As plants were closed and operations became automated and streamlined, the guarantee of employment policy was abandoned. David Swanson, a senior manufacturing executive, recalls that “the trauma… felt in the organization was significant… There were special problems for both those who were separated and those who were administering the separations” (Dyer et al., 2004, p. 197).

Smale realized that in some categories, P&G had too many brands that competed, and that no consideration was given on how they complemented each other. Brand managers were also in competition amongst themselves, thus inhibiting the potential scale that could be achieved and the learning that could be leveraged to better compete against external firms. “P&G lacked a coordinated strategy in each of its major categories, because it was no one’s business to identify segments and opportunities” (Dyer et al., 2004, p. 198).

In 1986, P&G formalized its statement of purpose, values and principles, and in 1987, began to reorganize into a matrix-system in order to transform itself “from a top-down hierarchical, command-and-control mode of operation into a leaner, flatter, and more responsive organization” (Dyer et al., 2004, p. 199). This reorganization was “the most significant reorganization of the Company in 30 years” and established thirty-nine Category Business Units (CBUs), which were led by 26 CBU managers (Dyer et al., 2004, p. 198). Separated functions of manufacturing, engineering, purchasing and distribution were combined under Product Supply and incentives were realigned to match company objectives. The Profit Improvement Program (PIP) for instance, changed manager’s focus from selling more to generating more profit. Top management also tried to simplify decision making, thus giving more authority to managers and abandoning the Administrative Committee, a forty- person group that for decades reviewed operations and approved expenditures.

By the end of the 1980s, Smale’s initiatives had paid off as P&G’s results improved. Although competition was aggressive, P&G retained leadership in its biggest categories with Liquid Tide, Ultra Pampers and Tartar Control Crest.

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In foods, P&G restored the struggling Pringles brand. In 1982, Pringles became “profitable for the first time in its history” when a cross-functional team, “an unprecedented approach for P&G”, reduced price, improved the taste and texture, increased the quantity of flavors, and resumed spending in advertising (Dyer et al., 2004, p. 187). The brand was further improved in the late 1980s when a “new team rethought Pringles from the ground up, starting with the demand side” to strengthen Pringles as a corporate brand. By the late 1990s, it achieved more than $1 billion in annual sales (Dyer et al., 2004, p. 188). P&G also acquired Fisher Nuts increasing its salty snacks business, but sold it in 1995.

In shampoos, P&G developed two successes in the 1980s, Pert Plus and Pantene. The growth of P&G hair care brands can be seen in Figure 4.7.

Figure 4.7. Growth of P&G Hair Care Brands, 1985 – 2004. Source: Pepper, 2005, p. 62

In 1980, researchers began to look for approaches to combine shampoo and hair conditioners. By the mid-1980s, the BC-18 formula enabled such product development. The two-in-one shampoo was released in 1986 under the brand Pert Plus and gained momentum after media recognition in 1989. Pert Plus rose to 7% market share and “by early 1990, the brand had become the number one dollar-volume shampoo in the United States. Globally rebranded as Vidal Sasson & Go (in some European markets) and Rejoice or Rejoy (in Asia), the brand scored further impressive gains” (Dyer et al., 2004, p. 270).

The Pantene brand was obtained through the Richardson Vicks Inc. (RVI) acquisition in 1985, however it “remained a limited, upscale marketing concept” until it was developed into a beauty shampoo in Taiwan (Dyer et al., 2004, p. 272). The brand came together from

116 existing P&G haircare concepts present in several countries, and became a success. The reinvigorated Pantene-Pro-V fused the BC-18 technology with the “shine through health” concept. After its global release in less than two years, it became a mega-brand (Dyer et al., 2004, p. 273).

The OTC health care segments prospered with the brands acquired from Norwich Eaton and RVI. Brands such as Pepto-Bismol, for upset stomach and diarrhea, Metamucil, a laxative, and other Vicks brands such as DayQuil and NyQuil, thrived through P&G’s product supply, marketing and advertising capabilities (Dyer et al., 2004, p. 200).

Oils of Olay skin cream was also an RVI brand that succeeded with P&G. The brand became a global success through P&G’s distribution and advertising capabilities, and became the foundation for the beauty care business. In 1989, P&G entered cosmetics through its acquisition of Noxell Company for $1.34 billion, the biggest deal the company had ever made until the time (Dyer et al., 2004, p. 201). In 1987, P&G acquired Bain de Soleil. The company also acquired American Cyanamid’s Shulton division, owner of Old Spice brands. In 1991, P&G acquired Max Factor and Betrix businesses from Revlon, and in 1993 Giorgio cosmetics from Avon was added to enhance its business in beauty care.

By 1989, P&G’s cold beverage business continued to struggle. The company acquired Sundor Company, owner of Sunny Delight, in an attempt to improve its citrus business, but exited the carbonated beverages segment by selling its Crush International Business (Dyer et al., 2004, p. 201). Citrus Hill was also sold in 1993, and Hawaiian Punch, acquired in 1990 from Del Monte / RJR Nabisco, was sold in 1999.

In 1992, P&G also began to sell its operations with Buckeye. P&G Cellulose was sold since Artzt concluded that P&G “would be better off working with raw materials suppliers rather than continuing to create much of its own raw material supply internally” (Dyer et al., 2004, p. 286). The segment had been struggling for years due to the increase of suppliers, decrease in price, and rise of non-cellulose pulps.

The 1990s was a period of further restructuring resulting from the company’s aggressive growth pursuit in the 1980s. According to a company release,

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We believe that we must slim down to stay competitive in a very competitive world. Internally, the dramatic growth of our business during the past decade – including more than 40 acquisitions, plus entry into 29 new countries and 20 new business categories – has created a more complex work environment. Externally, customers want better value, and our competitors are getting leaner and quicker. We are simply going to have to run faster to stay ahead, and we intend to do that (Dyer et al., 2004, p. 288). In 1992, P&G began a reengineering initiative to streamline global operations, reduce costs and increase productivity that became known as Strengthening Global Effectiveness (SGE). The recommendations from such effort were difficult to implement, and the major outcome from the program was downsizing. Besides the financial burden of the program, SGE had the effect of decreasing employee morale (Dyer et al., 2004, p. 289).

P&G had started experimenting with supply chain integration in the 1980s and with Walmart more specifically in 1988. Prior to the venture with Walmart, P&G had turned into Walmart’s biggest supplier, yet was considered by Sam Walton “the hardest company to do business with… [P&G had] an extremely overcomplicated and inflexible sales organization” (Dyer et al., 2004, p. 315). The collaboration in supply chain resulted in immediate benefits as “P&G sales to Walmart leaped by more than $250 million” (Dyer et al., 2004, p. 320) within two years. The experience led P&G to restructure its relationship with other customers by implementing new efficient practices of integrated supply chain and a centralized purchasing approach (Dyer et al., 2004).

In 1992, P&G reorganized its sales organization into Customer Business Development (CBD) units, in which the sales force was organized around customer accounts for an improved relationship. Furthermore, in 1993, P&G switched from its traditional promotional practices to the value pricing concept of an Every Day Low Price (EDLP) in order to make its offerings more transparent (Dyer et al., 2004). P&G led in the initiative to shift from high- low prices to EDLP for both household and personal care products. At first Colgate gave retailers the choice between high-low and EDLP, but then it reduced its trade promotion activities (Low, 1996, p. 69).

In 1995, the company also reorganized its geographic management structure. The operations that were previously divided between US and International businesses became restructured around four regions: North America, Latin America, Asia, and Europe/Middle East/Africa (Tucker et al., 2005, p. 6).

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In 1998, P&G was considered too slow and risk-averse for an increasingly fast and competitive environment. P&G therefore launched a major restructuring, called “Organization 2005”, to better adapt the company to the new times. The company again altered its management structure from the four geographic regions to a matrix structure with seven global business units (GBUs): Baby Care, Beauty Care, Fabric & Home Care, Feminine Protection, Food & Beverage, Health Care & Corporate New Ventures, and Tissue & Towels (Tucker et al., 2005, p. 7). The 7 GBUs established in 1998 underwent several changes. They became 6 GBUs in 2000, 5 GBUs in 2002, and 3 GBUs in 2004. The components of Organization 2005 are shown Figure 4.8.

Figure 4.8. Components of the Organization 2005. Source: Pepper, 2005, p. 310

In 2011, the Global Business Units were further consolidated into 2 GBUs, Beauty and Grooming, and Household care. The two Global Business Units together were composed of the following business segments: Beauty; Grooming; Health Care; Snacks and Pet Care; Fabric Care and Home Care; Baby Care and Family Care. The Snacks and Pet Care business segments were divested in 2012 and 2014, respectively (Annual Reports).

The Organization 2005 restructuring focused on creating a

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culture that drives stretch, innovation and speed. A culture that rewards going for breakthrough goals, that supports stretching, taking risks – even if there is a chance of failing short… a culture that stimulates robust innovation – big ideas that change the game – and encourages visionary leadership. A culture that encourages collaboration and emphasizes learning and sharing new knowledge. A culture that values speed and fosters fast, streamlined decision making (Dyer et al., 2004, p.296).

The reorganization changed nearly everything about how the company organized and managed itself. It shifted the basis of the company’s operations from geographical profit centers to a global matrix featuring worldwide product groups and geographical marketing organizations (Dyer et al., 2004, p. 282). Some of the problems at the company were caused by the Organization 2005 changes. The matrix structure of Global Business Units (GBUs) and Market Development Organizations (MDOs) created morale issues as MDO employees believed to have been lowered in status and become disempowered. As a result, the collaboration that was needed for the matrix structure to work appropriately was hindered (Dyer et al., 2004, p. 302). Secondly, the development of management systems to support the new infrastructure was slow. The president of the Global Feminine Care GBU/Northeast Asia MDO noted that previously, all systems generated data by country, “then all of a sudden, we wanted global business data…Just trying to figure out what was going on in our worldwide business was a nightmare! Getting answers to basic questions… could entail a dozen phone calls, faxes, or e- mails and other costly time delays” (Dyer et al., 2004, p. 302).

The reorganization occurred all at once, and was atypical of P&G, which always attempted pilot-experiments to reduce risk and to leverage learning. Thousands of employees were relocated at the same time, generating all sorts of difficulties. Issues ranged from staff housing allocation to problems in direct communication with new bosses, many of which were in different time zones (Dyer et al., 2004, p. 302).

The company lost control of cash flow and costs and suffered delays and frustrations in untangling ambiguous and overlapping responsibilities. To reach ambitious revenue targets, managers attempted to sustain high prices in the face of fierce competition and pushed new brands into the market before they were ready. Management lost focus on the company’s biggest brands and markets (Dyer et al., 2004, p. 303). In early 2000, news that the company had been talking to Warner-Lambert and American Home Products for a potential merger that would transform P&G into “a major factor in the OTC health care industry” broke out and worried company investors causing stocks to sharply fall (Dyer et al., 2004, p. 302). Further issues arose when forecasted earnings for the second half of the year 2000 were revised from a growth of 7-9% year on

120 year performance to a drop of about 10%, causing the stock price to further plunge. As a result of the crisis, P&G encountered external and internal pressures; Jager resigned his position as President, CEO, and Chairman, and Alan Lafley became President and CEO in June 2000. Former P&G CEO, Pepper, returned to P&G and assumed the position of Chairman (Dyer et al., 2004, p. 302).

4.3.13 The New Millennium In 1986, Lafley participated in a class given by Michael Porter and Monitor Company at P&G that he considered “P&G’s first experience with business strategy” (Lafley & Martin, 2013, p.49). CEO Smale had requested Monitor to create an Applied Strategic Management (ASM) Program to teach specific strategy tools to category-management teams in the four global regions. The program, which had a duration of three days, continued until 1989 (Lafley & Martin, 2013, p.179). Even though the business improved, by the late 1990s, “P&G forgot most of what it had learned…[and] reverted to the same helter-skelter, new categories and new-brands, and M&A approach” (Lafley & Martin, 2013, p.49). 17

Pepper accounts that in the new millennium, Lafley and him,

returned focus on the fundamentals: winning with the consumers and with our customers, winning on our largest brands, winning in our largest countries. We did those few things we knew we must do to have a healthy business: get our prices right and our costs down; lead innovation and commercialize it effectively; build strong partnerships with our customers; and work together across all our business units focusing on building leadership brands (Pepper, 2005, p. 311). By 2002, when Lafley also assumed the position of Chairman, P&G had showed signs of “returning to the consistent, reliable earnings and cash growth that shareholders expect[ed]” (Dyer et al., 2004, p. 308).

Lafley restored investor and employee confidence in P&G and reorganized the business. Lafley stated:

By the time of my election to CEO in 2000, most of P&G’s businesses were missing their goals, many by a wide margin. The company overinvested and overextended. It was not winning with those who mattered most – consumers and customers. When I visited all our top retailers in my first thirty days on the job, I found that P&G was their biggest supplier but nowhere near their best supplier. Consumers were abandoning P&G, as

17 Ed Artzt, CEO from 1990-1995, ended many training programs, such as the effective management courses, which he believed “got misdirected” as “the focus was not on beating the living daylights out of Unilever or Henkel, which is the way they try to do to us” (Swasy, 1993, p.73), however, he created The P&G College, also nicknamed Eddie’s War College, to institutionalize training. It was created as a training program on P&G values, strategic thinking, technology deployment, advertising, and other basics.

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evidenced by declining rates and market share on most of our leading brands.

I was determined to get P&G’s strategy right. To me, right meant that P&G would focus on achievable ways to win with the consumers who mattered most and against the very best competition. It meant leaders would make real strategic choices (identifying what they would do and not do, where they would play and not play, and how specifically they would create competitive advantage to win). And it meant that leaders at all levels of the company would become capable strategists as well as capable operators. I was going to teach strategy until P&G was excellent at it.

I wanted my team to understand that strategy is disciplined thinking that requires tough choices and is all about winning. Grow or grow faster is not a strategy. Build market share is not a strategy. Ten percent or greater earnings-per-share growth is not a strategy. Beat XYZ competitor is not a strategy. A strategy is a coordinated and integrated set of where-to- play, how-to-win, core capability, and management system choices that uniquely meet a consumer’s needs, thereby creating competitive advantage and superior value for a business. Strategy is a way to win – and nothing less (Lafley, 2013, p. 50). Lafley’s approach to turning around the faltering company was based on ten beliefs shown in Table 4.16, and three priorities.

1. Lead Change 2. The Consumer is Boss 3. Innovation is Our Life Blood 4. Power of Strategy 5. Power of Execution 6. Power of Brands 7. Power of Knowledge and Learning 8. Power of P&G People 9. Direct, Simple and Transparent 10. Take P&G’s Statement of Purpose, Values, and Principles Seriously Table 4.16. Ten Things I Believe by Lafley, June 2000. Source: Dyer et al., 2004, p. 305 The three priorities were that P&G “had to come to grips with reality”, make clear choices setting goals focused on the company’s biggest brands, markets, and customers, and had to develop a new global team (Dyer et al., 2004, p. 304).18

With this in mind, Lafley decreased the rate of new product introductions in order to ensure that all new products received proper marketing support (Tucker et al., 2005, p. 7). Lafley also exited underperforming and non-strategic businesses divesting “about fifteen businesses a year for ten years, between 2000 and 2009” (Lafley, Martin, 2013, p. 125). Duncan Hines and P&G’s long-time Crisco brand were sold in 1997 and 2001, respectively. Jiff peanut butter was also sold in 2001 (Dyer et al., 2004). In 2004, P&G also sold its Sunny

18 Lafley observed that “we weren’t a team. We were all firefighting and trying to fix problems in our individual businesses” (Dyer et al., 2004, p. 306).

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Delight and Punica Drinks, both of which were in the beverage segment (Tucker et al., 2005). The company sold Prell in 1999, Biz Bleach in 2000 and Spic and Span in 2001 (Dyer et al., 2004, p. 281). Further restructuring was done with the divesture of the coffee business in 2008, the pharmaceutical business in 2009, the snacks business in 2012, and pet care operations in 2014.

Despite the sale of many long-time brands, P&G also reinforced its business through internal innovations such as Swiffer and Febreze in 1999 and Crest Whitestrips in 2001, as well as other initiatives. In 2008, the company began experimenting with new business models such as the franchising of Tide Dry Cleaning and Mr. Clean Car Wash.

The company also expanded through external market acquisitions. Prior to Lafley, P&G had acquired companies such as Tambrands Inc., a manufacturer of tampons, Iams Company, a global leader in premium pet nutrition, and Recovery Engineering Inc., producer of household drinking water systems and filters (Dyer et al., 2004, p. 298). Under Lafley’s leadership, acquisitions became more targeted. P&G acquired Clairol and SpinBrush in 2001, and Wella in 2003 (Dyer et al., 2004, p. 281). Gillette was acquired in 2005 for $57 Billion, and became the company’s largest acquisition (McCraw, 2009, p. 49).

Through his actions, Lafley began adjusting the company for a new globalized world. More than half of the company’s top thirty officers were substituted by younger and more diverse executives (Dyer et al., 2004, p. 306). New work systems were implemented that helped increase collaboration and information exchange among employees (Dyer et al., 2004). P&G also began to “reverse its policy of extreme secrecy, opening up both within the company and outside it” (McCraw, 2009, p. 54). Within the company, examples include the new informality of dress codes and the creation of blogging software for its employees. Externally, a major shift was demonstrated in 2001 by the replacement of the company’s traditional R&D and a “Not Invented Here” mindset with Connect and Develop (McCraw, 2009, p. 54). Connect and Develop are activities designed to enhance technological innovation at P&G through networks, as demonstrated in Figure 4.9.

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Figure 4.9. Connect & Develop Connections. Source: Sakkab, 2002, p. 40

The company has “gone from ‘protective’ to ‘proactive’” in utilizing the over 2,000,000 researchers world-wide among other connections to leverage the technical capabilities of its 8,000 P&G researchers (Sakkab, 2002, p. 43).

Robert A. McDonald substituted Lafley as President and CEO in 2008 and as chairman in 2010; however due to shy profit results, retired in 2013 for the return of Lafley as President, CEO, and Chairman, positions that he still holds today.

The same year that Lafley returned to P&G, he had released a book called Playing to Win: How Strategy Really Works with the Dean of the Rotman School of Management, Roger Martin, who had worked with him on the transformation of P&G from 2000 to 2009. The results from such transformation are quantified in Table 4.17.

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Where-to-play Results Parameter Choice 2000 2009 Core Categories, % of P&G Sales 55 79 Core Categories, % of P&G Profits 59 83 Grow from the Core Number of brands with $1 billion (or more) annual sales 54 69 Core Categories, sales compound annual growth rate 11% (CAGR) Beauty, sales, CAGR 15% Beauty, % of P&G sales 16 33 Extend into Beauty Beauty, percentage of P%G sales growth 44 Beauty, percentage of P&G profit growth 42 Emerging Markets, sales CAGR 13% Expand into Emerging markets, % of P&G Sales 20 32 Emerging Markets Emerging Markets, % of P&G sales growth 42 Emerging Markets, % of P&G profit growth 29 Gross 46 52 $3.5 $15 Free Cash Flow billion billion Other KPI Capital expenditures (% of sales) 7.6 4.3 Global business services (% of sales) 6.5 3.1 R&D (% of sales) 4.8 2.5 Marketing (% of sales) 14 15 Table 4.17. Results of P&G’s Transformation from 2000 to 2009. Lafley & Martin, 2013, p. 224 Lafley and Martin worked together to “put a robust strategic process in place throughout P&G”, which is framed in Figure 4.10 (Lafley & Martin, 2013, p. 208).

Figure 4.10. Strategy Playbook. Source: Lafley & Martin, 2013, p. 213

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Lafley accounts that when he first became CEO, they would “set aside a day at a time, a day we could get away from our calendars, e-mails, and Blackberries, and devote ourselves to strategic issues – of his or my choosing. We kept a running list of strategic choices…” (Lafley & Martin, 2013, p. 208).

According to Lafley and Martin, strategy is “a coordinated and integrated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems” (Lafley & Martin, 2013, p. 5). These five choices create a Strategic Choice Cascade. The Strategic Choice Cascade may also be nested in distinct levels of an organization, and was used to frame the thinking process of strategy for P&G at a corporate level and at a product level. The nested strategic choice cascade and the example elaborated for P&G at a corporate level is demonstrated in Figure 4.11.

Figure 4.11. Strategic Choice Cascades. Source: Lafley & Martin, 2013, p. 16, 32

Along with the Strategic Choice Cascade, a Strategy Logic Flow helps think through the where to play and how to win of strategy. Although many strategic tools exist, such as Porter’s Five Forces, SWOT Analysis, BCG Growth Matrix, GE-McKinsey Nine-Box Matrix among other theories, such as VRIN (Valuable, Rare, Inimitable, and Non-Substitutable), which was developed from the resource-based view, “none considers the full strategic landscape. Alone, none can help you decide where to play and how to win. Together, they produce a potentially unfocused and overwhelming mass of data and analysis” (Lafley & Martin, 2013, p. 160). As seen in Figure 4.12, the Strategy Logic Flow enables a directed

126 approach to choosing where to play and how to win through questions across four dimensions: industry, customers, relative position, and competition.

Figure 4.12. Strategy Logic Flow. Source: Lafley & Martin, 2013, p. 161

The process of reverse engineering then helps determine the best strategic approach and diminishes the risks of implementing any given option. Unlike a traditional approach of obtaining buy-in to an option, which may be time-consuming and unproductive, Reverse Engineering Strategic Options focuses on what would have to be true for the choice to hold, as demonstrated in Figure 4.13.

Generating Buy-in Reverse-engineering Strategic Options

Study lots of things Frame the choice

Develop salable options Generate Strategic possibilities

Forecast Financials for options Specify Conditions

Get consensus of key managers Identify barriers to choice

Polish Proposal Design valid tests

Sell hard to senior management Conduct tests

Tell the organization to execute plan Choose

Figure 4.13. Traditional Buy-in and Reverse Engineering Strategic Options. Source: Lafley & Martin, 2013, p. 185, 187

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According to Lafley, a company has the ability to win where it has chosen to play if its capabilities support the selected strategic option. In order to comprehend P&G’s core capabilities, a group of P&G employees attended an off-site meeting for business and functional leaders to develop a list of the core capabilities at P&G.19 The five core capabilities at P&G were determined to be: Understanding Consumers, Creating and Building Brands, Innovating (in the broadest sense), Partnering and Going to Market with Customers and Suppliers, and Leveraging Global Scales (Lafley & Martin, 2013, p. 115). An activity system with the relationship between the core capabilities and their supporting activities was also developed and is demonstrated in Figure 4.14.

Figure 4.14. P&G Activity System. Source: Lafley & Martin, 2013, p. 116

As different parts of the business may require different capabilities, several layers of activity systems may exist within an organization. The shared capabilities among the different businesses create reinforcing rods, as shown in Figure 4.15, which connect different parts of the organization and help “drive strategy forward at all levels” (Lafley & Martin, 2013, p. 121).

19 Core capabilities were those for which P&G had a measurable competitive advantage, were relevant across its businesses, and were required for the company to succeed (Lafley & Martin, 2013).

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Figure 4.15. Reinforcing Rods. Source: Lafley & Martin, 2013, p. 121

Management systems must also be developed to foster the “process for creating, reviewing, and communicating about strategy”, to support the company’s core capabilities and to ensure that the strategy is succeeding (Lafley & Martin, 2013, p. 129).

According to company employees, the “strategy creation and review process at P&G was… corporate theatre at best” (Lafley & Martin, 2013, p. 129). Strategy review meetings had become a talk of anything but strategy, and the come-in-and-sell approach had become entrenched in the P&G culture. Lafley began a radical change in the strategy review processes at P&G in 2001. The meetings changed from formal presentations with many people, to dialogues between corporate leaders and the few individuals responsible for the business. The topics for discussion were determined ahead of time and the review meetings focused on the “competitiveness, effectiveness and robustness of a strategy”, and helped build the strategic thinking capacity of each employee (Lafley & Martin, 2013, p. 133). By 2005, “a new approach to strategy reviews was so ingrained and viewed by the majority as so superior to the prior system that it would have been inconceivable to go back” (Lafley & Martin, 2013, p. 135). Furthermore, the existing one-page OGSM document that had been previously used as a list of initiatives, was adapted to the strategic choice cascade, as shown in Figure 4.16, in order to enable a clear and simple communication of strategy.

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A Sample OGSM (objectives, goals, strategies, and measures) Objectives Strategy Measures Improve the lives of families by Where to Play:  Operating TSR progress providing consumer-preffered paper  Win in North America  Share and sales growth products for kitchen and bathroom  Grow Bounty and Charmin progress margin of leadership  Profit growth progress Be the operating TSR leader in North  Win in supermarket and mass American tissue/towel and value discount channels Efficiency Measures: creator for P&G  Build performance, sensory, and  Capital efficiency Goals value consumer segments  Inventory turns Year-on-year operating TSR > x% x% annual share and sales growth How to Win: Consumer preference measures: x% annual gross and operating profit 1) Win in North America  Weighted Purchase Intent margin improvement  Get plant/equipment spend to  Trial, purchase, and loyalty x% return on capital investments in xx of sales plant equipment and inventory  Reduce inventory by x% Retailer feedback measures: 2) Be the choice of consumers  Key business drivers  Superior base products, prices (distribution, share of shelf, right share of merchandising, etc)  Preferred product formats and  Preferred vendor designs  Manage category growth 3) Be the choice of retailers  Improve shelf availability and service  Develop differentiated shopping solutions  Win with the winners

Figure 4.16. Adapted OGSM. Source: Lafley & Martin, 2013, p. 140

Communication of strategic discussion and company strategy at P&G improved. A different form of dialogue based on assertive inquiry rather than advocacy, from the work of organizational learning theorist Chris Argyris, was encouraged. The new stance, “I have a view worth hearing, but I may be missing something”, instilled a collaborative and constructive environment (Lafley & Martin, 2013, p. 136). Company-level choices were also repeatedly communicated from upper-management to other levels through three clearly stated themes, which became a mantra for the organization: make the consumer the boss, win the consumer value equation, win the two most important moments of truth (when the consumer encounters the product in the store, and first uses it at home).

Management systems were also developed to fortify P&G’s core capabilities. P&G invested in “scope and scale”, in order to take advantage of the “learning curves and re- applicability” that existed due to its size, and invested in strategic partnerships (Lafley & Martin, 2013, p. 145). P&G also began investing heavily in new forms of consumer-research methods and forms of innovation. To foster innovation, Connect & Develop was created, and

130 work focused on disruptive innovation was started with Clay Christensen and his Innosight Consulting Firm. Furthermore, P&G created a Brand Building Framework (BBF) that has been updated and improved to help create institutional knowledge on brand building.20

Finally, measurement systems were changed to consider holistic performance measurements. Lafley switched company metrics from a market total shareholder return, which was based on investor expectations and largely outside of the control of P&G managers, to operating total share return, which included “sales growth, profit margin improvement, and increase in capital efficiency” (Lafley & Martin, 2013, p.151). Such measurements enabled managers to directly influence the metrics, enabled cross comparison between different business segments within P&G and permitted a meaningful benchmark against competitors. Several individual businesses had also developed myopic measurements and were too focused on technical performance. The individual business performance measurements were also changed to a Weighted Purchase Intent (WPI) measure, which accounted for other dimensions creating a more complete value equation of the products.

Under Lafley’s leadership, P&G declared in its 2014 annual report that it had a total of 118,000 employees, who conduct global operations in over 40 countries and sell products in over 180 countries. P&G had a net sales over $83 Billion from which 39% was from North America, 28% from Europe, 16% from Asia, 10% from Latin America, and 7% from India, Middle East and Africa. In terms of its business segments, 32% was derived from Fabric Care and Home care, 25% Baby, Feminine and Family Care, 24% Beauty, 10% Grooming, and 9% Health Care (Annual Reports).

20 Until the year 2000, P&G had done a “poor job of capturing, cataloguing, and systematically learning from brand and marketing success and failures” as most knowledge was captured in a “pithy one page memo” or passed down through “anecdotal storytelling by marketing masters and company leaders who had lived through the experience” (Lafley & Martin, 2013, p.148).

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5. ANALYSIS

This chapter consists of an analysis of the growth trajectory underwent by P&G and Colgate-Palmolive. The first section aims to describe three major industry moments to contextualize the growth of both companies within each given period. The second section compares Colgate and Procter & Gamble in light of the central mechanism for success – their ability to renew through growth and to foster organizational integrity while sustaining an adequate amount of slack. The actions of Colgate and P&G are then individually explored according to the central mechanism for success to provide an increased depth of analysis.

5.1 INDUSTRY PERIODS The development of an organizational behavior occurs in a process, so change in the responses towards the growth challenges, and consequently their influence in the central mechanism, may not occur in an immediate and clear-cut manner. It may take some time for a new set of responses to develop into a distinguishable pattern.

The longitudinal analysis, which seeks to identify how change in organizational actions and behavior throughout time affected the company’s tendency for success, has been segmented into three time frames according to important shifts in the soap and detergent industry. The industry shift marks have been selected as reference points to better illustrate the overarching movements of the environment. They are summarized below and then are further explored.

i) Period I – Soap Industry Formation (1806 – 1879): The first time frame is characterized by the formation of the United States, the integration of markets, local and regional competition, and the defining of the industry. The initial mark is based on the foundation of the Colgate Company, one of the earlier soap establishments to begin the conversion of housewives from competitors into customers. The end mark was selected based on P&G’s introduction of Ivory Soap, which gained an unprecedented amount of advertising expenditure and production capability, significantly increasing competition in the newly emerging national market.

ii) Period II – Soap Industry Consolidation (1879 – 1946): The second period is dominated by national competition and the consolidation of the soap industry. The end mark is defined based on the introduction of the all-purpose Tide synthetic detergent, a breakthrough development that began to substitute soaps.

iii) Period III – The Era of the Detergents (1946 – Present): The third period is typified by a radical innovation in which the importance of detergents surpasses that of soaps and attracts other industry players. A globalized world develops through the rise of new technologies and result in the situation existing in the present day.

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5.1.1 Period I (1806-1879): Soap Industry Formation The Soap Industry Formation period occurs in parallel to the formation of the United States and is closely tied to the beginning of the nation, which had its Declaration of Independence in 1776, created the American Constitution in 1787, and performed the Louisiana Purchase in 1803. The overall population of the United States is depicted in Table 5.1, which also includes the population of New York, founding city of Colgate, and Cincinnati, founding city of Procter & Gamble.

Growth Growth New York % of US Growth Rate of Cincinnati Rate of % of USA Quantity City Populatio USA Pop. rate of Year NYC Population Cincinnati Pop. in of States Population n in New *** US Pop Pop ** Pop. Cincinnati in USA * York City (%) (%) (%) 1790 33,131 --- 0.84 ------3,929,214 --- 13 1800 60,515 83 1.14 ------5,308,483 35 16 1810 96,373 59 1.33 2,540 --- 0.04 7,239,881 36 17 1820 123,706 28 1.28 9,642 280 0.10 9,638,453 33 23 1830 202,589 64 1.57 24,831 158 0.19 12,866,020 33 24 1840 312,710 54 1.83 46,338 87 0.27 17,069,453 33 26 1850 515,547 65 2.22 115,435 149 0.50 23,191,876 36 30 1860 813,669 58 2.59 161,044 40 0.51 31,443,321 36 33 1870 942,292 16 2.44 216,239 34 0.56 38,558,371 23 37 1880 1,206,299 28 2.40 255,139 18 0.51 50,189,209 30 38 Sources: *http://www.nyc.gov/html/dcp/pdf/census/1790-2000_nyc_total_foreign_birth.pdf ** http://physics.bu.edu/~redner/projects/population/cities/cincinnati.html ***US Census Bureau (http://www.1930census.com/united_states_federal_census.php) Table 5.1. Population during the Industry Formation Period Data of the US population indicates how the country was still a young and growing nation, with a generally higher growth rate in both NYC and Cincinnati in comparison to the national average. Although the absolute population of New York City was greater than the population of Cincinnati, the growth rate of Cincinnati was greater than that of New York City due to the expansion of the United States westward. The development of the states in the United States during the Industry Formation Period is depicted in Figure 5.1.

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1800 1840 1880

Figure 5.1. Boundaries of the States during the Industry Formation Period. Source: US Census Bureau (http://www.1930census.com) As a result of a rudimentary infrastructure, competition was at first localized, however it expanded to regional markets with the development of commercial ferries, the construction of canals, and the expansion of the railroads. The opening of new markets in the 19th century resulted in new regional competition and increased business opportunities.

Along with the development of the United States and the integration of its markets, the Soap Industry also underwent a formation period with the total value of the US Soap product increasing from $300,000 in 1795 to $43,600,385 in 1890. In thirty years, the amount of employees in the soap industry nearly tripled from 3,247 people in 1860 to 9,305 in 1890 (Colgate, 1985, p. 425).

The year of 1806 was selected as the starting point of analysis for the Soap Industry Formation Period due to the foundation of The Colgate Company in New York City. William Colgate was amongst the first establishments to begin the conversion from house-wives into customers, at a time when more than 75% of the soaps were produced in the household. Early scientific discoveries in the industry helped increase soap production, decrease its costs, improve the quality of soap, and reduce the waste of its byproducts.

Although the discovery of oil in 1859 marks a significant moment for the soap manufacturers, who partook in the candle and soap trade, it had little effect on their response towards the growth challenges. Their focus slowly switched from candles to soaps, both of which were made from the same raw material. In 1879, Thomas A. Edison also devised a commercially viable electric lightbulb, which would further diminish the use of kerosene, oil lamps, and candles.

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The sales of soaps surpassed those of candles during the 1870s. For P&G, the year of this transition was in 1876 (Dyer, et al., 2004, p. 19). Soap sales also increased due to a greater hygienic awareness of the general population, which began to have public waterworks and household plumbing installed in their cities with the urbanization trend (Lief, 1958, p. 41).

The year of 1879 has been selected as the separation mark for a new period, the Soap Industry Consolidation Period, due to the introduction of Ivory Soap and the increased national competition.

5.1.2 Period II (1879 – 1946): Soap Industry Consolidation The introduction of Ivory Soap into the market in 1879 marks the beginning of the Industry Consolidation Period due to the important effects it had on the national competition of the soap industry. Although a few soaps such as Babbitt and Sapolio had been successful with their in-print advertising (Dyer et al., 2004), Ivory Soap greatly increased the newly emerging national competition in the soap industry through its unprecedented advertising budget of $11,000, and through its continued investment leadership over the years (Elliott, 2014). Ivory Soap became extensively present in the American households through advertising in the newly emerging mass media of magazines, which began to broaden their readership and started to circulate nationally (Dyer et al., 2004). Other prominent trademarks that also became engaged in large scale consumer advertising were Sapolio, Pears’, Lever Brothers and Kirk (Adage, 2003).

P&G was an early adopter of several marketing initiatives with concentrated efforts on its Ivory Soap. Besides a pioneer in early magazine advertisements, Ivory Soap was the first product to receive colored ads in the United States. Ivory was also amongst the first products to attempt mass distribution of samples and to engage in other forms of advertising and promotional activities. Through its advertising that focused on purity, buoyancy, discreet fragrance, and low cost, Ivory Soap appealed to the aspirations of the changing American social middle-class. Ivory Soap stood out in an increasingly competitive market due to its quality, which was similar to that of imported castile soap, and due to its low cost, thus offering the consumer “clear quality advantages over lower end soaps, and better price and unique performance advantages over the imported luxury soaps of the period” (Rawson, 2009, p. 5).

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The installation of modern equipment with new-continuous processes for the mass production of the branded Ivory Soap, together with its national advertising campaign and sales force, enabled P&G to become market leader overtaking Colgate in the 1880s. It “forced Colgate, along with other American soap manufacturers to build an integrated enterprise similar to Procter and Gamble’s and to engage in large-scale national advertising of their products” (Ingham, 1983, p.180).

Along with the increased national competition, a wave of merger and acquisitions started in 1890. Between 1890 and 1929, the number of soap manufacturers in the United States significantly reduced from 578 to 282, while the soap market increased from $46.6 million to $310.2 million (Dyer et al., 2004, p.47).

5.1.3 Period III (1946 – Present): The Era of the Detergents In 1946, Procter & Gamble introduced an all-purpose detergent named Tide, which drastically reshaped the market. Unilever and Colgate-Palmolive followed by introducing their own detergents, and contributed to a total increase of 30% in the soap and detergent industry between 1946 and 1956 (Laux et al., 1997). In 1953, synthetic detergents surpassed soaps (SDA, 1994) and encouraged other players into the market since detergents began to cut into the profits of the traditional soaps. Although other players, especially, in the chemical industry entered the detergent market, the historical dominance of the Big 3, which included P&G, Unilever and Colgate, continued.

US consumption of detergents increased from 70 million pounds in the 1940s to 1.6 billion pounds in the 1950s, with detergents accounting for three times the amount of shares controlled by traditional soaps in the laundry and dishwashing markets (Laux et al., 1997). The drastic increase in popularity of detergents, which coincided with the post-war boom and the spread of the washing machines, led the Federal Government along with the Association of American Soap and Glycerine Producers to investigate the impacts of detergents in the environment, and resulted in several changes in the synthetic detergent formulation.

The development of new technologies and a supply chain management integration during the 1980s contributed to an increasingly connected, globalized, and competitive industry.

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5.2 RENEWAL THROUGH GROWTH Renewal through growth is characterized by the ability of the company to create high- reaching value through enterprising initiatives, and to capture such value through a proactive navigation and fashioning of the environment. Organizational renewal occurs through the development of process or product innovations, the application of ideas and technologies that enable the company to improve and expand its offerings, in existing or new product lines, business segments or markets.

5.2.1 Colgate and Procter & Gamble Comparison Although Colgate was founded in 1806, 31 years before The Procter & Gamble Company, which was founded in 1837, the prevalence of local and regional market competition created a favorable environment for both companies to develop in the soap trade. During the Industry Formation Period, both companies grew with the growing industry and country, increased their product scope, market penetration, and improved their manufacturing processes to begin large-scale production.

The productive expansion enabled by the enterprising spirit of the founders and their ability to navigate in the environment, led Colgate and P&G to outgrow their competition and to become leaders in their respective geographical markets. An overview of each of the company’s main initiatives promoting organizational renewal through growth during the Industry Formation Period is depicted in the Table 5.2.

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Industry Formation Period (1806 – 1879) Colgate Year P&G Began conversion of housewives into customers 1806 Did not exist with quality soaps and unusual delivery policy Started newspaper advertising of its products 1817 Did not exist domestically and internationally Offered hundreds of products in business line 1820s Did not exist Became one of largest US Starch manufacturers New sale to businesses and other cities Began production of quality hand soaps using 1840s No evidence principles of Saponification Unprecedented increase in production capacity with Colgate’s Folly Moved to NJ for increased manufacturing space Began manufacturing fancy soap on extensive 1850s Began using Moon-and-Stars emblem scale Included new products in business offerings Licensed Glycerine Recovery patent Started to manufacture fatty acids on a large scale

Introduction of Luxury lines, perfumed soaps, 1860s Began to conduct systematic product testing perfumes and essences Obtained government contract to supply soap to the Union army during the American Civil War

Introduction of Cashmere Bouquet, the first 1870s Underwent series of Plant enlargement and milled perfumed toilet soap innovations including introduction of new Introduction of Colgate Dental Cream machinery for its production processes toothpaste Table 5.2. Main Actions during the Industry Formation Period (1806 - 1879) During the Industry Consolidation Period, actions by Colgate and P&G affecting their ability to renew through growth began to differ. In the 1880s, P&G overcame Colgate and became the largest national soap manufacturer in the US (Ingham, 1983). Procter & Gamble was more ambitious, enterprising and proactive in fashioning the environment than The Colgate Company. While P&G led the industry through innovative practices in advertising, operations, labor practices, and set new industry standards, Colgate became a follower and took longer than its competitors to engage in large scale advertising, to modernize its operations, and to partake in the industry consolidation wave.

Colgate’s ability to renew through growth was affected by a change in behavior towards its enterprising and navigating challenges. With the exception of the collapsible pump-dispenser for the Colgate Ribbon Dental Cream (Colgate.com, 2015), the company failed to create any significant new value for its existing customers. Colgate was amongst the first US companies to expand abroad (Colgate.com, 2015), yet it lacked innovation and relied

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primarily on the success of its previously developed soap products to engage in new geographical markets.

Table 5.3 highlights the main renewal through growth initiatives by Colgate and P&G during the Industry Consolidation Period. Unlike Colgate, Procter & Gamble continued to display organizational behavior that promoted the creation and capture of high-reaching value.

Industry Consolidation Period (1879 – 1946) Colgate Year P&G No evidence 1880s Pioneered in advertising and operational initiatives. One of first US companies to implement Profit sharing plan and other labor relation policies. Amongst first to produce toothpaste in 1890s Began opening new production plants along the US collapsible tubes Ventured into cottonseed-oil crushing mills Opened one of first corporate labs in field of consumer goods Offered more than 800 products, including 1900s Entry into Soap powder segment toilet and laundry soaps, perfumes and other scented personal care items Amongst earliest US firms to internationalize 1910s Licensed Kayser patent and built hydrogenation plant. Entry into Foods through development of Crisco Began practicing direct sales distribution.

Merger with Palmolive-Peet bolstered domestic 1920s Developed patent for granules and international manufacturing capability and Entry into cellulose production product scope Began to acquire experience with Radio advertising Entry into haircare market 1930s Amongst first company to conduct broad-based consumer research in systematic way. Developed brand-man concept Developed Soap-Opera Programming Introduced detergent, shampoo and dentifrice Developed hydrolyzer and new continuous process for soap production Began to acquire experience with TV Offered about 200 brands, 6 of which attained major sales and share positions

Table 5.3. Main Actions during the Industry Consolidation Period (1879 - 1946) Colgate displayed a comparatively smaller ambition than P&G during the Industry Consolidation Period. Unlike P&G, which accepted an original amount of $2,250,000 when it incorporated in 1890 and became leveraged through bonded debt as early as 1900, Colgate had a more conservative fund-raising initiative (Moody’s). Colgate only accepted an initial amount of $1,000,000 when it incorporated in 1908 (Moody’s). Furthermore, it only engaged

139 in funded debt in 1938, when it authorized a value of $3,000,000 to fund the construction of the Palmolive Building Corp., a 37-floor office building in Chicago, which it sold in 1943 (Moody’s).

A comparison between the stock capitalization for Colgate and P&G during the Industry Consolidation Period is demonstrated in Table 5.4, and displays how a more risk- averse Colgate authorized and issued less stock than the more ambitious Procter & Gamble. By 1920, for instance, P&G had authorized a total of $72,000,000 and issued $31,848,211 in stocks, while Colgate had authorized $3,000,000 and issued $2,597,800 in stocks (Moody’s).

Stocks Total Authorized Total Issued Year Company Colgate P&G Colgate P&G Common $1,000,000 $9,000,000 $1,000,000 $9,000,000 1908 Preferred --- $2,500,000 --- $2,250,000 Total $1,000,000 $11,500,000 $1,000,000 $11,250,000 Common $1,000,000 $24,000,000 $1,000,000 $13,497,848 1916 Preferred --- $2,250,000 --- $2,250,000 Total $1,000,000 $26,250,000 $1,000,000 $15,747,848 Common $1,000,000 $24,000,000 $1,000,000 $19,732,111 1920 Preferred $2,000,000 $48,000,000 $1,597,800 $12,116,100 Total $3,000,000 $72,000,000 $2,597,800 $31,848,211 100,000 1,250,000 Common 80,000 shares 1,250,000 shares shares shares 1927 Preferred $15,000,000 $48,000,000 $6,000,000 $14,750,000 Voting 10,000 shares --- 10,000 shares --- 3,000,000 7,500,000 Common 1,999,970 shares 6,400,000 shares 1930 shares shares Preferred $30,000,000 $48,000,000 $14,445,900 $14,750,000 3,000,000 7,500,000 Common 1,962,808 shares 6,409,418 shares shares shares 1940 250,000 Preferred $48,000,000 125,000 shares $10,697,300 shares Table 5.4. Stock Capitalization during Industry Consolidation. Source: Moody’s Colgate was also amongst the last companies to engage in the merger and acquisition wave of the soap industry that started in 1890. In fact, when Colgate merged with Palmolive- Peet in 1928, it recovered its position as the second largest company in the soap industry, with net sales of approximately $104,534,371, while P&G had net sales of $172,425,270 (Moody’s).

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As Colgate concentrated in expanding into international locations based on the Colgate soap products, P&G fortified itself in the domestic market, and improved its domestic penetration through increased reach and business scope. Whereas P&G underwent related growth by adding foods, haircare and dentifrices to its traditional soap business, Colgate divested itself from several US interests, including that of essential oils and synthetics, and edible oils, in order to focus on its core soap business as well as on its famous dental cream (Foster, 1975). Although Colgate entered the haircare market in 1938, it was four years after P&G had already entered the market with its Drene Shampoo (Moody’s).

The major initiatives by Colgate and Procter & Gamble relating to renewal through growth during the Era of the Detergents have been summarized in Table 5.5, presented next.

Era of the Detergents Colgate Year P&G Entry into detergents market 1940s Introduction of the revolutionary Tide detergent New market development through extensive internationalization No evidence 1950s Revolutionized TV programming Extended its Foods segment to new related lines Entered Paper business through acquisition of Charmin Paper Mills Crash program for Product Development 1960s Crest was first consumer’s product to obtain implemented endorsement from American Dental Association Construction of Global Research Center Development of CPF technology Entry into Drugs and Foods industry through Revolution in diapers business with Pampers acquisitions Entry into Sports, Cosmetics & Other industries 1970s Entry into feminine care with Rely Tampon through acquisitions Restored emphasis on internal product 1980s Led industry supply chain integration between development and began period of related manufacturers and retailers acquisitions Began diversification into Beverage, Drugs and Cosmetics industry through acquisitions Began regionalization and coordination of its businesses Introduction of Colgate Total toothpaste 1990s Began Organizational 2005 restructuring Restructuring to free funds for marketing and 2000s Started “Consumer is boss” mindset product development initiatives Developed organizational structures to support innovation Acquisition and divesture of businesses Restructuring for sales, marketing and new 2010s Began to focus on brand shedding initiatives product development initiatives in markets with high-potential Table 5.5. Main Actions during the Era of the Detergents. Procter & Gamble had surpassed Colgate in market leadership during the 1880s, however, it had been “unable to achieve anything like breakout success against Colgate or

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Lever Brothers” until the introduction of Tide (Dyer et al., 2004, p. 67). In 1946, P&G’s all- purpose synthetic detergent, Tide, created a radical innovation in the market as detergents began to replace soaps.

The introduction of Tide significantly increased P&G’s size and strength relative to that of Colgate. Figure 5.2, presented next, displays a Fleck indicator for the organizational size of Colgate and P&G in the economy.21 Net sales are divided by the US GNP in order to neutralize the effects of time, inflation and deflation. It serves as an indicator to the share of the economy held by each company, and thus acts as a proxy to their economic power. The area between the curves indicates the economic power gap between P&G and Colgate (Fleck, 2015).

Proxy to Economic Power [Net Sales as a % of US GNP] 0.70000 Consumer is Boss 0.60000 Acquisitions 0.50000 Introduction 0.40000 of Tide 0.30000 Economic Power 0.20000 Gap 0.10000

0.00000

1899 1935 1971 2007 1887 1893 1905 1911 1917 1923 1929 1941 1947 1953 1959 1965 1977 1983 1989 1995 2001 2013

P&G Colgate

Figure 5.2. Net Sales as a % of US GNP. Data from Moody’s Overall, P&G has consistently increased its economic power. The increase in 1946 was a result from the introduction of Tide detergent, in the mid-1980s it was primarily due to acquisitions, and in the new millennium it was mainly due to a restored focus on the consumer. Colgate, on the other hand, has maintained a relatively constant economic power throughout most of its history. The increase in Colgate’s economic power during the 1970s is accompanied by a decrease in the 1980s. During the 1970s, Colgate engaged extensively in

21 Fleck Indicators are accounting-based, time-invariant, relative measures that help depict organizational growth trajectory throughout a company’s existence (Fleck, 2015). Other indicators comparing P&G’s and Colgate’s growth include: the Fortune 500 Ranking, the Total Number of Employees, and Gross Properties, Plants and Equipment as a % of US GNP. These are shown in Figure 6.2, 6.3, and 6.4 in the appendix.

142 acquisitions in which it believed it could have an advantage over P&G, however, most were divested in the 1980s causing a decrease in net sales.

Although annual sales serve as an indicator for growth, the quality of growth must be considered. According to Fleck, net profits as a percentage of US GNP may serve as a proxy to the overall financial performance. As a result, the area between the comparable P&G and Colgate curves in Figure 5.3 depicts the competitive advantage one firm has over the other (Fleck, 2015).

Proxy to Overall Performance [Net Profits as % of US GNP] 0.12000 0.10000 0.08000 0.06000 Competitive Advantage 0.04000 Gap 0.02000 0.00000

-0.02000

1899 1917 1887 1893 1905 1911 1923 1929 1935 1941 1947 1953 1959 1965 1971 1977 1983 1989 1995 2001 2007 2013 -0.04000

P&G Colgate

Figure 5.3. Net Profits as a % of US GNP. Data from Moody’s Even though P&G’s competitive advantage over Colgate reduced during World War II, mainly due to a scarcity of resources to fulfill demand, it increased after the release of Tide detergent and practically maintained a constant gap until the 1980s.

Since the 1980s, Procter & Gamble’s competitive advantage has substantially increased over Colgate. Whereas Colgate’s restructuring in the 1980s was focused on reorganizing its extensively diversified business, Procter & Gamble focused on obtaining gains in scale through regionalization processes and increased coordination, and in integrating its supply-chain management with that of retailers.

Throughout history, Procter & Gamble has maintained a greater consistency than Colgate in its actions encouraging renewal through growth. As a result, P&G has developed a greater tendency than Colgate towards sustaining its existence, as suggested by the economic power and competitive advantage gap. The adequacy and consistency of organizational

143 initiatives by Colgate and P&G concerning renewal through growth are explored next in detail for each company.

5.2.2 Colgate

5.2.2.1 Period I: Soap Industry Formation (1806 – 1879) The Colgate Company has demonstrated an ability to renew itself through growth during the Industry Formation Period. Colgate grew into the market leader based on the enterprising spirit of the founder, which enabled the creation of high-value, and the ability to capture such value due to a proactive navigation of the environment. The company also renewed itself through the development of new business processes and product offerings.

The enterprising spirit of the company was based on the character of William Colgate, who showed signs of ambition even before founding his own company. When his father dissolved a partnership in the soap trade and moved to the State of New York, William Colgate remained in Baltimore financially supported by his aunt, and attempted the trade by himself. After one year struggling in his sole adventure, William Colgate decided to move to New York City, an expanding city where he believed better opportunities existed (Hardin, 1959).

Upon his arrival to New York City, William Colgate applied to the largest tallow- chandler business in town, and although it had no vacancy, the owner felt empathetic towards the young man and offered him work as an assistant clerk. Even though William Colgate had no money, credit or friends in New York City, he refused the job explaining his ambition:

I desire, sir, to learn the business. I wish to work to earn a living for myself. Anyone can assist a clerk, but I wish to know how to work (Everts, 1881, p. 49).

The salary was small, yet in three years, he had worked in manufacturing and sales, and had become the main manager at John Slidell & Co. This approach demonstrated judgement, since after learning the trade and becoming an expert in the business, William Colgate minimized the risks associated to opening his own company in 1806. Without formal schooling, William’s knowledge developed from personal experience and through observation of his surroundings. A letter from his sister demonstrates the failures William Colgate experienced through the failed ventures of his father. His sister wrote concerning their father, Robert Colgate:

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his plans were much greater than his funds, consequently he was obliged to give them up before they were fully tried, and some more fortunate being reaped the profits of them.... If you will now and then take a review of the last twelve years they will afford you a better lesson than is to be found in books (Hardin, 1959, p. 23). After founding his company, William Colgate quickly expanded his business through his fund-raising ingenuity. In 1807, William invited a partner into the company in exchange for the advancement of capital, which he used to help pay his father’s debts and to buy his father a farm. By 1812, William had grown the business to a sizable fortune of $5,000 and had practically undisputed control of the market. The growth of his business enabled him to purchase back the shares from his partner the following year with the addendum that the partner would not engage in the soap trade for at least three years (Hardin, 1959, p. 54).

The Colgate Company created and captured high-reaching value as one of the earlier establishments that helped set the foundation of the United States soap business (Colgate, 1895). At a time when 75% of the soap production was homemade, William began the conversion of the housewives from competitors to customers with the higher quality soaps that he developed. He also began an unusual policy of home delivery, which quickly earned him a reputation in New York for having a good product and a courteous service (Hardin, 1959, p. 51).

Colgate was tuned to opportunities in the environment. Records demonstrate that since 1817, The Colgate Company placed newspaper advertisements in an attempt to capture value from both domestic and international clients (Foster, 1975, p. 9). Colgate also increased its product offerings after listening to a sea captain, who approached the company, and explained his know-how about manufacturing remelted soap. Upon hearing his description, Colgate hired the sea captain and soon extended its soap line to include the manufacture of White and Brown Windsor, and Honey Soaps.

The company underwent a productive expansion with an increase in scope and scale of its product offerings during the Industry Formation Period. By the end of the 1820s it had included hundreds of products in its business lines, the major of which were Windsor Toilet Soaps and Pearl Starch. The production of starch developed into one of the largest in the country; however, due to his conservatism, William Colgate opted not to push further growth in starch along with the growth of the company’s original soap business line (Everts, 1881).

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Besides catering to the needs of the housewives, which were recurring clients, an 1826 testimonial demonstrates how William Colgate had also been successful in selling his products to businesses, and in expanding his reach into other cities:

I, William Ward, a manufacturer of cloth in Rockland, New York State, have used the past year in fulling cloth William Colgate and Company’s fuller soap, and do find it quite superior to any soap I ever used in this country, and quite equal to the best I ever used in England where I was a manufacturer of cloth (Hardin, 1959, p. 51)

In 1845, the business gained a significant increase in scale with Colgate’s Folly, a creation of an unprecedented 43,000 pound soap boiling kettle, first of its kind in the USA. Although many individuals believed that Colgate was reaching beyond its capability and would fail trying to greatly increase the company’s production volume, William Colgate proved a visionary leader as the increased supply was soon fully utilized and became insufficient to fulfill demand (Hardin, 1959).

In 1850, Colgate began to manufacture fancy soap on an extensive scale, and after William’s death in 1857, his son Samuel continued to expand the business giving continuity to his father’s initiatives. Samuel sustained domestic and international growth on a sound conservative basis despite the Wall Street crash of 1857.

Like his father, who met many prominent US leaders including the US Secretary of State, John Quincy Adams, the Secretary of the Navy, Smith Thompson, the Vice-President of the USA, Daniel Tompkins, and the Governor of New York, DeWitt Clinton, among others, by participating in associations and societies such as in the Board of the American Bible Society (Hardin, 1959, p. 41), Samuel Colgate also met important business leaders through his involvement in religious associations and in civic activities focused on improving the welfare of his community. He was, for instance, a friend of Thomas A. Edison’s, became interested in his pioneering work, and subscribed to twenty-shares of stock at Edison Electric Light Company (Hardin, 1959).

Under the leadership of William Colgate, the company had captured enough value that it became considered one of the market leaders, yet, it was under the leadership of his son, Samuel Colgate, that the Colgate Company “became [the] largest soap manufacturer in the United States” (Ingham, 1983, p. 180).22 Although the starch production was discontinued

22 Samuel Colgate was identified in 1895 as an important figure in the development of the soap industry, and was requested by Chancey M. Depew to write about the history of the trade for the One Hundred Years of American Commerce.

146 in 1866 after a fire destroyed the factory, the company demonstrated versatility introducing a luxury line, perfumed soaps, and perfumes and essences, shortly followed by toothpaste (Schusteff et al., 2005, p. 1). When the perfumery and cosmetic industry were at an embryonic stage in the 1860s, Colgate began producing perfumed and essences, and applied such knowledge to introduce perfumed soaps. The first milled perfumed soap in the industry, Cashmere Bouquet, was introduced in 1872 by Colgate, and became one of the company’s most distinguished global products. In 1873, Colgate also introduced aromatic toothpaste sold in jars, which in 1877 became the renowned Colgate Dental Cream (Colgate.com, 2015).

5.2.2.2 Period II: Soap Industry Consolidation (1879 – 1946) During the 1880s, the Colgate Company, which had previously captured most of the industry value and had become the industry leader, was displaced by Procter & Gamble. Although in 1896 Colgate was amongst the first companies to package dental cream in collapsible tubes, and had by the turn of the century more than 800 products, including toilet and laundry soaps, perfumes and other scented personal care items, it lacked organizational renewal during the Soap Industry Consolidation Period (Colgate.com, 2015). Colgate primarily grew by expanding the reach of its successful soap products into new geographies.

As one of the earlier American companies to internationalize, The Colgate Company demonstrated a proactive international geographic expansion. As early as World War I, Colgate partnered with two other manufacturers of soap and toiletry to expand abroad. Colgate developed its first international subsidiary in 1914, located in Canada, and established operations across Europe, in the South Pacific, in Asia, and in Latin America in the early 1920s. In the late 1920s, Colgate added major operations in the Philippines, South Africa, Brazil and Argentina (Colgate.com, 2015). Colgate established sixteen subsidiaries abroad between 1914 and 1933, and was able to fashion the international markets with its first-mover advantages. By 1938, whereas P&G had only established 3 international subsidiaries, Colgate had already established 21 of them. In 1939, 24.7% of total sales derived from foreign earnings (Moody’s).

Events prior to World War II also demonstrate how Colgate monitored the international environment. Apprehensive that a war could limit England’s soap imports, Colgate decided to acquire the Goodwin & Sons Company in England to develop a local production capability and minimize its business risk. After World War II started, the English government created restrictions on soap production based upon the national production of the

147 previous year. Although Colgate could produce Palmolive Soap in the Goodwin & Sons factory, the production quota the company had received was extremely limited as it was solely based on the domestic soap production of the previous year, and would result in Unilever’s Lux taking over the market by default. Upon taking the national production quota issue to the House of Commons, Colgate was able to include imports into the quota restriction, thus preventing a loss of its position in England (Foster, 1975).

Unlike its proactive approach in fashioning the environment in foreign markets, within the US, Colgate displayed a reduced ambition and a certain degree of accommodation. President Richard Colgate stated in 1906:

We are one hundred years old. We have occupied the same position for one hundred years. Every member of the firm is a descendant of the founder. During that time we have had no disagreement between employer and employee. No department has ever been closed on account of a strike. The factory has never been shut down for lack of orders. We have no record of a judge or jury ever handing down a decision against Colgate and Company. We have always had the highest rating from the commercial agencies. We are today on terms of friendship with all our competitors, having no enemy among them (Hardin, 1959, p. 68) During the Industry Consolidation Period, Colgate was mostly reactive and drifted in the domestic market. Although Colgate had its top management in important industry positions,23 Colgate became an industry follower, incorporating in 1908, eighteen years after its main competitor, and joining the industry consolidation wave in 1928, which was towards the end of the soap-industry merger and acquisition wave that had started in 1890. In 1927, The Colgate Company had two domestic plants, one in New Jersey and one in Indiana, while Procter & Gamble had US manufacturing plants in Ohio, Kansas, Georgia, New York, Texas and California. The Colgate-Palmolive-Peet merger in 1928, increased Colgate’s domestic reach to a total of five manufacturing plants in the United States, and further bolstered the company’s international presence (Moody’s). When Colgate merged with Palmolive-Peet, it recovered the position of the second largest company in the soap industry, but remained about 60% smaller than the leader, P&G (Moody’s).

23 Gilbert Colgate, President of Colgate from 1919 to 1925, was President of the Association of Perfumes and Soaps and the American Perfumer's Association. Likewise, his brother Sidney Colgate, President of Colgate from 1925 to 1928, was also President of the Association of Perfumes and Soaps. Sidney had also been President of the Association of American Soap Glycerine Producers, of the Cleanliness Institute, and served between 1914 and 1918 as Chairman of the War Service Commission of the Soap Industry during World War I.

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Besides the merger with Palmolive-Peet, Colgate only made a few other acquisitions in the United States during the Industry Consolidation Period. The company acquired the traditional Kirkman Bros Company in 1930, and Kay Daumit, which produced Lustre-Crème Shampoo, in 1946 (Foster, 1975).

In fact, Colgate divested itself from several US interests during the Industry Consolidation Period. In 1928, Colgate divested the Delawanna Company, which made essential oils and synthetics, and the Troco Company, a subsidiary inherited from Palmolive- Peet that made nut margarine. Colgate also closed its edible oil department, which refined coconut oil, and sold the property (Foster, 1975). In 1930, Colgate sold the Cleveland-based company, Pompeian Mfg. Co, which it had purchased in 1927. Furthermore, in 1932, The Colgate-Palmolive-Peet divested the US interests of the Omega Chemical Co. of New York, which it acquired in 1931, only retaining its international controlling interests in the Omega Ltd of London, the Societe Cadum of Paris, and the Societe Cadum Belge of Brussels (Moody’s).

During the Industry Consolidation Period, the 3rd generation Colgates led the company under a conservative philosophy depicted by Sidney Colgate’s statement, “Conservation of assets was not inconsistent with profits. So whenever there is any doubt, we settle it by whatever conserves assets” (Hardin, 1959, p.71).

The only event that demonstrated a sign of ambition and a proactive initiative in fashioning the domestic environment occurred in 1929 under the leadership of Charles Pearce, who assumed Presidency of the Colgate-Palmolive-Peet Company after the merger. The Colgate-Palmolive-Peet Company attempted to create the International Quality Products Corporation, a behemoth trust with a value exceeding $125 million (Foster, 1975). Colgate would have become the nucleus of a giant conglomerate integrating food and drug companies, manufacturers and retailers, yet the plan fell through with the beginning of the Great Depression.

Leadership of the Colgate-Palmolive-Peet merger further inhibited the value-capture ability of the company. Pearce was driven by “a mania for expansion” (Forbes, 1934, apud Collins & Porras, 1994, p. 176), and under his direction from 1928 to 1933, Colgate’s average return on sales decreased from 9% to 4%, while P&G’s average return on sales increased from 11.6% to 12% despite the Great Depression. During the decade following Pierce’s Presidency (1928-1933), Colgate also maintained a lower value-capture ability than

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P&G, which “grew twice as fast and attained four times the profits as Colgate” (Collins & Porras, 1994, p. 176).

5.2.2.3 Period III: The Era of the Detergents (1946 – Present) Colgate lacked adequate enterprising initiatives and continued to drift in the environment with reactive measures, which hindered its value capture ability during the beginning of the Era of the Detergents. The leadership gap between Procter & Gamble, which was first-to-market with its all-purpose Tide detergent in 1946, and Colgate, which followed with the introduction of its Fab detergent in 1947, increased. Although Colgate’s value capture had slightly improved with sales in Europe flourishing immediately after World War II, the introduction of detergents into the market severely affected Colgate’s soap business as detergents began to replace soaps (Foster, 1975).

Whereas soaps had guided Colgate’s international expansion and had contributed to about half of the company’s net sales and three quarters of its total tonnage in the US domestic market in 1947, it was the Colgate Dental Cream and the powdered detergents that guided Colgate’s growth during the 1950s and 60s. The Colgate Dental Cream had been first introduced in 1877, and the Fab detergent and Ajax cleanser, were both developed in 1947. By 1957, Colgate’s sales of synthetic detergents, dental cream, and toilet articles were greater than those of soap. Newly-constructed foreign plants were not designed to produce the Palmolive Soap, nor other Colgate soap brands, which became produced by local manufacturers (Foster, 1975).

One of the only instances when Colgate showed a proactive fashioning of the environment within the United States was through the release of Fab in New York prior to the arrival of Tide in the region. With the quick entry into the New York market, and help of the soft water conditions of the area, Fab was able to capture and retain a large portion of market share in the region (Dyer et al., 2004, p. 244).24

Overall, however, Colgate loss significant value capture as its principal products were surpassed by competition. The value capture ability of Colgate through its detergent line was also much smaller than that of P&G’s. In 1950, not only did Procter & Gamble possess the leading detergent Tide, which accounted for more than 50% of the market, but it also owned the second and fourth-leading detergents in the market, Cheer and the reformulated Oxydol, respectively. Colgate’s Fab Detergent was squeezed in third place market leadership (Lief,

24 Tide had a significantly better performance than Fab Detergent in regions with hard water.

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1958). Furthermore, although Colgate along with P&G re-echoed Unilever’s claims advertising the popular no-rinse appeal of the Surf detergent, due to the limited reach of Unilever’s Surf and Colgate’s Fab detergents, it was Tide that became associated to the coveted no-rinse reputation (Lief, 1958).

The Colgate Company suffered another severe set-back in 1960, when the Colgate Dental Cream lost its 80 year consecutive market leadership to Procter & Gamble’s Crest toothpaste. David Foster, who later assumed Presidency, comments how the new products that began to guide the company growth were also deeply affected:

Colgate’s cash cow products had been harmed, and the absence of any innovation that could bring value to its customers provided the company with a bleak future outlook. According to Forbes,

The company had not produced any new major products in years. None were even in the works, and between 1956 and 1960, Colgate’s domestic volume had actually declined (Forbes, 1969, apud Collins & Porras, 1994, p. 196)

As a reactive measure to its lack of new products and its declining profits, “suppliers were asked to set up joint research programs to seek out new compounds that could cut costs, more importantly, build new products that would answer consumer needs…” (Foster, 1975, p. 24). The need for new products also resulted in the creation of a comprehensive product development program during the 1960s. “Lesch launched a crash program to create almost overnight what it had taken P&G 30 years to nurture and perfect” (Forbes, 1966, apud Collins & Porras, 1994, p. 195).

The program led to the development of a few brands. The Baggies Food Wrap, which was an attempt to diversify the company beyond its traditional competitive business into other segments, was introduced in 1963. The Palmolive Dishwashing Liquid was introduced in 1966, the Colgate Toothpaste reformulated with MFP Fluoride and the Ultra Brite Toothpaste was released in 1968, and the Irish Spring deodorant soap became commercially available in 1972. Products developed in the United States, such as the Ultra Brite, Ajax

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Cleansers, Palmolive Liquid, Colgate Dental Cream with MFP and Cold Power, and their advertising, were then adapted and sent to foreign markets as “it was seen that new products were desperately needed there as well” (Foster, 1975, p. 24).

Colgate’s value capture from foreign markets became increasingly significant. In 1957, the foreign market accounted for 47% of global sales, and in 1960 it became 53% of global sales (Hardin, 1959). Colgate was able to retain its leadership abroad due to its ability to understand and fulfill the local needs of specific markets in Europe, Latin America and Asia, and due to the popularity of regional trademarks.

In Mexico, for instance, Colgate withheld P&G from a successful entry for nearly ten years. Colgate had fashioned the environment and made Fab detergent so ubiquitous in Mexico that it had become a synonym for detergents, thus making it difficult for P&G to obtain a profit in the country. The success and fame of Fab in Mexico, however, resulted in a loss of brand equity when customers who asked for Fab were given non-branded, degraded and cheaper detergents that had flooded the market in the mid-1950s. The inability of Colgate, which also began selling its own low-graded detergents, to continue fashioning the environment as it once had in Mexico and to renew Fab’s image, caused Colgate to lose its initial market domination, and to eventually lose its market leadership in Mexico to P&G (Dyer et al., 2004).

Despite Colgate’s renewed efforts on internal development during the 1960s, its expenditure on research and development remained significantly smaller than that of P&G. In 1968, Colgate spent 16.9%, and in 1973, 9.9% as much as P&G did on R&D (Steiner, 2013).25 Besides the development of the program to help improve product innovation, Colgate also constructed a state of the art global research center located in New Jersey, in 1962, to help restore the enterprising initiative (Colgate.com, 2015).

While the company sought to establish its internal development, it also turned to complement its struggling traditional businesses by entering new segments in the 1960s and in the 1970s with a period of unrelated acquisitions. Colgate entered new business categories as it believed that it would no longer be able to capture further value from the saturated market of its traditional business lines. President Foster describes:

25 Colgate figures were based on budget amounts rather than on actual expenditure in R&D.

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in the US, many of our conventional categories like toilet soap, toothpaste and detergents, were not going to grow much faster than population or new home growth. They had reached an in-home incidence that could not be increased. Also, in these and other conventional categories we came up against P&G and there is no denying its marketing and technical capability (Foster, 1975, p. 24).

The company therefore instilled a “strategy that emphasized internal development via a specialized new venture group; joint ventures for marketing other companies’ products; and outright acquisitions of business in which Colgate could gain a marketing advantage over Procter & Gamble” (Schusteff et al., 2005, p. 2).

Although Colgate engaged in joint-venture activities within the realm of its toiletries specialties, such as selling razor and blades from the British Wilkinson Sword Company, it also entered joint-ventures in unrelated segments, such as selling soy bean snacks from United Roast. In fact, Colgate was sued by United Roast for the violation of certain marketing terms and had to pay them an amount of $950,000 (Schusteff et al., 2005).

Colgate remained behind P&G in sales leadership within the United States in its traditional segments of toothpaste, soap, detergent, and shaving creams. It was consistently losing in the personal care market to Procter & Gamble, which had been constantly outspending Colgate in advertising, and capturing more industry value (Schusteff et al., 2005).

Internal developments at Colgate were also hindered due to the use of profits towards external acquisitions.

Profits from the core business propped up Foster’s acquisitions. That squeezed financially and stifled important things such as new product development and plant modernization (Steinbreder & Caminiti, 1987).

As a result, Colgate mainly grew during the 1970s through its extensive acquisitions. A list of the company’s acquisitions until 1985 and their description is presented in Table 5.6 .

Year Acquired Business Description 1946 Kay-Daumit, Inc. Produced Lustre-Crème Shampoo 1959 Wildroot Co., Inc Manufacturer of men’s hair tonics 1959 Sterno Corp Markets canned heat and appliances 1960 S.M. Edison Chemical Co., Inc 1960 Lakeside Laboratories, Inc Markets ethical drugs for treatment of heart condition, mental depression, anemia, asthma and gastrointestinal disorders 1961 Consumer Product Division of

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Unexcelled Chemical Corp 1961 Reefer-Galler Inc. Manufacturer of moth control products and allied items 1962 Canaan Products Inc. Produces Wash n’ Drip remoistened towelettes 1963 80.1% interest in Manufacturer and distributor of food products Barbier & Dauphin S.A. 1963 75% interest in Manufacturers and distributors of food products Lombardi S.p.A. and M.M. Lombardi S.p.A. 1966 Industria Quimica S.A., Guatemalan manufacturer of detergents Guatemala 1966 Kendall Co. Provides products distributed primarily to hospitals and other health care institutions 1973 Helena Rubinstein Inc. Produces and distributes cosmetics 1974 Ram Golf Corp Sports 1974 Bancroft Racket Co. Sports 1976 Charles A. Eaton Co. 1976 Riviana Foods Inc. Foods (Includes Hill’s Pet Nutrition) 1976 Marisa Christina Inc. Importer of high quality sweaters 1977 Joseph Terry & Sons of York, England 1977 Respiratory Care Inc. Owner of respiratory.com 1977 Maui Divers of Hawaii Ltd. Sports 1977 Leach Industries 1977 Medsonics, Inc 1978 Princess House, Inc 1978 AJD Cap Corp 1978 NDM Corp 1978 Ram Golf Corp Sports 1979 Several small sports companies 1984 51% Interest in PT Reckett & Coleman 1984 Anatros Corporation 1984 George C. St. Lauren Jr. Inc 1984 McGaw Division of American Hospital Supply Corporation 1985 50% interest in Institutional Financing Services Table 5.6. Colgate Acquisitions During the First Half of the Era of the Detergents (1940-1985). Source: Moody’s Colgate’s extensive growth through unrelated acquisitions during the 1970s was unhealthy.

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The acquisitions resulted in more losers than winners, and most of them were divested. In the early 1980s, Colgate was also described to be “virtually the only consumer products company in the country with no new major product program (Forbes, 1982, apud Collins & Porras, 1994, p. 196).

In the early 1980s, Colgate renewed its emphasis in consumer advertising with a focus on the company’s detergent and toothpaste lines. Although this temporarily improved the value capture of the company’s main products, it harmed all remaining products that received little to no attention. Even though Colgate was first-to-market gel toothpaste with its Colgate Winterfresh in 1981, the company’s excessive restored focus on product research harmed new product development as new products never passed the test-market stage (Schusteff et al., 2005).

The defining of the company’s key businesses improved Colgate’s ability to fashion the environment and to create and capture value from it. The Colgate Company began to develop a clearer vision of its business goals during the mid-1980s, when it envisioned itself as “… the best truly global consumer products company” by focusing on its main categories (Colgate.com, 2015). Colgate continued exploring the environment, but now through a series of related acquisitions and joint-ventures that were focused on strengthening Colgate’s main segments.

Colgate’s growth through acquisitions also became more successful than they had previously been. Whereas most acquisitions during the 1960s and 70s were divested, most acquisitions carried out since the mid-1980s were successfully integrated and retained. Table 5.7 presented next, displays how all acquisitions were related to the Oral Care, Personal Care, Home Care, or Pet Nutrition segments, and consequently leveraged the company’s strengths.

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Year Acquired Business Line 1986 Home Health Care Operation 1986 Veterinary Companies of America 1987 Cotelle, S.A Manufacturer of liquid bleach and hose hold products in France 1987 Klorin Leading Bleacher Producer in Scandinavia 1987 Softsoap Brand and liquid soap business from Liquid Soap Minnetonka Corporation 1988 Vipont Pharmaceutical Manufactured oral-hygiene products 1989 Veterinary products distribution company and other businesses 1990 Hawley & Hazel Hong Kong Oral Care Company 1990 Javex Companies Bleach Manufacturer in Canada 1990 Scherer Laboratories 1991 Murphy Phoenix Company Murphy Oil Soap 1991 Plax International Antiplaque mouthwash business from Pfizer 1992 Mennen Company Deodorant and Antiperspirent – Speedstick 1992 Remaining interest in Viset Italian manufacturer of consumer products 1993 S.C Johnson’s brands of liquid soap and body soap in Liquid and body Soap Europe/South Pacific 1993 Cristasol Glass cleaner business in Spain 1994 Cibaca Toothpaste and toothbrush business in India 1994 NSOA Laundry soap business in Senegal 1994 Nevex Non-clorine bleach business in Venezuela 1994 Na Pancha Laundry Soap Business in Peru 1995 Kolynos Oral care business from American Home Long established multinational oral Products care business with strong market share in South America 1995 Odol Oral Care Business Oral Care 1995 Barbados Cosmetic Products In the Carribbean 1996 Profiden Oral Care Business Spain 1996 Seprod Fabric care business in Jamaica 2004 Gabba Holding AG Swiss based company in Oral Care 2006 Tom’s of Maine Inc. Led Natural ingredients in Personal Care Market 2011 Sanex Personal Care Brand from Unilever Table 5.7. Colgate’s Acquisitions During the Second-half of the Era of the Detergents (1986 – 2015). Source: Moody’s In 1993, for instance, Colgate became the global leader in the liquid soaps category after acquiring liquid soap brands from S.C. Johnson in Europe and in the South Pacific. In 1995, Colgate acquired the Latin America oral care giant, Kolynos, increasing its oral care market share in Latin American from 54% to 79% (Schusteff et al., 2005, p. 5). The company

156 also sought to strengthen its position through partnerships. In 1998, for instance, it engaged in a joint-venture with Sanxiao, the Chinese marketing leader of toothbrushes, thus further fortifying its leadership in oral care.

Guided by Mark, who restored “and fostered an entrepreneurial spirit” at Colgate (Steinbreder & Caminiti, 1987), the company began to improve through its emphasis in internal product development and new related acquisitions. Besides improved versions of the Palmolive and Dynamo detergents, and the Ajax Cleanser, The Colgate Company introduced the Palmolive Automatic Dishwashing Liquid and the Colgate Tartar Control Toothpaste in 1986. Colgate also beat P&G to market with the 1988 introduction of a throw-in pouch laundry detergent, Fab 1 Shot, however, it failed to capture consumer interest or to reach sales expectations.

Colgate also began the expansion of its New Jersey Research facility in 1987, and opened a state-of-the-art liquid detergent plant in Ohio in 1988. It further developed a technology center to develop manufacturing techniques in New Jersey in 1989, and made its single largest capital investment of $80 million in the construction of a manufacturing plant for Hill’s Pet Nutrition in 1991. Colgate also quickly expanded geographically in 1990 into the Eastern Europe and established subsidiaries in the emerging markets of China, Russia, Cambodia, and Vietnam. Furthermore, the company built one of the world’s most modern oral care facilities in China in 1994 (Colgate.com, 2015).

Even though in the early 1990s Colgate set aside less than 2% of its revenues for R&D while P&G set aside almost 3% (Forbes, 1991, apud Collins & Porras, 1994, p. 196), Colgate’s recovered entrepreneurial focused initiatives enabled it to introduce several products within a short time frame every year. The savings and cost reductions obtained from a restructuring in the 1990s were reinvested in research, development, and advertising, which helped increase sales through new product roll-outs. In 1992, the Colgate Total toothpaste was released worldwide, and upon becoming the first toothpaste to receive approval from the Food and Drug Administration (FDA) and the American Dental Association (ADA) for acting against cavities, plaque, and gingivitis, it was released in the United States in 1997. The Colgate Total toothpaste enabled Colgate to regain market leadership in the US toothpaste market after nearly 40 years. The Total Fresh Stripe also received FDA approval and was introduced in 1998, while the Palmolive Spring Sensations was released in 1999 (Colgate.com, 2015).

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In the year 2000, Colgate introduced the novelty of 2in1 toothpaste and mouthwash into the market, the Actibrush Battery Power Toothpaste, the Simply White Gel and Total Plus Whitening Toothpaste, among other oral care products. In 2002, Colgate introduced a premium line of pet food with natural ingredients called Hill’s Science Diet Nature’s Best for its Pet Nutrition category (Colgate.com, 2015).

The largest contributor to Colgate’s profitability during the 1990s was the Hill’s Pet Nutrition, which earned gross margins between 55-60% and attained an average yearly growth rate of 14.6% between 1989 and 1994 (Schusteff et al., 2005). Overall, however, Colgate had displayed a smaller profitability and gross margin than its competitors. A worldwide restructuring conducted in 1995 that focused on efficiency and competitiveness improved its margins to levels similar to those obtained by other industry leaders (Annual Reports).

Colgate’s value capture ability during the early 2000s again decreased with the intensified global competition, particularly from P&G, which forced Colgate-Palmolive to increase its expenditure in advertising, and from the increased power of retailers. Despite a year on year revenue increase of 7% in 2004, profits fell by 7%, and encouraged Colgate to undertake the 2004 Restructuring Plan in order to free funds for marketing and product development initiatives (Schusteff et al., 2005).

The new millennium also marked the failure of Colgate to capture sufficient value from the detergents segment in order to maintain it as a viable business. Unable to compete with P&G in detergents, Colgate began divesting its detergents business in certain markets in 2001. In 2003, President Reuben Mark announced that, “P&G’s strength in the detergent category made any further effort by Colgate to build share unprofitable”, and that Colgate would withdraw completely from the detergents laundry business (Pepper, 2005, p. 43).

Colgate is also currently undergoing another four-year restructuring program that started in 2014. The 2014 Restructuring Program will enable the building of initiatives in sales, marketing and new product development for markets with high-potential (Annual Reports).

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5.2.3 Procter & Gamble

5.2.3.1 Period I: Soap Industry Formation (1806 – 1879) Procter & Gamble has exhibited an ability to renew itself through growth based on the enterprising character of its founders and their proactivity in navigating and fashioning the environment during the Industry Formation Period.

William Procter went into business for himself by opening a store with products acquired on credit from his previous employer. When he discovered that his shop had been robbed before the morning of its first opening day, instead of starting at a smaller scale in England, William Procter showed entrepreneurial versatility in his vision that he would be better able to improve his conditions in the growing country of the United States. After borrowing money, and moving to the US, William displayed ingenuity by engaging in the candle-manufacturing business, a trade that he had learned under the indenture and that was the quickest way for self-support (Lief, 1958).

James Gamble learned the trade of soap making from his father, and also showed an enterprising character. He opted to venture in his own business, and quickly established a partnership for the manufacture of soap and candle (Lief, 1958).

Both William Procter and James Gamble were engaged in successful businesses prior to founding Procter & Gamble in 1837. The founding of The Procter & Gamble Company, with an initial capital of $7,192.24, depicted judgement by both brothers-in-law, who realized that they were practically in the same trade (Dyer et al., 2004). Through a partnership, they minimized organizational risks in the advent of poor economic conditions and strengthened each other’s business against competition. When P&G was formed in 1837, sixteen competitors were present in Cincinnati, most of which also manufactured soap and had local sales (Lief, 1958).

William Procter and James Gamble were ambitious in their plans to grow the company, and would reinvest nearly all the profits back in the business. At the early start of their business, P&G sold two lots in their tract to acquire additional capital, and required that the buyer refrain from making soaps, candles, tallow or lard in that property. They opted to sell their real estate and mortgage their home property to raise capital to further invest in the expansion of their business (Lief, 1958).

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Besides its enterprising spirit, P&G has exhibited an adequate navigation of the environment since its foundation. The land that P&G selected and acquired to build their factory was in a region close to the stockyards and the canal (Lief, 1958, p. 20), a strategic location since the transportation of most products was done by ferries. P&G’s location in Cincinnati, then also called the nation’s “Porkopolis”, also exposed P&G to pioneering methods in industrial production as meatpackers grew their operations (Dyer et al., 2004).

In 1837, P&G began to advertise their products in the Daily Gazette, and wrote a letter to consulting chemistry expert and instructor, Campbell Morfit, in an attempt to capture greater value for their business. In the letter, James Gamble expressed his desire: “to acquire knowledge of chemistry” and to obtain “all information you can [give me] with regard to your lectures and the best means I can employ to obtain a profit by them” (Lief, 1958, p. 19).

During the 1850s, P&G also realized the value-capture potential of the Moon-and- Stars emblem. Although it is unknown how it started, P&G ordered that the design be removed from the side of the boxes containing its products since the company believed it to be senseless. As a result, many customers complained with the mistaken belief that the products had been adulterated. P&G quickly learned the power of their symbol and reinstated the emblem as a sign of quality and integrity. During the period, competitors began to adopt a standard of short-weighting the products; however, P&G opposed the practice of competitors and advertised to inform customers about the deficiency in weight of products manufactured by other companies. Competitors have also attempted to imitate the moon-and-stars symbol to take advantage of P&G’s privileged standing with its customers, yet lost when P&G took the matter to court (Lief, 1958).

P&G became well-known for its positive reputation, which helped it improve its fund- raising capability, and grow its sales. P&G’s bank credit increased and it was no longer required to have a second party endorsing its notes. Furthermore, individuals began utilizing P&G’s invoices as cash equivalent (Lief, 1958).

The company underwent a productive expansion during the Industry Formation Period. While in the 1830s and 1840s it only produced Palm, Rosin, Toilet, and Shaving Soaps, during the 1850s it included Oleine Soap, Star, Adamantine, and Tallow Candles, Pearl Starch and Lard Oil. In 1858, P&G attended a demonstration by Tilghmann to the star- candle manufacturers in Cincinnati, licensed a Glycerine recovery patent, and modified it for proper operation to increase factory efficiency and to improve the utilization of its

160 byproducts. The company also began to manufacture fatty acids on a large scale, and in 1859, became considered to be the establishment in Cincinnati most extensively engaged in operations (Lief, 1958, p. 31).

Through experiments that began in 1860, P&G also proactively monitored its environment. As P&G began to systematically perform product testing, it for instance, realized that it had received unusually weaker raw material from a broker, and won the case upon taking it to the Cincinnati Chamber of Commerce (Lief, 1958, p.27).

Written records display experiments with new kinds of soap builders and analysis comparing P&G’s soap to that of competitors. A notebook entry by James Norris Gamble reads: “Colgate & Co’s Family Soap, obtained from Mssrs. Colgate & Dutch St New York April 6, 1858”… was “still fresh when used for analysis” (Dyer et al., 2004, p. 17). Another record shows that P&G had begun experimenting with floating soap as early as 1863, when James Norris Gamble wrote referring to Samuel Lowry, a partner at the company, “He spoke well of the floating soap I had given him”… “We will I think make all our soap stock in that way” (Dyer et al., 2004, p. 24).

Sensing that a war could occur, P&G secured a great amount of rosin stock and lard. Once the American Civil War broke out in 1860 and prices of commodities soared, P&G had been prepared. P&G had material to supply the demands of almost the entire Union Army of the west, and captured federal government contracts to supply thousands of boxes of soap and candles to the Union Army. As a consequence of the government contract, even when the martial law order was declared in Cincinnati, P&G was the only company allowed to maintain its factory open and operating (Lief, 1958).

Procter & Gamble’s positioning during the Civil War enabled it to gain greater exposure and capture greater value of the soap market. During the war, many house-wives began to purchase manufactured soap as they became responsible for an increased amount of home-activities that were previously completed by their husbands. Meanwhile, the husbands in the army were supplied with and grew used to the quality of the P&G soap. Upon the end of the war, the habit of purchasing and using the trusted P&G soap product continued (Adage, 2003).

P&G persisted with its enterprising initiatives and continued to proactively fashion the environment after the Civil War. After the American Civil War, P&G was worth $800,000

161 and underwent a series of plant enlargement and innovations (Lief, 1958, p.38). It introduced new machinery such as the foot-press for stamping soap bars, the telegraph to improve communication between its factory and office, and in 1873 had one of the first telephones in Ohio. Furthermore, upon learning that that Colgate and Fairbank attempted a two-way license over lard caddy in 1870, P&G proposed a three-way patent purchase. Although it failed to acquire the patent, it annulled its competitors’ deal (Lief, 1958).

When people developed a poor attitude towards credit and debt during the Grant Administration in the 1870s, P&G opted to consult a mercantile agency, which enabled it to learn about the profile of its clients in a comprehensive and systematic way. Upon examination of their approved grades, character, credit, and capital, P&G held better information to separate paying from defaulting customers, thus aiding the company in its decision of to whom they should continue selling and enabling it to effectively navigate in the environment.

5.2.3.2 Period II: Soap Industry Consolidation (1879 – 1946) William Cooper Procter wrote a letter in 1920 that accurately portrays P&G’s ambitious growth initiatives during the Industry Consolidation Period. In his words, “Growth is a condition of life. When it stops, decay begins” (Lief, 1958, p. 160).

During the Industry Consolidation Period, P&G set a new stage for national competition through productive expansion and by proactively molding the newly formed national market. Procter & Gamble exhibited fund-raising abilities that enabled it to invest an unprecedented amount of resources in the national advertising of Ivory Soap and to increase its production capability. Besides pioneering in advertising and operational activities that became industry practices, P&G revealed ambition by being amongst the first companies to incorporate and to partake in the wave of mergers and acquisitions in the soap industry. The company further showed versatility through its vision of modernizing to increase the market penetration of its existing products, expand geographically through the development of new markets, and to engage in new business segments. Furthermore, P&G displayed judgement as it began to monitor and to conduct small-scale market testing experiments to aid its decision making prior to executing larger initiatives.

Procter & Gamble began the advertising of Ivory Soap in traditional ways, with sales representatives reaching out to wholesalers and other outlets with cake samples; however, it quickly joined pioneers like Sapolio and Royal Baking powder with in-print advertising.

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Although P&G was not the first company to advertise nationally, its initiatives with Ivory Soap were pivotal in the newly formed national industry (Lief, 1958).

P&G’s unprecedented spending in advertisement and relevant advertising slogans, which emphasized that Ivory was 99 44/100% pure and that It Floats! resonated with the public and provided the company with significant positive exposure and value-capture ability (Lief, 1958).26 The slogans that were developed also touched significant pain points at a time when consumers were overwhelmed with fraudulent advertising claims, and were burdened with the loss of soap bars upon washing in rivers, lakes or bath tubs (McCraw, 2009).

P&G was amongst the first companies to utilize the newly broadening mass medium of magazines, and secured an unprecedented amount of funding for its advertisings throughout the years, as shown in Table 5.8.

Year Advertising Event 1878 Launched P&G’s White Soap 1879 Re-named Ivory Soap 1881 Advertising Budget Secured 1882 Unprecedented amount of $11,000 1884 $45,000 1886 $146,000 1889 $158,000 1893 $125,000 1894 $180,000 1897 $300,000 1905 $400,000 Table 5.8. Advertising during Early Years of Ivory Soap. Source: Dyer et al., 2004 and Lief, 1958 During the early years of Ivory advertising, P&G displayed judgement, by testing for the right topic and pitch. Initial associations of its advertising were scattered, however, as P&G better understood the new mass communication medium and its customers, it centered Ivory advertising on the baby theme (Dyer et al., 2004).

P&G’s ability to monitor the environment and to fashion its markets extend beyond its early magazine advertisements and into new forms and formats. Upon hearing about colored printing in Europe, in 1896, P&G became the first company to insert colored advertising in

26 The 99 44/100% pure advertisements developed from Harley Procter’s idea to request a soap analysis from chemistry professors at distinct renowned universities. Although the slogan echoed amongst consumers, it is important to note that purity claims and chemist endorsements were not entirely new. The Royal Baking Powder had also made earlier claims with chemist ratifications that its soap was “Absolutely Pure” (Lief, 1958, p.10).

163 the United States (McCraw, 2009). After the success of colored advertising, P&G urged a local printer to go abroad and learn the process so that it could be performed in Cincinnati. Furthermore, P&G began acquiring experience with radio advertising for Crisco as early as 1923, and pioneered in radio network broadcasting in 1927. In 1932, P&G introduced the well-known soap operas, which caught on in 1933, and became a crucial aspect of the radio’s programming. Even though television would only gain importance in the 1950s, P&G had begun experimenting with the medium as early as 1935 (Lief, 1958).

At a time when store owners had a high capacity to influence consumer purchase, P&G also engaged in new communication methods to increase the demand for Ivory. Although grocers were directly addressed in Ivory’s early advertisings (Dyer et al., 2004, p.27), P&G began to handle multiple stakeholders as it went beyond the traditional push and began to experiment with pull methods. P&G started to reach out directly to its consumers and developed initiatives so that women would specifically request Ivory Soap at their local dealers.

P&G also took a leading role in the industry through its operational activities despite experiencing some setbacks. In 1880, the company had to pay $260,000 resulting from the negative court decision concerning the law suit from the Tilghman Glycerine Recovery patent (Lief, 1958). P&G had also incurred losses due to the explosion of a Glycerine extraction tank, which damaged expensive equipment. Furthermore, in 1884, a fire destroyed a large portion of P&G’s plant. Realizing that stock prices would soar after the industry became aware of P&G’s losses due to the fire, William Alexander Procter purchased all the red oil supply he could find, which resulted in its scarcity in the market, and enabled P&G to resell the surplus for a significant profit (Lief, 1958).

Even after the company suffered severe blows, it revealed fund-raising abilities and effectively secured a one-million dollar loan from the Mercantile Bank of New York to build another factory. The company also incorporated as early as 1890 and obtained an original amount of $2,250,000 in stocks in order to carry out its ambitious industry expansion and consolidation plans (Moody’s).

Instead of rebuilding the factory in the same location that privileged water transportation, P&G opted to build its model plant in the outskirts of the city, where space existed for further growth, and where several railroad tracks converged, thus creating cost- savings in distribution. Ivorydale became a highly integrated and modern factory committed

164 to the mass manufacturing of branded merchandise, and had a production capability with “twice the capacity of all other Cincinnati Producers combined” (Lief, 1958, p.71). Ivorydale also became an important ground for P&G to implement its innovative labor relation policies that reduced company turnover rate below the industry standard.

In 1887, P&G wrote to its customers demonstrating its entrepreneurial spirit, “There is much progress in soapmaking as in anything else, and we aim to keep ourselves in the forefront always” (Lief, 1958, p.73). P&G expanded geographically by constructing several plants across the United States. It opened one factory in Kansas City in 1905, one in New York in 1907, one in Canada in 1915, and one in California in 1930 (Moody’s).

The company also engaged in new business segments within the soap industry. P&G had traditionally served the laundry and toilet soap segments. Ivory Soap, introduced in 1879, acted in both fields, while Lenox soap, which was introduced in 1884, targeted only the laundry segment. In 1897, P&G attempted to increase the scope of its business and expand into powdered soaps. Recognizing that its entry in the sector resulted in a price-war, P&G quietly withdrew and opted to wait for the right time of entry. In 1902, P&G began to sell soap chips on a small scale, and in 1903, the company acquired Schultz’s Star Soap, which was not a significant competitor, but enabled entry into washing powder. P&G reformulated the acquired soap powder and in 1904, introduced the P&G White Naphtha Soap (Lief, 1958).

During the Industry Consolidation Period, consumer trend shifted first from soap bars to chips and flakes, and then to granules. P&G resisted the trend from soap bars to chips and flakes. It had a late entry into the flakes segment with Chipso in 1920, and into the perfumed soaps segment with Camay in 1926, however, it developed the patent for granules in 1926, and applied the process to its acquired Oxydol brand (Lief, 1958).

P&G also experienced growth into other related fields through new product development. The entry into foods was marked by the introduction of Crisco in 1911, which was developed based upon the know-how from P&G’s Buckeye Cotton Oil Company and the licensing of the US rights for the Kayser hydrogenation patent. During the development of the Crisco shortening, P&G also acquired McCraw Manufacturing Company, a shortening company that enabled P&G to discretely perfect the all-vegetable oil food product formulation until it was finalized and ready to establish P&G in the food market. Through the Buckeye Oil Company, P&G also entered cellulose production in 1920 (Dyer et al., 2004).

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In 1932, P&G made an exploration trip to Europe, where it searched for new applications for its business. The company uncovered a detergent patent and conducted a joint licensing for its American rights with DuPont. P&G and DuPont further created the Gardinol Corporation, which enabled P&G to improve the formulation of its granules. Although the industry movement to detergents would not occur until 1946, the early interest in synthetic detergents enabled P&G to launch its first detergent in 1933, enter the hair-care market with its Drene shampoo in 1934, and the dentifrice segment with its Teel toothpaste in 1938 (Dyer et al., 2004).

P&G further underwent significant technological progress in the late 1930s and early 1940s. The company’s research program spurred the development of a hydrolyzer and a new continuous process for soap production. “These innovations elevated the ancient art of soapmaking to the rank of modern chemical engineering” and soon became industry standard practices (Lief, 1958, p.209). In 1939, P&G was marketing about 200 brands, 140 of which were soap brands. From P&G’s products, P&G White Naphtha, Oxydol, Ivory, Chipso, Crisco, and Camay had attained major sales and share positions.

Procter & Gamble also fashioned the environment through its distribution initiatives that challenged and changed established standards. After court rulings invalidated price- maintenance contracts, affecting the previously upheld practice where manufacturers enforced wholesaler and retailer prices, wholesalers began to cut prices and request discounts from manufacturers to ensure their own survival. As a result, P&G began to change the industry’s distribution activities by opting to sell directly to retailers in New York City in 1913. The initiative expanded after World War I to include all of New England in 1919, and all of the United States in 1920 (Dyer et al., 2004).

Internal debates about the initiative to distribute nation-wide went as follows: 27

Accountants: “We would need to increase the number of accounts from 20,000 to over 400,000… do you realize what that will do to our accounting costs?”

Distribution Team: “We’d have to open hundreds of warehouses around the country… We’d have to hire trucking companies all over the United States to deliver to the retail stores”

Sales: “How can P&G possibly build a sales staff large enough to visit every little grocery store in America?... The sales division would have to be bigger than the U.S. Army!”

27 Obtained from Build to Last by Jim Collins and Jerry Porras on page 183. Originally in: Schisgall, Oscar. Eyes on tomorrow: The Evolution of Procter & Gamble. New York. Doubleday, 1981. 87-98.

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Managers: Will the wholesalers become so furious when their P&G business is taken away that they’ll start to boycott and refuse to sell anything to stores that deal directly with P&G?... That could ruin us” Even though many people thought that such new practice would end bankrupting the company, P&G was successful in its endeavor and other competitors eventually followed P&G’s lead.

Procter & Gamble also established important communication channels through which it began to listen and to learn to how consumers perceived and utilized the products of the company and those of competitors. P&G developed the Market Research Department in 1925 and the door-to-door field research in 1931, and became the first company to conduct broad-based consumer research in a systematic and sustained way (Pepper, 2005, p. 18, Dyer et al., 2004, p. 58).

5.2.3.3 Period III: The Era of the Detergents (1946 – Present) Procter & Gamble continued to display renewal through growth with its enterprising initiatives and proactive navigation of the environment that enabled it to create and capture high-reaching value throughout most of the Era of the Detergents. During the late 1940s and 1950s, P&G revolutionized the soap market through its detergent, and in the 1960s, it reshaped the diapers business. During the 1970s, however, Procter & Gamble’s ability to fashion the environment diminished as the company began to resist changes to its products, and sought to capture value from elements that consumers had stopped valuing. Although P&G continued to struggle in several segments during the 1980s and 1990s, it also began to recover. P&G’s enterprising and navigation of the environment improved in the new millennium, when the company began to focus on what really mattered for the customer, and thus improved its own value capture ability.

Procter & Gamble had attained market leadership since the 1880s, however, it had been “unable to achieve anything like breakout success against Colgate or Lever Brothers” until it introduced Tide in 1946 (Dyer et al., 2004, p. 67). The all-purpose detergent Tide quickly captured consumer interest and soon became the best-selling detergent in the United States. When upper management realized the potential of the product that had been developed by a P&G scientist, they opted to compress the testing phases, and bypass some tests in order to obtain a head start of almost two years against its main competitors, Colgate-Palmolive and Unilever (Dyer et al., 2004). By 1949, Tide had obtained more than 50% of the market

167 share in the packaged synthetic detergents segment, which was “equivalent to a quarter the entire national volume in packaged washing products” (Lief, 1958, p. 246).

Although Tide cannibalized the company’s own brands, to help push Tide as far and as deep as it could into the market, Procter & Gamble reduced some of the brands it supported and fashioned the environment through partnerships, marketing, and advertising initiatives. As washing machines began to spread, P&G set up exclusive agreements with the washing machine manufacturers to include a box of Tide with every new appliance sold. Although such exclusive agreements were disallowed by the FTC, a strong association had already been made by the consumers between the new washing machines and the Tide detergent (Dyer et al., 2004).

P&G also extensively engaged in television advertising, and according to the television trade, was credited for “causing a revolution in the programming” (Lief, 1958, p. 271). Due to the increasing popularity of the television, Procter & Gamble redirected its advertising efforts towards the TV and gave up on radio advertising all together by 1955. In 1957, for instance, P&G delivered 79 million selling messages to 42 million homes during its daytime television programming alone. Procter & Gamble’s large presence on the television helped it maintain its products in the consumer’s mind (Dyer et al., 2004). This was especially important as “more than half of the company’s volume in household items was in brands not on the market a decade before” (Lief, 1958, p. 280). Furthermore, Procter & Gamble had a “penetration unequaled by any other manufacturer of anything” and was present in 95% of the US households with at least one of its products (Dyer et al., 2004, p. 89).

As competitors began to crowd the market and take away Tide’s market shares, P&G developed a second detergent, Cheer, to be positioned as a buffer for Tide. It also reformulated its famous Oxydol granules to give the brand a fighting chance against detergents. As a result, Tide continued to be the distant leader, Cheer the runner-up, Colgate’s Fab obtained the third-place position, and the reformulated Oxydol recovered to fourth place. With the hegemony of P&G in the detergents segment, “between 1951 and 1956, P&G earned nearly a quarter of a billion dollars in profits in laundry, while both Lever and Colgate lost money in the category” (Dyer et al., 2004, p. 83).

Tide was also a turning point for P&G’s international operations. According to President Deupree, “you couldn’t get into [a foreign country] with yellow soap bar...

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[offering] more of the same” (Lief, 1958, p. 263). Tide created such a high-reaching value that its differentiation enabled P&G to expand abroad. By 1955, the combined consumption of soap and detergents in the fifteen foreign countries in which P&G did business matched the consumption of the United States (Lief, 1958).

Procter & Gamble became heavily committed to Tide and invested about “$300,000,000 in plant and equipment in the post-war decade, to erect and staff new laboratories, and to enhance the welfare of the workers” (Lief, 1958, p. 278). By 1956, “more than half of P&G’s soap-making equipment [had become] idle if not obsolete… [as the] company invested as much money in plant and equipment as it had done in its first hundred years” (Lief, 1958, p. 253). P&G also had almost three times as much personnel working on research, development, engineering and manufacturing than it had prior to the development of Tide. In fact, in 1956, ten percent of the employees were fully devoted to research in some form, while company spending in research and development was three times greater than what it had been in 1946 (Lief, 1958, p. 307).

Research and development also pushed other company offerings into leading market positions. According to Deupree, “We have moved right ahead in the development of new ideas and inventions… we believe in research and use it to the utmost” (Lief, 1958, p. 308). Even though only a few soap brands that had existed in the early 1900s remained in the market in the 1950s, P&G’s constant research enabled a form of its soap brands to survive. By 1954, for instance, under the brand Personal Ivory, Ivory Soap still “outsold all other toilet soaps, including Lever’s Lux and Lifebuoy, Armour’s Dial, P&G’s own Camay, and Colgate’s Palmolive and Cashmere Bouquet” (Lief, 1958, p. 296).

Investments were also made in other business segments that were deemed attractive. After realizing the market potential of liquid soap, for instance, P&G created the Joy liquid soap to compete with Lever’s Lux before it had the chance to catch on in the market. P&G continued to introduce several other shampoo brands such as Prell and Shashta Cream Shampoo, however, leadership in the hair care category occurred in the late 1960s, when Head & Shoulders captured 25% and Prell attained 22% of the market share (Dyer et al., 2004). P&G had also entered the permanents segment due to its knowledge in hair care, and obtained runner-up leadership with its Lilt brand launched in 1949.

P&G’s Teel toothpaste, which had been introduced in 1938, only endured during World War II due to the limited supply of competing products, and by the late 1940s, it was

169 going out of business. Although the unpopular Teel was discontinued in 1953, exiting the category was not an option for P&G. According to CEO Smale,

Colgate was using profits from dentifrice to augment their… advertising and promotion of detergents… [We felt] that if we can compete with these guys in dentifrice and in essence make them spend money against dentifrice rather than divert it to detergents, we’re going to be better off (Dyer et al., 2004, p. 145).

As a result, P&G invested in the development of two toothpastes. Gleem was developed internally by P&G scientists as fast as possible using existing technology, and quickly became the second largest-selling toothpaste upon its launch in 1952. Crest was developed under a partnership with the Indiana University and was introduced in 1955. In 1959, the Colgate Dental Cream by Colgate was market leader with 32% of market share, Gleem by P&G held runner-up leadership with 20.3% share, and Pepsodent by Unilever held 11.5% share. Crest by P&G retained the fourth place position, yet was the only top-selling brand with fluoride (Dyer et al., 2004). 28

P&G exhibited proactivity in fashioning the toothpaste market through several of its initiatives. The company began the uncommon practice at the time, of educating health professionals about the benefits of using Crest toothpaste through the Crest Professional Services group created in 1957.29 P&G also had to convince diverse stakeholders that the stannous fluoride in Crest was a complement, not a substitute to the community water fluoridation or to the sodium fluoride applied by dentists twice a year. Since 1955, Procter & Gamble had also attempted to gain endorsement from the American Dental Association (ADA), and in 1960, became the first toothpaste ever endorsed by the ADA for its therapeutic benefits. P&G’s proactivity enabled Crest to overtake the Colgate Dental Cream and end its 80-year consecutive leadership.

In the 1950s, P&G also extended its traditional food business in the all-vegetable- shortening segment led by Crisco. It introduced new shortening brands such as Golden Fluffo; it entered the bulk-shortening market with Pertex and Selex; and entered the instant- shortening market. It further entered the baking-mixes segment through acquisition of

28 Some companies such as Block Drug’s Super Amm-i-dent and Colgate’s Brisk toothpaste emphasized the fluoridation of their toothpastes in their ads, while other companies, such as Warner-Lambert’s Listerine Antizyme emphasized the lack of fluoride in its toothpaste leveraging the concern that large doses of fluoride could be harmful for children (Dyer et al., 2004, p. 150). 29 Although the Crest Professional Services group was initially experimental, it became permanent in 1964 and helped educate professionals about other P&G products such as Pampers, Safeguard and Head & Shoulders.

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Duncan Hines brands since housewives demonstrated interest in buying already-mixed shortening with other ingredients (Lief, 1958).

President McElroy demonstrated the company’s interest in innovating by stating, “Move ahead by being dissatisfied” (Lief, 1958, p. 298). A company note to a consumer also expressed the enterprising spirit of the company:

We happen to be in the most competitive business there is… We don’t keep on improving our products just because we enjoy it (although it does give us a pleasant feeling of satisfaction). The fact of the matter is that we want to maintain our position of leadership in this fast-moving field and that means constantly searching to find ways of making our products better (Lief, 1958, p. 307) Besides internal product development, P&G also grew through a few related acquisitions. In 1954, P&G set up a small Exploratory Development Division to look for opportunities that would enable the company to expand into the consumers business. Such group was responsible for uncovering small companies with “some technological connection to the existing business”, that “could significantly be improved by applying P&G’s technologies and know-how”, and that had a “low-cost, high volume units that were bought from retail outlets” (Dyer et al., 2004, p. 94). During the 1940s, 50s, and 60s, P&G performed the following acquisitions:

Year Company Business 1945 30 Spic & Span Cleaning 1955 W.T. Young, Inc Foods (Processed Bit Top Peanut Butter and salted peanuts) 1956 Nebrasca Consolidated Mills Foods (Owner of Duncan Hines Brands) 1956 Hines-Park Foods, Inc Foods 1956 Duncan Hines Institute Foods 1956 Charmin Paper Mills, Inc Paper 1957 31 Clorox Cleaning 1963 Folgers Coffee Table 5.9. P&G Acquisitions during 1940s, 50s, and 60s. Source Moody’s

Much of the company’s growth during the 1960s and 1970s came from the acquisition of Charmin Paper Mills despite the slow growth in its first six years. In 1960, P&G introduced a successful tissue called Puffs and in 1962, attempted to expand the Charmin toilet tissue outside its regional territory. The introduction of Bounty paper towel in 1965 was also successful, but insufficient to support expansion. Extensive growth was enabled by the

30 Acquired before the Exploratory Development Division was set up. 31 Divested due to FTC ruling in 1967.

171 development of the manufacturing breakthrough of CPF Technology, which created a high- reaching value to consumers that strongly preferred softer and more absorbent paper products (Dyer et al., 2004).

In 1964, P&G began an ambitious expansion plan to convert all of its mills, at a cost ranging from $640,000 to $1,000,000 per machine to CPF technology (Dyer et al., 2004, p. 128). All of the company’s brands, with the exception of Puffs, received such innovation in their manufacturing process and significantly improved. The reformulated Charmin toilet tissue, for instance, became the “top-selling bathroom tissue in its marketing area” within two years of its launch (Dyer et al., 2004, p. 129).

Procter & Gamble also developed affordable disposable diapers. Cloth diapers were the norm at the time, yet P&G reshaped the environment by introducing cheap disposable diapers, which began to replace cloth diapers. Testing in 1958 demonstrated that mothers had an interest but found the disposable diapers too expensive, so in 1961, P&G released cheaper Pampers by mass producing them. The mass production manufacturing process developed for Pampers was considered to have “provided the company with a running start of at least four years” (Dyer et al., 2004, p. 135). By 1969, the mass produced Pampers controlled 92% of the market, and had “become P&G’s second largest brand, after Tide” (Dyer et al., 2004, p. 136).

As a result of P&G’s adequate responses to the enterprising and navigating challenges and the company’s renewal through growth during the late 1940s, 50s, and 60s, P&G had developed a leading position in all of its major businesses in the beginning of the 1970s. Tide led in laundry detergents, Pampers in disposable diapers, Crest in toothpastes, Head & Shoulders in shampoos, Crisco in shortening, and Charmin in toilet tissues (Dyer et al., 2004).

During the 1970s, however, P&G’s enterprising spirit and ability to proactively monitor and navigate in the environment suffered. The company displayed a resistance to change and became reactive to the market, thus impairing its capability to create and capture high-reaching value.

Environmental consciousness began to spread during the 1970s, and detergents, which contained phosphates, were largely blamed for polluting the water. When several cities banned detergents with phosphates in 1972, instead of leading change as it had historically

172 done, P&G’s initial response was to stop selling its detergents in those cities. It was only after competitors introduced non-phosphate detergents and P&G began to lose market share that it decided to invest in its own non-phosphate detergent. P&G eventually spent more than $130 million to develop a phosphate replacement, and President Ed Harness accounts that the controversy was a “massive distraction” for the company (Dyer et al., 2004, p. 109). President Smale states that the phosphate controversy

had an effect of diminishing the productivity of our R&D work in [cleaning products] for a decade… [It wasn’t] until the [19]80s that we really started to come up with some significant product development… in the broad cleaning area (Dyer et al., 2004, p. 109) In 1971, P&G began to research Olestra, which was supposed to be a substitute for fat in snacks and crackers. Olestra received FDA approval only after 25 years of research and $250 million in investments, and became considered one of the company’s biggest flops as it failed to catch on in the market (Tucker et al., 2005, p. 6). Another fiasco by P&G was the introduction of the Rely Tampons, which marked the company’s entry into the feminine care market. The Center for Disease and Control unveiled a statistical association between the Rely Tampons and the Toxic Shock Syndrome, which had been leading to many deaths, thus resulting in the discontinuity of the brand in 1980.

In the hair care and dentifrice segments, P&G also loss value-creating ability as it focused on performance developments that the consumers no longer prioritized. In the hair care segment, R&D Director accounts that P&G, “spent an awful lot of time on how to develop superior cleaning – how to keep hair cleaner longer – when… ‘cleaner longer’ was no longer a need” (Dyer et al., 2004, p. 112). The company was caught off-guard due to the changing habits and hairstyles. The emergence of blow driers encouraged more frequent cleaning, and consequently, shifted the necessity of consumers from cleaning performance to improved hair smell and aesthetics. Procter & Gamble, which had been focused on superior cleaning lost market share, and in 1974, Head & Shoulders was surpassed by Johnson& Johnson’s Baby Shampoo (Dyer et al., 2004).

In dentifrices, P&G strictly focused on the therapeutic benefits to consumers, ignoring any other elements that the consumers valued. Many of P&G’s competitors introduced different flavored toothpastes into the market. P&G research also demonstrated that consumers wanted different flavors besides the traditional Crest wintergreen, yet, according to Pepper, “a second Crest flavor was controversial with us” (Pepper, 2005, p. 49). The idea

173 was turned down by upper management due to the belief that mint flavor toothpaste would dilute the brand image and remove attention from the anti-cavity benefits. When the mint flavor was eventually released two years later, it quickly began to account for 25% of the Crest business. Another recommendation to launch Crest gel was also turned down by upper management out of fear of diluting the brand image. CEO Smale later acknowledged, “We eventually did market a Crest gel… but later than we should have” (Pepper, 2005, p. 50). Crest’s market share dropped from 42% in 1979 to 28% in 1985, while Colgate’s share increased from 18% to 25% largely due to a new pump dispenser, an innovation which P&G was also slow to adapt to (Dyer et al., 2004, p. 196).

Another segment in which the company failed to capture value was in snacks. Pringles, which was launched in 1968, captured 15% of the market in 1975, yet quickly had its market share drop to 4.3% by the end of the decade. Consumers began to complain about the taste and texture of the snack, and the Food and Drug Administration imposed restrictions in calling Pringles, potato chips, due to their synthetic nature. Furthermore, P&G had also developed a soft cookie and applied for a patent in 1979, but when the product became ready to market four years later, P&G was unable to compete with other competitors such as Nabisco, who introduced similar cookies in their established distribution channels. As a result, P&G quit the cookie business in 1987 after incurring an estimated loss of $100 million a year (Dyer et al., 2004).

Although P&G developed a technologically superior disposable diaper with an hourglass shape pad and elasticized waste, it allowed value slippage to occur due to an inadequate navigation of the environment. Such new, premium features were introduced into the market under the regional Luvs brand in 1976. By the early 1980s, however, Kimberly-Clark had introduced Huggies, its own fitted and shaped diaper with similar technology to that of Luvs, but only cents more expensive than Pampers (Dyer et al., 2004).

CEO Pepper accounts that internal “debate reached crisis proportions” as the company decided whether to maintain Pampers at its popular price and rectangular shape, or whether to “[scrape] hundreds of millions of dollars of production equipment” and transform Pampers into an hour-glass shape diaper with premium pricing (Pepper, 2005, p. 55). After trying to incrementally improve Pampers for six years, the company realized that it had to make the necessary investments. It was only in 1984 that the company decided to invest “500 million to upgrade its production system and an additional $225 million for advertising and

174 promotion” to revamp the Pampers brand (Dyer et al., 2004, p. 234). Meanwhile, competitors expanded and began to create value in niche markets.

As a result of the reactive growth during the 1970s, P&G missed out in capturing several opportunities as new projects were placed on hold to prioritize the needed company responses. According to CEO Pepper, the reactive measures with Pamper, for instance, resulted in missed opportunities.

We felt enormous pressure to take everything possible off our plate so we could focus on our top priority: getting the product right on basic Pampers diapers. So, we shut down the pull-on diaper project entirely. Sadly, we even halted the development of patents and the protection of intellectual property that we had been first to identify (Pepper, 2005, p.47).

During the 1980s, Procter & Gamble began to restore its ability to renew through growth. The company began to improve its internal product development and its operational processes. It also engaged in external acquisitions in search of business diversification.

Procter & Gamble’s product development started to recover during the 1980s. The company introduced the Always sanitary pads in 1983, and began to utilize a new, cross- functional “team [that] rethought Pringles from the ground up, starting with the demand side”, and turned the product into a mega brand (Dyer et al., 2004, p. 188). The hair care segment had been struggling, but significantly improved after the development of the BC-18 technology in the mid-1980s, which enabled a combination of shampoo and hair conditioner in a 2in1 formula that was applied to the Pert Plus and the Pantene-Pro-V brands. The Pert Plus shampoo, released in 1986, gained momentum after it gained media recognition in 1989, and rose to 7% market share. “By early 1990, the brand had become the number one dollar- volume shampoo in the United States. Globally rebranded… the brand scored further impressive gains” (Dyer et al., 2004, p. 270). The Pantene hair care brand also became a global success with the “shine through health” concept (Dyer et al., 2004, p. 273).

By the end of the 1980s, P&G retained leadership in its biggest categories through its Liquid Tide, Ultra Pampers, and Tartar Control Crest, which restored Crest’s market share from 28% to 40% (Dyer et al., 2004, p. 348).

In the late 1980s, Procter & Gamble also took a leading role in the industry supply chain integration. In 1988, P&G and Walmart engaged in a joint experimentation for improving their combined supply chain management. They developed data-delivery

175 highways, useful tracking measures, faster replenishment methods, reduced non-productive time, and gained greater insights about consumers. As a result, between 1989 and 1990, P&G sales to Walmart improved by $250 million. Along with Walmart, “Procter & Gamble has been the leader in moving to [Every Day Low Prices] EDLP in both household products and personal care products” (Low, 1996, p. 68). It converted to value pricing in order to increase the transparency of its prices for its customers.

Procter & Gamble continued to implement supply chain integration with other retailers including Kmart, Target, and other club and convenience stores during the 1990s, and further took a leading and active role in the industry “establishment of standards and practices for the continuous replenishment of stocks” (Dyer et al., 2004, p. 288). P&G had one of its top executives as first cochairman of the Joint Industry Committee, formed in 1993 by the Food Marketing Institute and the Grocery Manufacturers of America, to restructure supply chains and to improve customer service. The company also “made available proprietary continuous-replacement software it had developed in the 1980s, and the software became the official standard for [Efficient Consumer Response] ECR” (Dyer et al., 2004, p. 324).

During the 1980s, P&G resumed “acquisitions to broaden the company’s portfolio and hasten growth” (Dyer et al., 2004, p. 182). Procter & Gamble diversified into the beverage industry, in which it became the sixth-biggest soft drink company in the United States, the citrus-processing business, the pharmaceutical business with OTC and prescription drugs, and the cosmetics industry. Although P&G struggled with its cold beverage business and divested the carbonated beverages in 1989, the OTC health care segment prospered under Procter & Gamble’s product supply, marketing, and advertising capabilities (Dyer et al., 2004).

CEO Artzt stated that during the 1980s, P&G experienced dramatic growth “including more than 40 acquisitions, plus entry into 29 new countries and 20 new business categories” (Dyer et al., 2004, p. 288). As a result, the early 1990s was a period of reorganization and restructuring. According to a P&G executive, during the late 1980s and early 90s “we had little top line growth… Our earnings growth was largely fueled by cost reduction, and we realized that there was a limit to the cost you could take out of the system” (Dyer et al., 2004, p. 289). During the late 1990s, P&G began to reemphasize internal product development and to conduct targeted acquisitions.

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In order to increase product innovation in the 1990s, an Innovation Leadership Team was organized in 1993 to look for new opportunities that could derive from capabilities ranging across P&G’s different businesses and partner competencies. Upon identifying that new ideas could be harmed by a lack of funding and internal sponsorship, the Innovation Leadership Team set up a Corporate Innovation Fund. In 1994, the Innovation Leadership Team also set up the Corporate New Ventures organization to “have an important, direct role in the development of at least one major new business per year” and to develop “an efficient, reliable innovation process” (Dyer et al., 2004, p. 290). Corporate New Ventures developed products such as the Swiffer in 1999, Dryel in 1999, and ThermaCare in 2001.

Although some initiatives were fruitful, only about 20% of P&G’s new products were successful as the “Innovation process was driven by internal scientific and engineering perspectives rather than by consumer needs and ideas from outside partners” (Edersheim & Drucker, 2007, p. 75). According to CEO Lafley, “like many P&G businesses, the diaper business had [also] become a bit myopic – it focused on technical performance” instead of overall value to the consumer (Lafley & Martin, 2013, p. 152). Pampers had been testing in P&G labs as superior to competing diapers, yet, it was not winning in the marketplace. P&G employee recalls that

all our metrics over time [for Pampers] were geared to that absorbency metric. That’s how we defined success or nonsuccess. If we had a better diaper, a more absorbent, technically superior diaper, we then by definition would have the better product for consumers (Lafley & Martin, 2013, p. 152). The company also became internally-oriented and driven as shown by the improvements made on their Crest toothpaste brand. In 1986, competition introduced baking soda toothpaste that consumers enjoyed, yet, P&G only responded to the demand in 1996. It resisted the trend by arguing that baking soda brought about no therapeutic benefits (Dyer et al., 2004, p. 349). In 1990, a new trend that included a whitening ingredient in toothpastes began to capture consumer interest, yet P&G only entered the category in 1997 with its Crest Extra Whitening toothpaste after it had lost market share. Even though P&G was aware of Colgate Total’s success worldwide since its launch in 1992, it concentrated its efforts even more in therapeutic benefits.32 Although the company realized that the toothpaste segment was heading in other directions, it did not want to partake in it as described by a P&G

32 P&G had developed Multi-care, its own all-in-one-platform months before Colgate Total, but it was “primarily a defensive move” and had not undergone in-depth clinical research to support all of its claims (Dyer et al., 2004, p. 350).

177 employee, “We’ve now got a new game being played, and it’s not our game” (Dyer et al., 2004, p. 349). P&G released Crest Gum Care in 1995, but it was withdrawn from the market due to poor results. After nearly forty years, Crest lost its leadership to the Colgate Total toothpaste, which was launched in the US in 1997.

In 1998, P&G believed itself to be slow and risk-averse, and thus began the Organization 2005 Restructuring, which was focused on creating a

culture that drives stretch, innovation, and speed. A culture that rewards going for breakthrough goals, that supports stretching, taking risks – even if there is a chance of failing short… a culture that stimulates robust innovation – big ideas that change the game – and encourages visionary leadership (Dyer et al., 2004, p. 296). Although such changes emphasized enterprising, encouraging versatility and rewarding ambition, it neglected organizational ingenuity as risks were highly disregarded. The restructuring had a negative effect on the company’s brands since

To reach ambitious revenue targets, managers attempted to sustain high prices in the face of fierce competition and pushed new brands into the market before they were ready. Management lost focus on the company’s biggest brands and markets (Dyer et al., 2004, p. 303). CEO Lafley believed that “P&G was overinvested and overextended” (Lafley & Martin, 2013, p. 50). In the new millennium, Lafley returned to the basic principles by focusing on winning with the consumer. Lafley eliminated the “stretch, innovation, and speed” slogan and decreased the rate of new product innovation to ensure that all products under development would receive proper marketing support. P&G’s renewed focus on the consumer “radically changed how it prioritized R&D, and a relentless, disciplined weeding resulted. The company killed 75% of corporate innovation projects because they could not pass the litmus test of delighting consumers more than competitors’ products could” (Edersheim & Drucker, 2007, p. 78)

The improved ability to create and capture value resulted from an outside-in approach that refocused the business on the consumer. Lafley’s two top beliefs were that P&G has to lead change and that consumer is boss. The metrics that had previously hindered value capture as they missed what consumers treasured were remodeled.

We created a metric that would look holistically at all of the components that made up product or brand preference. Our weighted purchase of intent (WPI) measure looked at a number of product dimensions that included things like aesthetic appeal, the design, the feel of the diaper, the look of the diaper in addition to technical performance; it also considered the brand

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proposition you were giving to the consumer and the price of the product (Lafley & Martin, 2013, p. 153).

By focusing on the consumer and improving P&G’s relation with partners, the company restored its ability to navigate in the environment and turned from a protective to a proactive organization. P&G has been divesting itself of many none core segments. The company divested itself for instance, from the coffee business in 2008, the pharmaceutical business in 2009, the snack business in 2012, and its pet care operations in 2014, among other long term brands and recently acquired businesses with mediocre profits or poor future outlook (Annual Reports).

At the same time, P&G has been acquiring a few select businesses through which it can create high reaching value and increase its value capture ability, such as with the acquisition of Gillette in 2005. It has also acquired, for instance, some of Colgate’s detergents brand in Europe after Colgate announced that it would exit the laundry detergent business (Schusteff et al., 2005). In fact, P&G emerged as the winner in the US laundry detergent business among the Big 3 as Colgate exited the US laundry segment in 2005 and Unilever withdrew from it in 2007 (Tocquigny, 2012, p. 111).

Besides renewing itself through external acquisitions, Procter & Gamble has worked to systematize innovation by building several organizational structures to nurture enterprising initiatives during the new millennium. In 2000, “only about 15% of P&G’s innovations were meeting revenue and profit targets. The company launched its now well-known Connect + Develop program [in 2001] to bring in outside innovations and build a robust stage-gate process to help ideas from inception to launch” (Brown & Anthony, 2011). Such program leveraged the technical capabilities of P&G’s 8,000 researchers in connection with over 2 million researchers worldwide (Sakkab, 2002, p. 43), and in 2011 improved the amount of innovations meeting revenue target and profits to 50% (Brown & Anthony, 2011).

A pilot of the Growth Factory was implemented in 2008 based on Clay Christensen’s disruptive innovation concepts, and has been focused on transformational-sustaining innovations, which reframe existing categories. Examples of such products include Crest Whitestrips introduced in 2000, Crest Pro-Health in 2006, and Crest 3D White in 2010. P&G has further established several new-business groups kept separate from the core business that can search for entirely new opportunities across the organization. The company has also developed the Future Works group, which is focused on testing new business models, and has developed projects such as the Mr. Clean Car Wash and the Tide Dry Cleaning businesses.

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Furthermore, P&G revamped its strategy and development review process by integrating it with the innovation assessments, which were previously held separately (Brown & Anthony, 2011).

Chairman Pepper recognized the importance of renewal through growth for P&G when he affirmed: “Growth and Leadership involve constant change and innovation…We should embrace change proactively as a natural process of renewal” (Pepper, 2005, p.3).

5.2.4 Renewal through Growth Recap Colgate and Procter & Gamble underwent a productive expansion increasing the scale of their production and the scope of their products during the Industry Formation Period. Both companies successfully grew in the favorable environment, along with the formation of the United States and the growth of the industry to become market leaders in their regional territories.

During the Soap Industry Consolidation Period, the competitive landscape increased with the development of national competition. Whereas P&G innovated and underwent related diversification fortifying its domestic market, Colgate lacked renewal and grew by replicating its success in less competitive, international markets. P&G’s renewal through growth and investments in innovation spurred the development of the Tide detergent, and began the Era of the Detergents.

Procter & Gamble utilized Tide’s success to internationalize with a differentiated product, and reinvested the profits from Tide into R&D and new businesses, which led to another radical innovation, the Pampers disposable diaper. Meanwhile, Colgate, which had failed to innovate, lost leadership of its main products to those of P&G, and began to observe the decline of its domestic and international business profits. In an attempt to grow into any businesses in which it would have an advantage over P&G, Colgate resorted to unrelated diversification through external acquisitions, however, most were unsuccessful and were later divested. Colgate’s acquisitions became more successful after they became focused on businesses related to its core segments. P&G also engaged in a period of more loosely related acquisitions to spur growth, but also became more successful when it began to acquire closely related businesses that could be leveraged by its capabilities.

Since P&G has more consistently than Colgate sustained organizational actions that promote renewal through growth, it has developed a greater tendency for self-perpetuation.

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More recently, both companies have been investing in innovation and adjusting their worldwide business portfolios to create and capture high-reaching value, thus promoting their organizational renewal through growth.

5.3 ORGANIZATIONAL INTEGRITY Organizational integrity refers to the unity held by the organization. Besides the ethical and moral values connoted by integrity, it also relates to how distinct elements come together in benefit of the whole company. It is supported by the early provisioning of human resources, which enables a continuity of management, and the management of diversity, which allows for an increased integration of the company. Diversity encompasses personnel diversity, the geographical and departmental spread of the organization, and the diversification of the company’s business products and business segments. Organizational integrity is thus characterized by the cohesiveness of an organization through the strength of its organizational culture, the synergy in its personnel relationships, and the coordination of its business activities and structure.

5.3.1 Colgate and Procter & Gamble Comparison William Colgate, James Gamble and William Procter were all immigrants who came into the United States due to given complications in their homelands. William Colgate arrived to the United States from England as a boy with his family, which escaped from political persecution in England. James Gamble arrived with his family to the United States as a boy from Ireland, which suffered from a famine. William Procter arrived to the United States from England after his store, with goods purchased on credit from his previous employers, was robbed before its first opening day. The three individuals moved with their families to the growing country of the United States, where surging opportunities existed that would enable them to improve their life conditions.

During the Industry Formation Period, Colgate and P&G were led by the founders and the second generation. The founders of Colgate and P&G infused similar principles into their organizations, which were focused on quality and integrity. In both cases the first generation passed on the leadership responsibilities to the second generation around the time of the American Civil War. Both Samuel Colgate and William Alexander Procter had opted not to attend college and engaged at an early age in their parent’s business. When the second generation assumed leadership, Samuel Colgate was 35 years old and had been active in the Colgate Company for 17 years, while William Alexander Procter was 31 years old and had

181 been active in P&G for 14 years. Both individuals of the second generation continued to strengthen their companies by reinvigorating its principles.

The third generation also reinforced the principles set by the founders and maintained a strong reputation for their respective companies. The third generation Colgate and P&G, however, began to diverge in their responses towards the provisioning of human resources and in how they managed diversity. As a result, P&G began to display a greater organizational integrity than Colgate during the Industry Consolidation Period. The third generation Colgate and third generation P&G passed on the leadership of their respective companies, for the first time and within a two year difference, to someone outside the founding family. Colgate passed on its leadership to Charles Pearce in 1928, while P&G passed on its leadership to Richard Deupree in 1930.

R. Deupree came into contact with William Cooper Procter as early as 1917, when he joined the administrative committee as a sales manager. Deupree was groomed under William Cooper Procter, held the title of Director during four years and Vice President for one year prior to assuming company Presidency (Moody’s). Upon assuming leadership at P&G, he gave continuity to the company’s organizational culture. The Colgate brothers on the other hand, had not prepared anyone to assume company leadership as seen by the absence of any other director besides themselves, for nearly thirty years of company management (Moody’s). The solution for continuity was to merge Colgate with The Palmolive-Peet Company and let its CEO, Charles Pearce, run the company. The foreign CEO to Colgate, however, harmed Colgate’s integrity as he took initiatives that countered Colgate’s organizational culture.

Colgate underwent a series of tumultuous leadership transitions, mostly due to a poor succession planning, while P&G has maintained a successful continuity of management throughout most of its history. Figure 5.4, presented next, compares the leadership between both companies since their foundation, and depicts whether the leadership transition was smooth or turbulent.

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Figure 5.4. Leadership Transition Comparison between Colgate and P&G. Whereas Colgate underwent a series of turbulent leadership transitions from 1928 until 1979, in which succession planning was neglected or opposed, and organizational momentum was harmed by changes in organizational direction, Procter & Gamble has managed its transitions smoothly throughout most of its history. The only turbulent transitions in P&G’s history have been in the new millennium, where pressured by the financial community due to lackluster results, Durk Jager and Robert McDonald opted to retire, but offered their support to their successor.

Besides the greater turbulence in the transition of its company leaders, Colgate has also faced greater challenges than P&G among its top management personnel as shown in Figure 5.5. 33

33 No data is available for certain years. The graph only covers until 1989 to avoid introducing error in the data as tracking top management personnel became highly complex since the 1990s.

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% Turnover of Top Management (Officers & Directors) 35.00

30.00

25.00

20.00

15.00

10.00

5.00

0.00

1901 1905 1909 1915 1920 1924 1937 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1930 Black Bars: P&G has greater % of Top Management Turnover than Colgate White Bars: Colgate has greater % of Top Management Turnover than P&G Bar Magnitude: % Difference in Top Management Turnover

Figure 5.5. % Turnover of Top Management (Officers & Directors) at Colgate and P&G

The graph shows that from 1913 until 1989, Colgate has had an overall greater turnover rate in its top management than Procter & Gamble. The greater turmoil in the transition of Colgate’s President and the greater top management personnel turnover rate resulted in a weaker organizational integrity than that displayed by P&G.

P&G has also maintained a greater organizational unity than Colgate during its growth. Unlike Colgate, which rushed into international expansion with its autonomous subsidiaries, P&G first concentrated on strengthening its domestic business. The difference in the quantity of foreign countries in which Colgate and P&G had subsidiaries or branches from 1930 until 1970 is depicted in Figure 5.6.

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International Presence of Colgate and P&G

60 50 Colgate: Foreign Countries with 40 Subsidiaries or Branches 30 Colgate: Foreign 20 Countries with Mfg Plants 10 P&G: Foreign Countries 0 with subsidiaries or

Amount of Foreign Countries Foreign of Amount 1920 1930 1940 1950 1960 1970 1980 branches Years

Figure 5.6. International Presence of Colgate and P&G through Subsidiaries and branches. Data from Moody’s Whereas Colgate’s acquisitions varied more widely and were maintained as separate subsidiaries, P&G worked to integrate its related acquisitions by Procterizing them. Even as both companies revealed signs of fragmentation due to their international expansion, P&G has worked towards homogenizing P&G worldwide. P&G began to seek integration and gains in scale through regionalization initiatives in the 1980s, while Colgate began such initiatives in the 1990s.

In both companies, the early provisioning of human resources and coordinating efforts of diversity have precluded managerial disruption and organizational fragmentation. On the other hand, whenever human resources provisioning was late and poor coordinating efforts handled increasing diversity, the companies experienced the effects of managerial disruption and organizational fragmentation. More often that Colgate, P&G’s initiatives succeeded at precluding managerial disruption and organizational fragmentation. As a result, P&G’s existence has been less threatened than Colgate’s.

5.3.2 Colgate

5.3.2.1 Period I: Soap Industry Formation (1806 – 1879) The Colgate Company exhibited more often than not, a tendency to foster organizational integrity through the early provisioning of human resources and the integration during the Industry Formation Period. The Colgate Company developed a culture based on the personality of William Colgate. It embedded honesty and integrity in its business principles, which focused on conducting business ethically. The involvement of the leaders of

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Colgate in religious and civic endeavors also permeated the company, which separated parts of its profit for donations since its first business earnings (Hardin, 1959).

When William Colgate founded his company in 1806, he was the company’s sole employee. William Colgate would work all hours of the day and most hours of the night to produce his soap cakes. William Colgate acquired a partner in 1807 to obtain capital in order to help his father’s financial difficulties; however, in 1813 William purchased back all his partners’ shares, and invited his brother Bowles Colgate into the business (Hardin, 1959).

William Colgate also hired knowledgeable individuals who were able to expand the company. In its early days, The Colgate Company hired a sea captain who had the knowledge of how to manufacture remelted toilet soap. Through his know-how, the company began to manufacture white Windsor, brown Windsor and Honey Soaps (Hardin, 1959). In the 1820s, a partnership between William Colgate and his brother-in-law, John Gilbert, enabled the Colgate Company to create a starch business line, which soon developed into one of the largest factories in the country (Colgate.com, 2015). As William Colgate was unwilling to further extend this line in addition to its traditional business, two of the managers left the company to establish their own business. Mr. Gilbert started another starch factory, while Mr. Kingsford set up a starch factory that became a large enterprise and gained the reputation of the largest starch factory in America (Hardin, 1959).

Although Colgate was unable to retain two of its managers in the starch business, since it opted to focus its growth on its core soap products, it demonstrated early provisioning and training of its personnel with the entry of the second generation Colgate into the business. William Colgate’s son, Samuel Colgate, entered the business in 1838, when he was 16 years old. He had attended one of New York’s finest private schools, and instead of continuing onto college, he opted to begin his apprenticeship in his father’s business. In 1844, after six years of training, Samuel Colgate became a partner. In this same year, Charles Colgate, son of Bowles Colgate, also became a partner after having worked for one year in the company. Upon Bowles Colgate’s death in 1845, William Colgate invited another of his own sons, Joseph into the business. Joseph, however, did not remain active for long in the company (Hardin, 1959).

Samuel Colgate and Charles Colgate joined the business prior to two significant moments for Colgate in the Industry Formation Period: the increase in the company’s growth capacity with the Colgate’s Folly, and the relocation of the factory from New York City to

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Jersey City. In 1845, William Colgate opted to greatly increase the volume of the company with the unprecedented 43,000 pound kettle (Hardin, 1959). In 1847, the company relocated its manufacturing facility from New York City to Jersey City to modernize and expand the factory, while leaving the administrative offices and salesroom in New York City.

Besides the increase in production capacity, during the Industry Formation Period, Colgate also expanded its business offerings from toilet soap, mould and dipt candles to include other products such as starch, perfumed soaps, perfumes and essences, and aromatic toothpaste. Even with the expansion of the company in size and scope, the limited geographical spread of the company and the degree of synergy amongst the existing and new product offerings, which shared raw materials, enabled the continuation of an integrated business structure centered on the decision making of the Colgate family.

When William Colgate passed away in 1857, leadership of the company transferred to the second generation. His son, Samuel Colgate, who had been prepared for 17 years and was 35-years old, was ready to take over and continue the business based on the same principles. Charles Colgate also remained in the business until his death in 1880. In 1864, another son of Bowles, John Henry Colgate also joined the company and would remain active until 1911 (Hardin, 1959).

Both William and Samuel Colgate, who headed The Colgate Company during the Industry Formation Period, spent much of their time and attention to works beyond their core soap business. William and Samuel held important functions within religious associations, such as the American Bible Society, American Foreign Bible Society, the American Bible Union, the Missionary Convention of the State of New York, the General Missionary Convention of the Baptist Denomination in the United States, and the American Baptist Home Mission Society. William and Samuel also greatly contributed their time to academic organizations. For instance, William Colgate served for 7 years and Samuel Colgate for 44 years on the Board of the Baptist Education Society of the State of New York. Also, William Colgate served for 7 years, and Samuel for 44 years as trustees at Colgate University (Hardin, 1959, p.139).

Samuel Colgate was further engaged in other businesses and civic activities beyond the manufacturing of soap. In business, he also ventured into coal and gold mining, subscribed to stock in Edison Electric Light Company, engaged at a limited scale in real estate, and became associated with one insurance company. Samuel Colgate was also

187 extensively engaged in civic activities. With other members, he created a railroad company with the sole purpose of forcing the Morris and Essex Railroad monopoly to reduce their abusive fairs. He acted as one of the first directors of the Orange Memorial Hospital, helped fund the Orange Orphan Society, develop city parks, organized music societies, and constructed a music hall and a library in his community. Samuel also helped found the Society for the Suppression of Vice, and held an important and active role in the Society for the Prevention of Crime (Hardin, 1959, p.154).

5.3.2.2 Period II: Soap Industry Consolidation (1879 – 1946) The Colgate Company nurtured its organizational integrity during the early phase of the Industry Consolidation Period; however, it was harmed when Colgate placed a foreign leader as its President in the absence of other prepared employees for top management, and when it began to internationalize through a fragmented structure.

When Samuel Colgate passed away in 1897, his five sons took over the business. They had all graduated with Bachelor of Arts from Yale University (Hardin, 1959, p.158). Although they shared equal control of The Colgate Company, the oldest brother Richard became President due to his seniority in the company. The brothers had divided their responsibilities by functions so that each would attend to a given organizational area. Besides acting as President, Richard was in charge of Purchasing. Gilbert and Austen were Vice- Presidents and were responsible for Manufacturing. Sidney acted as the company Treasurer and took care of Sales, Distribution and Advertising. Russell, the youngest brother, was Head of the Office and responsible for Personnel. The third generation continued to uphold the tradition that the first generation had started of discussing problems weekly over lunch for a joint-decision making. The five brothers made every possible attempt to participate in the meetings, where they would to discuss business problems and promote a holistic and optimized solution over tea or coffee (Hardin, 1959).

The brothers held the position of President in professional groups such as the American Perfumers’ Association, the Association of American Soap and Glycerine Producers, the Cleanliness Institute and the War Service Commission of the Soap Industry for World War I. The Colgate brothers were also extensively engaged in religious and civic interests, donating their time and money. The civic interest of the five brothers were primarily concentrated on parks and playgrounds, care and welfare of children, and public schools, yet, Austen Colgate also engaged in politics and military service (Hardin, 1959).

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Under Richard’s presidency, Colgate completed its 100th anniversary in 1906, incorporated in 1908, and began to internationalize in 1914 (Hardin, 1959).

In celebration of its 100th anniversary in 1906, the five brothers honored The Colgate Company and the employees that had helped construct its story by closing down their factories and inviting their 1,000 employees and their families to a banquet at the Grand Central Palace in New York City. During the celebration, where managers and employees sat together, both managers and employees reiterated their gratitude for one another. The employees demonstrated their “deep appreciation of the many kindness shown them in the past”, and affirmed:

Colgate & Company have been to us most considerate and exemplary employers; have been model members of the communities in which they did business; have been liberal in charities, and have been examples of Christian men in business (Hardin, 1959, p. 69). Richard Colgate demonstrated the character of the company when he stated that in the midst of many changes,

There is one change which I am thankful to say has not been made, and that is the old-fashioned, honest business methods of doing business that William Colgate founded… We want to grow. We want to increase. We are all Americans – but we do not wish to grow or increase at the expense of honesty and uprightness and strict business principles (Hardin, 1959, p. 67). Sidney Colgate further emphasized the importance of the company’s organizational integrity, which would enable the company to deal with the coming business challenges. According to Sidney,

Whether you live or I live, this ship is bound to sail on… We have come here to adjust our compasses, but we must sail out into new seas and into untried conditions. Let us sail out with confidence, knowing that even in the terrific storms of business competition of the present day, this fair ship will sail on if we keep true to the compass that has been set by the founder (Hardin, 1959, p. 71). Although the company remained entirely controlled by the Colgate family members after its incorporation in 1908, it internationalized with a fragmented structure. Between 1914 and 1933, the Colgate Company established sixteen foreign subsidiaries, and quickly developed a presence across Europe, in the South Pacific, in Asia, in Latin America, and in South Africa (Ingham, 1983, p.180). By 1938, Colgate conducted its business in most foreign countries, excluding Japan and Russia. The company had subsidiaries or branches in 22 of them and serviced the remaining countries through agents (Moody’s).

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The purpose of the subsidiaries and international mergers and acquisitions were not to acquire new product offerings or local brands, but to develop local production capability for Colgate’s soaps (Foster, 1975). Despite the operational similarities that would have permitted greater business integration, the international businesses were highly autonomous.

The international subsidiaries were incorporated separately under local laws, and were typically run by native general managers. By 1939, The Colgate Company maintained foreign offices, each with a complete organization of its own, in London, Paris, Amsterdam, Brussels, Copenhagen, Stockholm, Hamburg, Zurich, Milan, Warsaw, Sydney, Rio de Janeiro, Buenos Aires, Valparaiso, Mexico City, Havana, Bombay, Batavia, Wellington, and Johannesburg, depicting its fragmented international expansion (Moody’s).

Once Richard passed away, the second eldest brother, Gilbert, became President, and the remaining brothers continued the international expansion that Richard had started. In 1925, Sidney Colgate became President as Gilbert assumed the newly created position of Chairman of the Board. In both cases, the agreement that control of the company was equally shared continued to be upheld and helped maintain a degree of organizational unity in the decision making (Hardin, 1959).

In 1928, the opportunity to merge Colgate with Palmolive-Peet appeared and seemed attractive to the third generation, which had failed to prepare a successor. For over twenty years the brothers were the only officers, and for nearly thirty years, were the only directors of the company. The first officer beyond the five brothers was a Comptroller, added in the 1920s. Samuel Bayard Colgate, part of the fourth generation Colgate, became a Secretary Officer, and another two officer positions were added in 1928, that of General Counsel and General Manager. In fact, the hired General Manager, W.E. McCaw, who only remained with Colgate until 1930, had served P&G in top management for nearly ten years since 1915 (Moody’s). By 1928, the year of the Colgate-Palmolive-Peet merger,

the brothers were getting old. Gilbert, the President, was seventy, Sidney was sixty-six. And Russell, who was only fifty-five, took no great part in the management… Sidney’s son, Bayard Colgate, was… barely six years out of Yale. That, for a Colgate, was too young. So the brothers listened attentively when Charles Pearce offered to merge Palmolive-Peet with Colgate… [After the merger], they resigned themselves to virtual retirement (Forbes, 1936, apud Collins, Porras, 1994, p. 176).

The transition was abrupt, and the Palmolive-Peet President, who assumed Presidency of Colgate-Palmolive-Peet, took actions that negatively affected Colgate’s culture and

190 identity. Pierce, for instance, conducted such hard bargains that it contrasted with the Colgate’s principles of fair dealings. As a result,

Druggists were especially irate: they had long been accustomed to the conservative dealings of the Colgates. The tactics of the Pearce… management pleased them not at all. And since Colgate… was depending on substantial profits from its toilet articles, … the defection of the druggists… was a ruinous blow” (Forbes, 1936, apud Collins, Porras, 1994, p. 176). The organizational unity changed upon the merger as a power struggle occurred between Palmolive-Peet and Colgate leadership concerning decision making. The selection of Charles S. Pearce as President of the combined Colgate-Palmolive-Peet Company resulted in the relocation of the Colgate’s executive offices to Chicago, where the Palmolive-Peet’s administrative offices were located. In the early 1930s, the Colgate family “roused up from its lethargy to look astonished on what Charles Pearce had done” (Forbes, 1936, apud Collins & Porras, 1994, p. 176). A reshuffle in management in 1933, during the Great Depression, resulted in a large part of Pearce’s team resigning. Charles Pearce became part of the Board, and the thirty-six year old Samuel Bayard Colgate became President.

S. Bayard Colgate attempted to reinstate the Colgate culture within the company and transferred the corporate headquarters back to New Jersey, but “Pearce’s reign of havoc made the CEO job particularly difficult for the young Colgate, who had not been prepared or groomed for such a role” (Collins & Porras, 1994, p. 176).34 In 1938, Samuel Bayard Colgate became Chairman and passed on the Presidency to the international sales manager, Edward H. Little.

Edward H. Little had become acquainted with the Colgate culture as early as 1902 when he joined the company. Prior to leaving Colgate due to health reasons, he participated in the 100th anniversary celebration dinner, which took place in 1906 and appropriately portrayed Colgate’s character. Upon his health improvement, Edward Little joined the B. J. Johnson Soap Company, which later changed its name into the Palmolive Soap Company, and returned to work at Colgate after the Colgate-Palmolive-Peet merger (Sims II, 1956).

Edward H. Little continued to make large donations on behalf of the Colgate- Palmolive-Peet Company to civic endeavors as he recognized the importance of developing the community to attract the best talent pool. The company continued to provide regular grants to research, and national education funds and foundations. According to Edward Little,

34 The executive offices were later relocated back to New York City, where they had originally been before Richard’s presidency.

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The Colgate-Palmolive Company fully recognizes that its future ability to serve the nation is dependent on the caliber of men and women who will be recruited to its personnel management. The colleges are doing a job for us and they are doing that job very well, despite financial obstacles. We deem it both a privilege and obligation to help support their efforts (Hardin, 1959, p. 80). 5.3.2.3 Period III: The Era of the Detergents (1946 – Present) Colgate’s organizational integrity was severely harmed from 1928 to the late 1970s. During the beginning of the Era of the Detergents, the inadequacy of Colgate’s responses to the provisioning of human resources and to the diversity challenge failed to insulate the company from threats to its continued existence. Besides a late provisioning of human resources demonstrated by the turmoil in the transition of Colgate’s leadership, the company also expanded in a fragmented manner, which caused Colgate’s organizational culture to falter. Whereas

up until the early 1900s, Colgate placed great emphasis on a paternalistic culture built around the Colgate family values…particularly over the past sixty years [, Collins and Porras] found no evidence that Colgate [still] imposes the same rigorous screening or tightness-of-fit criteria upon new hires… [Also,] Colgate has increasingly defined itself in relation to P&G…. has come to see itself as ‘second to Procter’ and on a quest to become ‘another P&G’ (Forbes, 1976, 1979, apud Collins & Porras, 1994, p. 135).

Colgate suffered from the lack of an organized succession planning and consequently had unprepared personnel in top offices. In certain cases, not only did the new President/CEO fail to give continuity to the work started by his predecessors, but he also undid such initiatives by redirecting the company, and ultimately harmed Colgate’s organizational integrity.

E.H. Little initially remained President of Colgate from 1938 until 1953, when he became Chairman. In 1957, however, Little once again became President of The Colgate Company until 1959, holding the title of Chairman until 1960. As Little retired in 1960 at the age of 79 (Collins & Porras 1994, 2002, p. 177), no one in Colgate was attributed with the Chairman title until 1962, when his successor, President George Lesch, also became the Chairman of Colgate (Moody’s).

Colgate’s leadership under E.H. Little until 1960 is described by Businessweek to have “been a one-man show” (Businessweek, 1957, p. 120, apud Collins & Porras, 1994, p. 176). Forbes wrote that “Colgate was dominated by [Little] – and ‘dominated’ is not too strong a term” (Forbes, 1966, apud, Collins & Porras, 1994, p. 176), while Collins and Porras

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“found no evidence that Little could imagine Colgate without himself at the helm, or that the company had any succession plan in place” (Collins & Porras, 1994, p. 177).

As a result, neither of the two Presidents who served when E.H. Little was Chairman, remained in the presidency for longer than two years. J.H. McConnell, who became President in 1953, left in 1954. In fact, he had not been adequately prepared for the role of President. McConnell had never been part of the Colgate top management team, neither as a company Officer nor as a Director. Upon his departure from Colgate, the Presidency position remained vacant for a period in 1955. William Lee Sims II, who had been an Officer and Director since 1946 and President of Colgate International since its formation in 1953, was elected President, but only remained in the position until 1956, after which Chairman Little returned to Presidency (Moody’s).

In 1960, The Colgate Company requested that George Lesch, one of the international Vice Presidents who had been part of the company’s top management since 1957 come in as a “White Knight” to fill the President position and to turnaround the struggling domestic operation of the company (Forbes, 1969, apud Collins & Porras, 1994, p. 177). Although no information concerning the provisioning of human resources under Lesch’s leadership was uncovered, his successor, David Foster harmed the provisioning of human resources.

David Foster began his career as a management trainee in the English subsidiary of Colgate-Palmolive and through his successful trajectory (Foster, 1975) became Vice President in 1966 and President in 1970 (Moody’s). In 1979, however, Colgate suffered another difficult transition as President and CEO David Foster “was removed – against his will – by the Colgate Board” after a period of unsuccessful acquisitions (Collins & Porras, 1994, p. 177). Fortune Magazine accounts that “Foster was undone by a rocky relationship with the board of directors and a series of misguided diversifications into sports, food, and other industries" (Steinbreder & Caminiti, 1987). Not only had Foster failed to develop a successor during his leadership, but he had actively impeded a succession planning. Foster “carried on a tradition of one-man rule at Colgate, and it suited his temperament” (Fortune, 1979, apud Collins & Porras, 1994, p. 177).

To the end, David Foster did his best to give his heir apparent the least possible power – or even visibility…. Foster [sought] an effective way to silence the board on the matter of succession. Colgate had an unwritten policy at the time calling for top executives to leave at sixty. Foster was then fifty-five and was saying he would adhere to the policy, but it is a telling comment that when [his potential heir] received an offer to become

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president of [another company], he took it (Fortune, 1979, apud Collins & Porras, 1994, p. 177).

Colgate also maintained a fragmented response during the beginning of the Detergents Era. Internationally, the company continued to expand with largely autonomous subsidiaries, while in its domestic market, Colgate began to decentralize its operational activities, which became independent of each other. A series of unrelated acquisitions during the 1960s and 70s further increased the company’s fragmentation.

Although Colgate International was formed in 1953 to help coordinate international operations, President Sims II described in 1956, how Colgate’s international expansion continued to be highly independent:

Our subsidiaries have a great deal of autonomy. Each company handles its financing, purchasing, production, sales, advertising, administration, director’s meetings and declaration of dividends. It is like being in business for themselves. We give them the rules of the game and they play it. Our contacts are mostly to make suggestions and to assist in planning the budget and the sales and advertising programs…. These companies are self- sustained and separately incorporated – usually under local laws… (Sims II, 1956, p. 16). The international presence of Colgate extended beyond the regions of its foreign subsidiaries. Sims describes for instance, that beyond the 29 international subsidiaries and the 3 foreign branches existing in 1956, “another 100 countries are supplied by our export departments in the United States, Canada, England, France, Australia, New Zealand…”, and are covered by local agents (Sims II, 1956, p. 16). In 2003, Colgate would market its products in over 200 countries and own facilities in over 70 countries (Moody’s).

Domestic operations also became increasingly decentralized. In 1957, the company created two separate divisions, the Household Products and the Toilet Products Division, both of which were responsible for their own activities that included sales, advertising, market research, packaging, purchasing, and manufacturing. Furthermore, in 1959, Colgate announced entry in the drug field and set up a Pharmaceutical Division to handle the manufacturing of proprietary and ethical drugs, and in 1960, it developed an Associated Products Division to supply industrial and institutional customers with the company’s products. In 1966, however, the separate Toilet Divisions and the Pharmaceutical Division were combined to form the Toilet Articles-Pharmaceutical Division (Moody’s).

Colgate’s entry into several distinct fields during the 1960s and 1970s further increased the company’s fragmentation. Colgate had been described by Moody’s in 1959 as:

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One of the three principal factors in the manfacture and sale of toilet, laundry, household, industrial and textile soaps, synthetic detergents, shaving soaps and creams, talc powders, toilet waters, cosmetics, shampoos, after shave lotion, air deodorant, insecticide, personal deodorant and other toilet preparations, dentifrice, and Glycerine (Moody’s, 1959)

The description of the company drastically changed in 1979. Moody’s described that the Colgate Company as: develops, manufactures and distributes a diversified mix of products in the United States and many other countries that is intended primarily for consumer and health care facilities. These products assist in maintenance of cleanliness, foster good personal hygiene and grooming, aid in restoration of health, provide good food, promote participation in teams and individual sports activities and enhance enjoyment of hobbies. Fabrics, pipeline coverings and related products are provided for industrial use (Moody’s, 1979).

Colgate’s principal products in 1959 and 1979 have been listed in Table 5.10 to depict the increased diversity in the company’s main products.

1959  Toilet Soaps  Synthetic Detergents  Talc Powders  Personal deodorant  Laundry Soaps  Shampoos  Toilet Waters  Glycerine  Household Soaps  Dentifrices  Cosmetics  Other Toilet  Industrial Soaps  Shaving Soaps and  Air Deodorant Preparations  Textile Soaps Creams  Insecticides  Selling agente for  After Shave Lotion Vaseline in US

1979 Household and Personal Health Care and Food Sports and Other Care Industrial  Laundry Detergents  Rice  Health Care Supplies  Golf Clubs  Dishwashing  Rice Products and Equipments  Shoes Detergents  Restaurant Businesses  Non-Woven Fabrics  Balls and Accessories  Toothpaste  Meats  Pipeline Coverings  Hostess and  Bar Soaps  Candy  Specialty Cotton Decorative Accessories  Cleansers  Rayon  Hobby Products  Hair Products  Sports clothing and  Shave Products Uniforms  Cosmetics  Tennis racquets, balls,  Adhesive Bandages shoes and supplies  Disposable Diapers  Racquetball racquets  Plastic Wraps  Fashion Accessories

Table 5.10. Colgate's Principle Products in 1959 and 1979. Source: Moody’s Colgate underwent a quick transformation during the 1970s that spread its business activities across several distinct categories, which serviced diverse markets, and consequently

195 increased the company’s diversity challenge. Furthermore, most of the acquisitions were not integrated to Colgate-Palmolive’s businesses and remained as subsidiaries (Moody’s). Whereas in 1973 Colgate’s products could be separated into 3 categories: Household; Personal Care; and Other Products, in 1974 it increased to 5 categories: Consumer Laundry & Cleaning; Personal Care & Cosmetics; Other Consumer Products; Professional; Industrial & Industry. Although the name of the group categories and their arrangements varied slightly during the late 1970s, in 1979 the company’s products were organized into 4 categories: Household & Personal Care; Food; Health and Industrial; Sports and Other. From these categories, only products in the Household & Personal Care have been in Colgate’s traditional lines of business (Moody’s). When Keith Crane, who had been President and COO since 1976 became President and CEO in 1979 after Foster’s removal, he redirected the company by divesting most of Colgate’s previous acquisitions and by refocusing Colgate on its major toothpaste and detergent brands (Schusteff et al., 2005). In 1984, President, CEO and Chairman Keith Crane passed the title of President and CEO to Reuben Mark, who had been a company officer since the mid-1970s, and continued as Chairman until 1986 (Moody’s).

During the 1980s, the company began to restore its organizational integrity, and continued to strengthen it during the 1990s, 2000s, and 2010s by promoting greater organizational integration through increasingly coordinating its activities as well as by conducting an early provisioning of human resources and focusing on its personnel.

In the early 1980s, Colgate began a restructuring period and sold most of its previous acquisitions. The company for instance, divested all of its sports business, ended its sports sponsorships, and sold most of its food business with the exception of pet’s nutrition. Furthermore, Colgate “quickly instituted a new management structure consisting of several group-vice presidents, reunited all domestic operations under one group, and realigned division managers in an attempt to promote a more cohesive organization” (Schusteff et al., 2005, p. 4).

Mark laid off employees and closed plants. He removed a cumbersome layer of management, pushed decision-making down through the ranks, and fostered an entrepreneurial spirit that had been as heretical at Colgate as brushing with Crest (Steinbreder & Caminiti, 1987) In 1986, the company’s main categories were considered to belong to three segments: Household & Personal Care; Health Care and Industrial; and Specialty Marketing, which

196 included pet food and pet care products, glassware products, and portable fuel for warming food. Reuben Mark continued the restructuring process begun by his predecessor and continued to sell non-core business, and by 1990, the company’s operations had been grouped into two segments: Household & Personal Care and Specialty Marketing (Moody’s).

Colgate further fine-tuned the organization into two segments in 1997: Oral Care, Personal Care, Home Care; and Pet Nutrition, both of which have remained the same until the present day (2015). All acquisitions since the mid-1980s have been directly related to these core categories, thus enabling better business integration and improving the company’s diversity challenge (Moody’s).

Although Pet Nutrition competed on a worldwide basis, Oral Care, Personal Care, and Home Care competed on a geographic basis with regional managers responsible for their financial results in their own operating divisions, which were separated into North America, Latin America, Europe, and Asia/Africa (Annual reports).

In 2003, The Colgate-Palmolive Company began to restructure its activities to strengthen its geographical operations. Colgate began to regionalize its highly fragmented businesses and began to streamline its manufacturing facilities. In 2004, the company initialized a four-year restructuring plan, with a focus to transform its core businesses into more globalized and streamlined operations, thus improving the company’s diversity challenge through an increased coordination and integration. Approximately one-third of the manufacturing facilities were closed, reducing the company’s fragmented local production facilities that were spread out throughout the globe. The European production of toothpastes, for instance, had been carried out in five distinct locations but became concentrated in one state of the art-facility in Poland. Furthermore, other business support functions that had coexisted among the subsidiaries were centralized (Annual reports).

The Colgate-Palmolive Company began another four-year restructuring program in 2012 to make Colgate-Palmolive as global as possible. The objective was to strengthen Colgate’s operations by clustering single-country subsidiaries into efficient regional hubs, and to further expand proven shared business services and streamlined business functions. The Global Growth and Efficiency Program will enable global information exchange for improved and faster decision making (Annual Reports).

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Since the mid-1980s, Reuben Mark has also helped improve the manner in which the company dealt with the provisioning of human resources. Besides giving continuity to the restructuring initialized by his predecessor, Mark encouraged employee engagement. He departed from the “prototypical Colgate boss, [who] rul[ed] with a stifling, autocratic hand”, and began to “take the handcuffs off... [Mark] wanted to foment independent action and encourage people to take risks” involving them in the decision making process (Steinbreder & Caminiti, 1987). According to Mark, “we had good people around the world. We had to let them operate, and we had to reward them” (Steinbreder & Caminiti, 1987). Colgate thus began to implement monetary rewards for innovative and cost-cutting ideas (Steinbreder & Caminiti, 1987), and began to emphasize employee motivation through programs such as the You Can Make a Difference Program, which recognized the values, innovation and achievements of its employees around the world (Colgate.com, 2015).

Although Mark passed the title of President to Mark Shanahan in 1993, he continued as Chairman and CEO until 2007, when Ian Cook became President, CEO and Chairman. Much like Mark, Ian Cook had ample experience in top management and gave continuity to the works of his predecessor. Ian Cook, who maintains leadership of Colgate to date, continues to emphasize the importance of employees, and has been “constantly focusing on developing leaders” (Cook, 2014). Cook has stated that in today’s global marketplace, “values and integrity are more important than ever before… in the end, it is the quality of the leaders and the culture of the company that drive long-term success” (Cook, 2014).

5.3.3 Procter & Gamble

5.3.3.1 Period I: Soap Industry Formation (1806 – 1879) Procter & Gamble’s responses to the human resource provisioning and the managing diversity challenge during the Industry Formation Period have enabled the company to foster a positive organizational integrity that has contributed to shield the company from self- destructive processes. Procter & Gamble developed the reputation of a trusted company with quality soaps and honest dealings for all of its stakeholders (Lief, 1958).

After the foundation of P&G in 1837, William Procter and James Gamble each focused on different aspects of the company. William Procter focused on sales and finances while James Gamble cared for the work in the factory. Even though each cared for different aspects of the company, the founders met frequently on Saturday nights and prompted each other for updates (Lief, 1958), which promoted an organizational integration. Decisions of

198 the strategic direction of the company and its daily operations remained concentrated under the family unit.

Despite the increased scale and scope of P&G’s operations during the Industry’s Formation Period, P&G supplied all of its customers with its single factory in Cincinnati and its products, such as soaps, candles, lard oil, fatty acids, and Glycerine (Lief, 1958), remained largely related with the use of similar raw materials, thus facilitating coordination. Furthermore, the increase in personnel accompanying the organizational growth did not affect the sentiment of organizational unity.

The number of employees at P&G grew in the 1850s from a few factory helpers to 80 employees in the end of the decade, and to about 300 people in 1870. Even with the increased amount of employees, P&G maintained a reputation for treating all of them like family. Customers also recognized P&G through its Moon-and-Stars emblem, which became a symbol of the integrity and reliability of a company that provided a quality product at a fair price. Banks trusted P&G, increased its bank credit and exempted it from requiring a second- party endorsement (Lief, 1958).

The second generation of the Procter and Gamble families also joined the business. William Procter’s son, William Alexander Procter entered the company in 1851, when he was seventeen years old. At the time, William Procter believed that his son would learn more from joining the business than he would at Kenyon College. William Alexander Procter underwent training through a rotation in several departments, became first, the manager of star-candles, and later, the manager of lard-oil, which gained significant importance in the company (Lief, 1958, p. 29). Having demonstrated good business judgement, William Alexander Procter was accepted into partnership in 1857. This same year, his brother George Procter joined the company and became a salesman travelling to Baltimore, Philadelphia, New York and Chicago to obtain new businesses (Lief, 1958).

James Gamble’s son, James Norris Gamble joined P&G in 1860, after graduating from Kenyon College and studying analytic and applied chemistry with leading chemistry consultant, Prof. Campbell Morfit, at the University of Maryland. James Norris Gamble was taken into partnership in 1864 (Lief, 1958).

After the end of the civil war, even though the Saturday-night updates with the founders continued, the founders opted to leave company direction to the second generation,

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William Alexander Procter, who was 31 years old and had been active in the business for 14 years, and James Norris Gamble, who had been active in the business for 5 years. All the partners, who included William Procter, James Gamble, William Alexander Procter, James Norris Gamble, and George Procter, would also engage in monthly conferences at the Gamble’s house to address company challenges and organizational direction (Lief, 1958).

Similar to the split responsibilities of the first generation, William Alexander Procter practically led the company while James Norris Gamble cared for the factory work. Harley Procter, William Procter’s third son, entered the company as a salesman in 1868 and eventually became responsible for sales management. The company also hired its first chemist in 1875 (Lief, 1958).

When James Norris Gamble’s two brothers, William Gamble and David Gamble, left their jobs to work at P&G in 1878, James Norris Gamble gained more time to focus on soap development. During this same year he purchased an all-vegetable formula, which he altered and eventually turned into Ivory Soap. Although P&G was a family company, family members were kept on payroll according to business merit as noticed by George Procter’s renouncing of his junior partnership as he grew tired of the job (Lief, 1958).

During the Industry Formation Period, P&G was also forming its human resources personnel and shaping its organizational integrity. In this initial phase, the company had an early response to resource provisioning as organizational needs were anticipated by the entry of new capable personnel. Even before lard-oil became a significant product in the company’s balance sheets, second-generation William Alexander Procter had undergone a job rotation and was considered by the founders prepared to hold that important management function. A need for the company to engage in the science of soap-making was also anticipated by James Norris Gamble, who studied analytic and applied chemistry with industry expert prior to entering P&G, and introduced a scientific approach to the art of soapmaking upon his entry into the company (Lief, 1958).

The business underwent a continuity of management once company leadership transitioned from the first to the second generation. Even as William Alexander Procter and James Norris Gamble began to lead the company after the American Civil War, the founders remained present by participating in the partners’ meetings to discuss overarching strategic direction. The continuity principle extended to other positions beyond the leadership roles. When family members such as George Procter left his sales position in the company after

200 growing tired of the business, the position was not left unattended as Harley Procter had already become a salesman, and was gaining experience that would later prepare him to assume a leading role in sales management.

The entry of William Gamble and David Gamble to assist their brother, James Norris Gamble in the factory also occurred before the purchase of the vegetable-formula. Their entry provided James Norris Gamble with time to study the formula and alter it in order to make a formulation that would eventually become the company’s famous Ivory Soap.

P&G successfully grew within the limits of its managerial capacity while promoting an integrated organization during the Industry Formation Period. Such actions helped the company strengthen its organizational integrity, which isolated it from self-destructive threats.

5.3.3.2 Period II: Soap Industry Consolidation (1879 – 1946) P&G has developed the reputation of an admired company amongst consumers and employees. During the beginning of the Industry Consolidation Period, P&G was well respected by the public. According to newspapers at the time, “both Ivory and P&G had acquired a personality. They were nationally famous and liked” (Lief, 1958, p. 67).

The extensive growth through related diversification underwent by P&G during this period, had an impact on internal organizational matters. Procter & Gamble’s organizational integrity for the Industry Consolidation Period and Era of the Detergents is analyzed in light of the internal development of its human resources and its organizational business structure.

Human Resources During the Industry Consolidation Period, Procter & Gamble placed an increased emphasis on its human resource provisioning. Early actions by the second generation demonstrate how it was conscientious toward its employee work relations. James Norris Gamble commented about the construction of Ivorydale, which was completed in 1886: “Among the reasons that worked most in its favor was that with better lighting, better air, better buildings, better surroundings generally, better man would come to us and those we had would do better work” (Lief, 1958, p. 77). The main force towards improved human resources, however, was William Cooper Procter, who entered P&G when it had about 500 employees in 1883 (Lief, 1958). His entry into P&G was a sign of a late response to the resource provisioning challenge as he joined the company upon the request of his father with

201 only one month remaining towards his graduation from what is now Princeton University (Lief, 1958).

William Cooper Procter developed many initiatives ahead of the industry in order to improve the company’s labor relations, which in turn attracted more and better personnel, and improved employee retention. He began working at the factory to learn the business from the ground up, and began to visibly defend the interest of the factory workers as early as 1885, when he convinced the partners with the radical idea at the time, to give employees year- round Saturday afternoon off without any wage reduction (Lief, 1958). Despite the benefit for the factory workers, the company faced 14 strikes during the following two years (Dyer et al., 2004).

The 1880s was a difficult time for laborers in the US industry. Each year, about half of P&G’s employees were replaced by new ones, however, William Cooper Procter recognized that "Too much stress cannot be placed upon the advantage of being able to retain the same employees year after year", and was proactive to improve the situation (Lief, 1958, p. 86). In an attempt to reduce company costs and improve labor relations, William Cooper Procter implemented a Profit Sharing Plan in 1887, one of the first in the United States, with the hopes of creating “perfect loyalty to the Company and mutual respect and confidence” between laborers and management (Dyer et al., 2004, p. 46). The same year that the Profit Sharing Plan was implemented, however, the company experienced three strikes. The Profit Sharing Plan underwent several changes. In 1892, it included an Employee Stock Purchase Program, in 1896 the company ensured employees at lower pay scale against losses in company stocks up to one-thousand dollars, and in 1903 it became associated to P&G common stocks. The Profit Sharing Plan also suffered another significant change in 1919, which has practically remained unchanged since 1922. While in 1903 less than 3.5% of workers had fully paid subscriptions, by 1926, the number increased to 21.7% (Feis, 1928, p. 37), and continued to rise. Although it took some time for employees to appreciate the program, the Profit Sharing Plan gained significant acceptance and enrollment during difficult economic years, as the developed Guarantee of Employment Policy would only cover profit sharers (Feis, 1928).

Procter & Gamble was also among the first companies to offer comprehensive benefits to its employees. In 1915, it offered sickness, disability, life insurance, and a retirement pension system. Although most companies did not have a pension plan, P&G’s

202 pension system compared unfavorably against those that existed. This is partly because William Cooper Procter believed it to resemble charity and that preparations for old age should be provisioned early in life, through for instance, the enrollment in profit sharing. Wages and earnings of P&G employees were also higher than those offered by local competitors. Yet, they were smaller than those given in the Eastern industrial centers (Feis, 1928).

In 1918, P&G created the Employee Conference Committee in order to increase communication among employees and management “to the end that both may benefit and that a fuller understanding between them shall exist” (Feis, 1928, p. 68). At a time when no major company had laborers sitting with managers, William Cooper Procter extended the number of Board seats from 9 to 12, in order to include one labor representative from each of the company’s three national plants (Feis, 1928). 35

After pioneering an 8-hour day attempt in 1919, the work journey underwent several modifications, and in 1933, became established with 5 workdays a week. In 1939, P&G also initiated paid holidays for its employees, and in 1944, the company developed a Profit- Sharing Trust Plan to cover salaried employees who were not covered by the regular profit sharing plan (Feis, 1928).

William Cooper Procter also implemented the Guarantee of Employment Policy in 1923, which ensured that about 5,500 workers in P&G’s three factories would be guaranteed full pay for a full forty-eight week calendar year. 36 The Guarantee of Employment Policy however, did not extend to the workers in the Macon and Dallas plants, nor in the cottonseed oil mills (Feis, 1928).

In a written letter to his niece in 1920, William Cooper Procter described an institutionalization process that the company was undergoing through in order to strengthen the organization:

35 In 1935, with the enacting of the Wagner Act and the development of independent unions in the P&G plants, the Employee Conference Committee was eliminated and the Board was reconstituted without the three seats for the labor representatives. It was deemed no longer needed due to the new communication channel that had opened between laborers and managers.

36 In 1932, the company authorized modifications on the Guarantee of Employment Policy given an early notice. Later in the year, the policy was reduced to 75% of its initially stated guarantee.

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I think everything is working out all right, but the business and organization was in bad shape two or three years ago… I am not quite yet through with the job, and when I get through, I want to put it in shape where it won’t easily go upon the rocks (Lief, 1958, p. 160). In 1930, William Cooper Procter became Chairman and left the company presidency to Richard Deupree, who also assumed the Chairman position upon William Cooper Procter’s death in 1934.

When Richard Deupree assumed company leadership, he became the first President of P&G that was not a member of the Procter and Gamble family. As Deupree and William Cooper Procter’s business relation developed into a close friendship, Deupree absorbed the traditions and the continuity of management principle at P&G. Having risen within P&G from his initial job as a clerk in 1909, William Cooper Procter’s words of “reputation and character… standards ….ideals of honesty… justice and affection in dealings with its people…” had been embedded in Deupree’s views (Lief, 1958, p. 126). Similar to William Cooper Procter, Deupree believed that P&G’s strength depended on its people. According to Deupree, “People—our people, [are] the crux of our business” (Lief, 1958, p.309), and the relationship between management and employees was “not only a result but a way of life” (Lief, 1958, p.310).

In the 1930s, P&G had developed the reputation of being a “stodgy, tradition-bound, parochial firm – stiff and formal, almost military” (McCraw, 2009, p.38). Applicants were recruited in college campuses, given batteries of exams and upon becoming hired, were expected to be in the job for life and to rise through the corporate ranks (McCraw, 2009).

The brand-man concept, created in 1931, also helped in the early development of talented executives. As the employee demonstrated a greater potential in the brand management team, he would gain increased responsibilities and rise through the ranks to a brand man, gain exposure to all aspects affecting a brand and develop into a well-rounded executive. According to a P&G alumnus,

Early on in your career, you get to be a generalist. You get to work with the packaging and the performance of the product; the advertising and promotion; the distribution and pricing; the research and business analysis; everything about the brand. That’s why P&G brand managers tend to have a pretty mature look at business early on in their careers. Add to that the way they’re recruited and trained, it’s no wonder they’re all so competitive (Tocquigny, 2012, p. 8). Employees received orientation and proper training under the eye of supervisors. As leadership qualities were developed, individuals advanced in stages within a training program

204 that had an established timeframe. Promotions were made from within and based on merit, thus helping maintain the organizational identity. Furthermore, P&G sought to place employees in top-level positions during their forties, so that they would still have energy to endure the demanding executive post (Lief, 1958).

Organizational Business Structure Two major operational initiatives during the Era of the Detergents had the effect of integrating mechanisms. P&G constructed Ivorydale in 1886 after a fire destroyed a large portion of P&G’s plant, which had been an aggregation of 17 buildings. Ivorydale was distinguished by its modern capabilities and was built with continuous and integrated processes (Lief, 1958). By the turn of the century, Ivorydale contained three locomotives and more than 10 miles of railroad tracks within the plant. Also, the conversion of the distribution to direct selling in 1920, which stabilized the cyclical business (Dyer et al., 2004), had the important operational effect of increasing departmental integration. Departments began to have coalescing objectives and were forced to integrate their efforts in order to maintain yearly purchasing, production and sales in relative synchrony throughout the year. Direct selling enabled the Guaranteed Employment Policy to be implemented, and according to Deupree, “guaranteed employment forces you to know your business. Anything that does that forces a better control and direction of the business” (Lief, 1958, p. 142).

Even though P&G entered new business sectors expanding its core business from soaps into other segments such as food, cellulose, hair-care, and dentifrices, the company underwent a related diversification, resulting in an integrated, rather than a fragmented expansion. The Buckeye subsidiary was acquired as cottonseed oil became a primary raw material for soap production. From the subsidiary, the company developed edible vegetable oil and expanded into foods. P&G also entered the cellulose production seeking an outlet for the hull fibers and cotton pulp from the cottonseeds. The hair-care and dentifrices segments evolved from a reformulation of the company’s basic household cleaning of synthetic detergents (Lief, 1958).

Despite the change in Procter & Gamble’s organizational structure from a family to an incorporated company in 1890, Procter & Gamble’s leadership remained concentrated in the Procter and Gamble families and a few investors, as no one cashed out. William Alexander Procter became the company President. James Norris Gamble was elected Vice-President. David Gamble became Secretary-Treasurer, while William Cooper Procter became General

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Manager. James Gamble, who was 87-years old, did not take any post in the company, while Harley Procter obtained the honorary title of Second Vice President since he withdrew from operations to enjoy life. First generation William Procter had passed away in 1887, a few years before the company became incorporated (Lief, 1958).

When James Gamble passed away in 1895, the active role of James Norris Gamble and David Gamble began to fade. William Alexander Procter led the company with the help of his son, and in 1906 relinquished the Presidency to William Cooper Procter. This same year, David Gamble resigned from the Secretary position. In 1907, William Alexander Procter passed away at the age of 73, and William Cooper Procter, who remained childless, concentrated his energy in the Procter & Gamble Company (Lief, 1958).

Several departments were set up to help the company coordinate its activities. Table 5.11 provides an overview of P&G’s organizational development during the Industry Consolidation Period.

Year Organizational Development Objective Buckeye Cotton Oil Co Secure cottonseed oil that had become an important 1901 subsidiary raw material for soapmaking Central Purchasing Organize purchase of raw material in scale in global 1905 Department market 1905 Traffic Department Coordinate transfer of raw materials Employee Conference Increase communication between employees and 1918 Committee management Encourage Conference Committee and to listen to 1919 Service Department company employees 1920 Chemical-Pulp Division Outlet for Buckeye’s hull fibers and cotton-pulp Experimental kitchen, bakery and laundry laboratories 1922 Product Service Department combined to test from consumer’s perspective Economic Research 1924 Analyze price fluctuation and future markets Department 1925 Market Research Department Understand consumer perception and behavior Mid Incorporated Research, Process and Products Chemical Division 1920s Department Success of the brands would ultimately result in the 1931 Brand-man concept success of the company Drug-Product Sales Developed to sell Drene Shampoo and to search for 1934 Department other products in drug and department stores Procter & Gamble Defense 1940 Support the United States Government during WWII Corporation 1943 Drug-Product Division 1946 Overseas Division Manage operations of international subsidiaries Table 5.11. P&G’s Organizational Development During Industry Consolidation Phase. Compiled from Dyer et al., 2004, Lief, 1958, and Moody’s

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Company direction was concentrated under William Cooper Procter, who had full power. His administrative committee composed of a few group-vice presidents and executive officials located in Cincinnati supported William Cooper Procter. A cordial atmosphere existed among the management group within the company, which had a clear line of communication and a well-defined organizational structure (Feis, 1928).

In 1926, P&G operated 6 production plants, Ivorydale in Cincinnati, Port Ivory in Staten Island, Kansas City in Kansas, Hamilton in Canada, Macon in Georgia and Dallas in Texas, and ten large cottonseed mills under the Buckeye subsidiary. In 1930 another plant was further constructed in Long Beach, California. Despite the increase in production plants, a labor relations investigation during this period describes how P&G’s management was integrated:

Management of all properties is unified and directed from Cincinnati. There the plant managers go for orders; there the sales work is directed, the raw materials purchased, the financial decisions made, the economic problems considered, the president's voice heard. There, too, are industrial relations plans first formulated, though in the plants these policies are constantly modified and adjusted. The extensive and highly technical chemical research work, which employs about 150 people, is concentrated at Ivorydale; much of it looks toward the future with long-sighted financial acumen, seeking to discover in chemical analysis new uses and sources of raw materials and new fields for company enterprise. The other plants all have their own control laboratories and personnel, as well (Feis, 1928, p. 7). In 1927, the company took its first steps towards decentralization of decision-making. The company believed that Camay had been hindered by the organizational focus on Ivory. As a result, P&G hired separate advertising agencies for Camay and Ivory, Oxydol and Chipso, determining that they would have to compete against each other in the marketplace (Lief, 1958).

In 1931, Neil McElroy, who had started as a mail clerk and worked with the Camay brand, proposed the brand-man concept, which altered the company’s organizational structure. Instead of a geographical organization of sales, the company shifted the organization around brands. The brand manager became responsible for coordinating all the activities of a brand, from product development to sales, and thus obtained a great deal of autonomy. The belief was that the success of the brands would ultimately result in the success of the company (Lief, 1958).

The institutionalization process that the company underwent, the positive responses to the early provisioning of human resources, and a cohesive diversity management, helped the

207 company develop a strong organizational character, which increased P&G’s propensity to self-perpetuate.

5.3.3.3 Period III: The Era of the Detergents (1946 – Present)

Human Resources Procter & Gamble continued to display an appropriate provisioning of human resources and a continuity of management throughout most of the Era of the Detergents. With the exception of the 1980s and 1990s, when the company underwent restructuring that reduce costs, reduced its workforce, and abolished long-standing policies, P&G has steadily hired and developed its personnel before the need appeared, and retained them through new challenges and growth opportunities within the company.

The continuity principle has been observed throughout Procter & Gamble’s history. During its 179 years of existence, P&G has only thirteen individuals at its helm. Richard Deupree, who had been groomed under William Cooper Procter and was the first president outside of the Procter family, demonstrated the company’s long-term outlook and adequate succession planning when he stated that “a youthful viewpoint is essential” for the success of the company (Lief, 1958, p. 246). Deupree, who had turned 63 years old, believed that although he could work for another few years, he would soon be incapable of dealing with the new complex situations of the environment. As a result, in 1948, Deupree became Chairman of the Board and passed over the company leadership to McElroy, who was 44 years old.

Like all the P&G leaders before him, McElroy also rose through the ranks of the company. He was initially a mail clerk and began to learn about marketing by reading the company’s mail in 1925. He worked in the introduction of Camay perfumed soap, and in 1929 was given the responsibility for maintaining the brand’s image and position. McElroy also developed the brand man concept that reorganized how the company was structured in 1931. In 1946, he was appointed assistant to President Deupree, and in 1948 assumed company Presidency. McElroy remained as President until 1957, when he became US Secretary of Defense (Lief, 1958).37

37 McElroy also served President Eisenhower as Chairman of the White House Conference Education in 1954 (Lief, 1958, p. 318). McElroy would replace Deupree and become Chairman in 1959, position he would hold until 1971 (Dyer et al., 2004, p. 427).

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As McElroy left to serve President Eisenhower, Howard Morgens assumed company presidency. Morgens had begun in the company as a salesman in 1933 and by 1954, was the Executive Vice President in charge of domestic operations. When Morgens became President in 1957, Chairman Deupree stated,

It is difficult to lose a man with the capabilities of Mr. McElroy, but the board of directors recognized fully the importance of the work he has been called upon by President Eisenhower to undertake….No company could make plans which would foresee the sudden removal of a president at age fifty-three. Even though we have always worked to develop management in depth so that we would be ready if and when something like this happened unexpectedly, we were very fortunate to have men like Mr. Howard Morgens ready to step into presidency, Mr. Lingle to assume increased responsibilities as the executive vice president, and all the others who now hold important positions in the administration of the business (Lief, 1958, p. 319) Procter & Gamble has been extensively focused on the growth its personnel. During the 1950s, the company received year after year a certificate for management excellence by the American Institute of Management , and in 1957, was selected among 3,000 companies as the “best managed business enterprise in America” (Lief, 1958, p. 316). After a careful selection process, the company would have its employee undergo on-the-job training with a thorough orientation. The new employee would receive

work under an executive who helped him, encouraged him, and watched the development of those qualities which he was supposed to possess when he was selected. He had been picked with the idea that he was going to move along rapidly. A time-table was laid out for his advancement by stepping stones. His superior kept track of his work and working methods, and reported on him periodically to the department management. Under a continuing training program, the aspirant received a chance to assume responsibility, to make decisions and carry them out. He was put in charge of others to determine how well he handled people and planned and allotted work. It was important not to stunt him, equally important not to overload him. Judgment must be exercised to avoid shaking his self–confidence through failures because of premature promotion (Lief, 1958, p. 315). According to Deupree, “If, as, and when you make up your mind you have a growing man, one who shows great promise, you’d better bind him to you with hoops of steel because the world is looking for that kind of man and he is subject to a great many offers” (Lief, 1958, p. 316).

P&G has continuously guided its provisioning of resources fully through meritocracy. Superiors would coach the individuals with potential in efforts to position them in top offices during their early 40s so that they would still have another twenty to twenty-five years in the demanding leadership positions. Guidance was very personalized with a small number of

209 subordinates to superiors, so that the superior would receive timely support, while the supervised individuals would gain increased exposure and would develop initiative and critical thinking (Lief, 1958, p. 316).

Procter & Gamble underwent severe changes that affected the company’s personnel development during the 1980s and 90s. In the early 80s, encouraged by President Smale, Procter & Gamble used an “unprecedented approach for P&G” by utilizing cross-functional teams to revamp the struggling Pringles brand, and later experimented working with teams that involved the customer (Dyer et al., 2004, p. 187). Although retailer and manufacturer relationship had traditionally been viewed as antagonistic, work with Walmart in 1988 demonstrated the benefits of working together in teams to integrate their supply-chain management.

In 1991, Smale’s successor, Artzt implemented the P&G College to help train personnel on the company’s traditions, values and culture. Procter & Gamble had grown to a size that limited the experience young personnel could obtain from the informal contact with the top leaders (Dyer et al., 2004, p. 290). The P&G College was therefore instituted a as a three or four day “combat training” session to reinforce P&G’s ways and passion to win. About 4,000 employees, including newly hired personnel, and when necessary, higher ups, rotated through the program yearly to receive indoctrination (Dyer et al., 2004). Although Artzt closed many training programs such as effective management courses due to the belief that they had become “misdirected” (Swasy, 1993, p. 73), The P&G College he created also became an internal forum to train and develop personnel through historical management cases (Dyer et al., 2004, p. 405).

In the 1980s as well as the 90s, P&G also focused on cost reduction. In 1981, the efforts on reducing costs redirected company spending towards automation. As operations became streamlined, plants were closed, the long-held Guarantee of Employment Policy established in 1923 was abandoned, and about “10% of the salaried workforce was trimmed during the early 1980s” (Dyer et al., 2004, p. 183). Senior manufacturing executive, David Swanson, recalls that “the trauma… felt in the organization was significant… there were special problems for both those who were separated and those who were administering the separations” (Dyer et al., 2004, p. 197).

P&G continued with its attempt to streamline global operations, reduce costs and increase its productivity during the early 1990s. In 1992, such initiative known as

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Strengthening Global Effectiveness, failed to produce the desired results as recommendations were difficult to implement. The major outcome was downsizing, which again affected employee morale (Dyer et al., 2004).

Pepper became President in 1995 after a successful internal track record like all of his predecessors. Pepper was known for his “management style [that] reflected his warmth and interpersonal skills. He was a consensus builder who was more likely to motivate with the carrot than the stick” (Dyer et al., 2004, p. 291). Well-regarded by the personnel for his commitment to the company and respect for people, Pepper was known to give inspirational messages on the essence and accomplishments of the company. He has said, for instance, “I hope to deepen your sense of pride in Procter & Gamble. And, I want to underscore the responsibility each of us has to help perpetuate the success of this great Company” (Pepper, 2005, p. 1).

Pepper and his successor, Jager, had been closely involved with the changes occurring within P&G since the early 1990s. In 1996, Pepper stated that, “much of what we’ve been doing is on a continuum” (Dyer et al., 2004, p.291), emphasizing the continuity of actions in the decisions of the leaders. In 1998, the company began a restructuring process called Organization 2005, which was focused on driving stretch, increasing innovation and speed in order to adjust the company for a faster and globalized world.

The Organization 2005 restructuring drastically departed from the P&G way. Not only did it seek to change the company from a slow and cautious culture to one that valued stretch, innovation and speed, but it was also implemented in a way atypical to P&G. P&G employees believed that on top of other issues, the company

tried to accomplish too much, too fast. Ill effects then multiplied… It also violated P&G custom by mounting an enormous change without first conducting tests and pilot-scale experiments to limit risk and to apply new learning as they moved ahead (Dyer et al., 2004, p. 303). The 1990s was therefore, the only time in the company history when P&G swayed from a cautious, risk-averse, systematic approach.

Since the change occurred all at once, thousands of employees were relocated at the same time resulting in all sorts of problems that ranged from housing its personnel to harmed communication between the boss and his subordinates, who in many instances, were in different time zones. In the year 2000, there was “an enormous crisis of confidence among

211 our employees” recalls another P&G employee (Tocquigny, 2012, p. 194). The internal crisis combined with external pressures led President Jager to resign and Lafley to assume leadership in the year 2000.

In the new millennium, Lafley worked to restore stakeholder confidence. A new global team and collaborative working systems to improve communication and increase information exchange were established. In June 2000,

[P&G employees] weren’t a team. We were all firefighting and trying to fix problems in our individual businesses” …. [so] during [Lafley’s] first two years, over half of the company’s top thirty officers turned over, with replacements younger, more diverse, and more broadly experienced, especially in assignments outside the United States (Dyer et al., 2004, p. 306). The offices were further redesigned and open spaces were created to promote informal idea exchange. P&G departed from its traditional secretive profile as employees were encouraged to open-up within the company and outside it. Furthermore, Lafley instituted several initiatives to help develop the company’s personnel. According to him, “leaders at all levels of the company would become capable strategists as well as capable operators. I was going to teach strategy until P&G was excellent at it” (Lafley & Martin, 2013, p. 50).

Besides the continued training that Procter & Gamble has emphasized for its employees, it has continuously focused in retaining its talent. The company has further developed a New Hire Academy to focus on the first three years of newly hired personnel, to keep them engaged and to provide them with internal growth opportunities. Such structure helped reduce turnover costs as “the average cost of a new hire at P&G is $80,000 and more than $200,000 if the employee leaves within the first 18 months” (Nikravan, 2014).

According to many P&G alumni,

All the culture of the company pivots on hiring, developing, and promoting the best talent largely based on the promotion-from-within practice…the practice of this principle is an extremely important aspect to preserve values, to spread them, and to build heritage from you own DNA (Tocquigny, 2012, p. 42). Throughout its history, Procter & Gamble has retained its ability to grow its leaders from within by preparing the next generation to assume increased responsibilities. The company has also maintained its mission to develop its personnel for a period of a 30 to 40 year career (Nikravan, 2014), which results in a continued effort towards the early provisioning of human resources.

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As new employees become Procterized through “indoctrination like nothing you can experience anywhere else” (Tocquigny, 2012, p. 226), and grow to leadership positions with the promotion-from-within policy at P&G, they instill the perpetuation of the organizational character in a self-reinforcing cycle, which increases its propensity for long-term success.

Organizational Business Structure Throughout the Era of the Detergents, Procter & Gamble has dealt with the diversity challenge in its domestic and international business. Although the brand management concept greatly helped P&G during the mid-20th century, the brands lacked an overall business coordination that eventually began to harm organizational growth. P&G also took steps during the 1950s that increased the diversity challenge as the company became subdivided into independent divisions, and became increasingly engaged in international operations. Although the company expanded through related growth, integrated its acquisitions to its business, and sought to model international subsidiaries after the parent company, P&G became increasingly fragmented. Since the 1980s, P&G has undergone several restructuring initiatives to increase its business integration, and to leverage one of the elements it now considers a core capability, global scale.

In 1955, Procter & Gamble reorganized into a multi-divisional structure. The company became organized into “divisions, each based around a different business”, in an attempt to maintain the historic growth pattern of doubling the business every decade since 1905 (Dyer et al., 2004, p. 91). The reorganization would enable each business division to look for growth opportunities in their related areas, while remaining close to the consumer.

Each division maintained its own departments in order to be completely autonomous and self-sustained. The six divisions developed were: the Buckeye Cotton-oil division; Buckeye Cellulose and specialties division; Overseas division; Soap-detergent division; Toilet-Goods Division; and the Foods division. Although the Buckeye Cellulose Corporation and the Buckeye Cotton-oil Company consolidated under the Buckeye Cellulose Corporation, they were maintained administratively separate. Soap and Detergents and Food separated, while the Drug Products was renamed the Toilet-Goods Division (Lief, 1958, p. 293). In 1964, the Overseas Division, which covered all foreign operations, became subdivided into four operating regions: Asia and Latin America; Britain, Canada, and Scandinavia; The Common Market; Export and Special Operations (Dyer et al., 2004, p. 104).

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During the late 1950s and early 1960s, Procter & Gamble engaged in several related acquisitions to enhance its business growth, primarily in the foods and in the soap and detergent segment. The acquisition of Clorox in 1957, however, was targeted by the Federal Trade Commission (FTC), and in 1967, was obliged to be divested. P&G was concerned that the FTC would make a similar ruling towards its 1963 acquisition of Folgers Coffee, which had made it the second largest coffee company in the United States, and negotiated a settlement with the FTC. Although P&G was able to retain Folgers Coffee, the agreement imposed strict conditions. FTC “ruling had a chilling effect on management’s attitude about acquisitions”, so unlike other companies that became extensively engaged in external acquisitions during the 1960s and 1970s, P&G concentrated its efforts on digesting and integrating its acquired businesses (Dyer et al., 2004, p. 107).

When Procter & Gamble began to internationalize propelled by the success of Tide, it decided that “the best way to succeed in other countries [was] to build in each one an exact replica of the U.S. Procter & Gamble” (Dyer et al., 2004, p. 105). Although local conditions were considered, company business policies and procedures were only adapted abroad as needed. To such effect, international managers spent time in the corporate headquarters in Cincinnati to absorb the company’s culture. Another P&G officer, Garganus, recognized that “some of the younger people from International developed the ability to carry heavy responsibility in the company… [and helped] speed up this homogenization of the Procter & Gamble organizations worldwide” (Dyer et al., 2004, p. 106).

As the company attempted to develop exact replicas of its US business abroad, issues began to develop due to distinct environmental conditions and consumer preferences. The formula for Drene, for instance, would crystalize in the cold bathroom temperatures in England and had to be reformulated. Such issues led P&G to the opposite side of the spectrum as it displayed over-accommodating initiatives. The Drene shampoo formula, for instance, was strengthened for the Cuban market due to the erroneous belief that hair and scalp were oilier in subtropical regions (Lief, 1958, p. 263). P&G thus began an attempt to balance the need to serve local interests, while preserving corporate strength.

Procter & Gamble had focused on the US domestic market and made it a stronghold prior to expanding internationally. As a result, in 1955, the Vice President of the Overseas Division noted that in “the United States we are champs and other are challenges; in other countries we are the challenger, faced with strong, alert international competitors” (Lief,

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1958, p. 268). The company however, underwent significant international growth between 1955 and 1979. “P&G’s foreign sales multiplied from $238 million to more than $1.3 billion, earnings increased eightfold, and overseas assets quadrupled” (Dyer et al., 2004, p. 105), which made the company more exposed to international events.

During the 1970s, the oil crisis in 1973 and 1974 resulted in a spike in the price of raw materials and substantially decreased the company’s profit margins (Dyer et al., 2004). Furthermore, the company had been producing mixed results with its product roll-outs in Western Europe. Both locally developed and North American brands performed well in some regions but not in others.

Procter & Gamble traced these frustrations largely to a fragmented organization in which operations in each nation were managed as autonomous units. Each country’s organization initially included responsibility for product development, manufacturing, advertising, and marketing and maintained its own finance and accounting departments. In addition to causing numerous problems in brand building across the region, these arrangements raised administrative costs in overhead, duplicated services, incompatible systems, and other areas (Dyer et al., 2004, p. 205). Although the functional departments complemented by brand managers may have been successful for P&G between 1930 and 1970, “companies with structures like those of P&G often became inflexible and unresponsive. It may be for this reason that P&G lost considerable market share in the 1970s” (Martinsons & Martinsons, 1994, p. 27).38 During the 1980s, Procter & Gamble underwent severe restructuring with efforts to increase company integration. P&G sought to continue integrating its new businesses, began to regionalize its operations, and to create an overarching business strategy.

When Procter & Gamble retook acquisitions as a form of growth in the 1980s, many businesses were being divested or spun off from the merger-acquisition wave that occurred during the 60s and 70s. Procter & Gamble entered diverse fields during the 1980s and 1990s through acquisitions that ranged more broadly. P&G entered the beverage industry with soft drinks and citrus processing, the pharmaceutical industry with over-the-counter and prescription drugs, the cosmetics industry, among other fields such as pet nutrition. Although some acquisitions were successful while others weren’t, P&G worked to integrate the new businesses and instill its own culture and processes in the acquired company. As recognized by a former officer, “they all get Procterized” (Swasy, 1993, p. 21). P&G senior managers

38 P&G practiced decentralized bureaucracy (Peters & Waterman, 1982, apud Martinsons & Martinsons, 1994, p. 26) with decision-making power skewed towards top management (Griffin & Ebert, 1993, apud Martinsons & Martinsons, 1994, p. 26).

215 entered the business to instill the culture, and at times, even boxed personnel in the acquired company in between P&G managers so that they would learn the P&G way (Swasy, 1993, p. 21).

Procter & Gamble also began to implement a regionalization strategy. The “Europeanization” program started in 1984 and focused on integrating certain aspects of the company’s European business. P&G began by developing a more integrated R&D, and then incorporated purchasing, manufacturing and marketing (Dyer et al., 2004, p. 205). The “ongoing move to global brands and common formulas and packages on regional basis, wherever possible, result[ed] in economies of scale and [a] need for fewer operations” (Dyer et al., 2004, p. 288).

Much like in Europe, Latin America also began to reorganize itself in regions in 1988 (Dyer et al., 2004, p. 257). In 1988 and 1993, the delineation of the regional structure was revisited as category teams were redefined, leading for a matrix structure to ultimately prevail (Dyer et al., 2004, p. 257). When Eastern Europe opened to trade in the 1990s, unlike competitors who implemented a country-based entry strategy, P&G implemented a regional- based entry strategy, and established manufacturing capabilities in Czech Republic, Poland, Hungary and the Soviet Union to cover all of Eastern Europe (Dyer et al., 2004, p. 330).

Brands had been intended to be positioned differently in the consumer’s mind; however, brand management teams had begun to compete against each other and to take shares away from each other instead of leveraging their combined efforts against external competitors. President Smale recognized that little attention was being given to how brand managers cooperated, shared their learning, and how the brands complemented each other in an overarching organizational strategy (Martinson, Martinson, 1994). According to P&G sales veteran,

[We] were all trying to cope with the same problems, predictably in different ways. No [P&G Unit] had the same entry, invoice, discount terms, promotion values or performance requirements… rancor and backbiting… [were] common fare (Dyer et al., 2004, p. 313). “P&G lacked a coordinated strategy in each of its major categories, because it was no one’s business to identify segments and opportunities” (Dyer et al., 2004, p. 198). On top of a regionalization of its businesses, P&G began to implement the category management system to instill an increase in the speed of decision-making, and to create an overarching strategy and direction for its products and segments. P&G appointed its first global executive in 1985,

216 and “during the next 6 years, P&G followed up by appointing global category executives for all the company’s core categories and gradually increasing their authority and responsibility” (Dyer et al., 2004, p. 293). Procter & Gamble also formalized its purpose statement, values and principles in 1986.

The objective of restructuring into a matrix structure was to transform P&G “from a top-down hierarchical, command-and-control mode of operation into a leaner, flatter, and more responsive organization” with regional efficiency and local responsiveness (Dyer et al., 2004, p. 199). The category manager was delegated authority previously held by upper- management. Although there was initial conflict as category managers were focused on profits and brand managers were focused on market share, new work systems were designed to resolve the issues. The new matrix structure also extended to the company’s international divisions (Martinsons & Martinsons, 1994, p. 27). P&G reorganized into 39 Category Business Units (CBUs) that were led by 26 CBU managers. Procter & Gamble also united the manufacturing, engineering, purchasing, and distribution functions, which had previously been separated, under Product Supply (Dyer et al., 2004).

New methods of collaborative work also became encouraged in the 1980s. Besides utilizing cross-functional teams for the first time, P&G also began to emphasize collaboration with retailers in efforts to integrate their supply chain-management. The visible benefits from working with its clients, led P&G to reorganize its sales organization in 1992 into Customer Business Development units. The sales organization was reorganized around customer accounts with the objective to improve the business relations. P&G was further prompted by officer Jager, to “simplify, standardize, and mechanize” all processes and procedures that did not generate value (Dyer et al., 2004, p. 323).

Global growth also resulted in fundamental changes in how the organizational structure created a learning environment for young P&G personnel since to the informal learning through contact to P&G leaders became more limited. To address this issue, in 1991, P&G created the P&G College as an “internal forum for management training and development” (Dyer et al., 2004, p. 405). It helped infuse P&G’s culture and “institutionalized the study of the company’s experience by identifying historical management cases to be studied as part of the curriculum in P&G College” (Dyer et al., 2004, p. 405).

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In 1995, Procter & Gamble reorganized its geographical structure that was previously separated as US and international, into four regions: North America; Latin America; Asia; Europe/Middle East/Africa (Tucker et al., 2005, p. 6).

In 1998, however, P&G underwent another restructuring, the Organization 2005 Restructuring, which changed the four geographic regions and the category businesses into a global matrix structure. The mesh between 8 Market Development Organizations (MDOs), based on geographic markets, and 7 Global business Units (GBUs), based on category businesses, however created significant morale issues. Although the new structure sought to encourage collaboration, knowledge sharing, and improve decision making, work was initially hindered. MDO leaders felt disempowered and had their morale drop as they loss the sovereignty of their geographies, and loss control over their bottom-line. Furthermore, according to the President of the Global Feminine Care GBU and the Northeast Asia MDO,

for years the company’s systems generated data by countries, “then all of a sudden, we wanted global business data.. It just wasn’t there. It was being cobbled together… Just trying to figure out what was going on in our worldwide business was a nightmare (Dyer et al., 2004, p. 302). The move to Global Business Categories had occurred in three steps.

First, under John Smale, P&G moved the majority of the US businesses to a category management structure. Under Ed Artzt, P&G created global category coordinators to manage technologies and brands on a more global basis. Then, under John Pepper and Durk Jager, the company moved to true GBUs – fully resourced global business and profit centers (Lafley & Martin, 2013, p. 146). CFO Moeller explains that the following step was to consolidate the activities that did not need to be recreated for each GBU to further help reduce costs and increase scale. According to him,

It’s not enough to build scale for a brand or category… you have to integrate that into the company. The processes that you put in place to do that, they have to be very deliberate. It doesn’t happen by itself. What happens [naturally] is entropy. You have to leverage scale in a way that doesn’t disable entrepreneurialism, business ownership. It’s integrative. It’s not centralized. Centralized is a very different thing. This scale work is bringing the leaders of the business to work together towards a plan that not only optimizes the company, but in its best form, optimizes their category as well. As we approach a market, for instance, with multiple categories, the chance for success for each of them increases (Lafley & Martin, 2013, p. 147) In the new millennium the company has worked on consolidating and integrating the business. A P&G employee notes that “We don’t exist in silos anymore” (Sellers, 2004). Whereas initially 7 GBUs had been created in 1998, they were reduced to 6 in the year 2000,

218 to 5 in 2002, to 3 GBUs in 2004, and ultimately 2 GBUs in 2011. There are also support functions shared by the entire organization that include Corporate Functions and Global Business Services. Furthermore, P&G has been divesting brands and businesses to create a more integrated company, focused on its core businesses and in its most profitable brands. P&G, for instance, has divested its Snacks segment in 2012 and its Pet Care segment in 2014 (Annual Reports).

Even the language used to express the priorities of the company in the new millennium attempted to be inclusive and integrative for P&G’s global personnel. Lafley has transmitted the need to refocus on the basics through simple clichés such as “The Consumer is boss”, “Reframing Brands”, “Connect & Develop”, and “360degree innovation” since according to Lafley, “we have to find things that are simple for 100,000 people to understand… more than half [of the] organization doesn’t have English as a first language. So it’s intentional” (Sellers, 2004).

In 2014, P&G conducted global operations in over 40 countries and sold its products in over 180 of them with the help of its 118,000 worldwide employees. From P&G’s global net sales of about $83 Billion, 39% comes from North America, 28% from Europe, 16% from Asia, 10% from Latin America, and 7% from India, Middle East and Africa. Considering its business segments, 32% derive from Fabric Care and Home Care, 25% from Baby, Feminine and Family Care, 24% from Beauty, 10% from Grooming, and 9% from Health Care (Annual Reports).

5.3.4 Organizational Integrity Recap During the Industry Formation Period, both Colgate and P&G revealed a strong organizational integrity. The founders transferred their own principles and values into their companies and focused on delivering their products with quality and integrity, elements that would guide the companies during future periods. Although both companies expanded in scale and scope, the related growth and decision making centered on the family enabled a greater coordination of the business.

In the Industry Consolidation Period, their responses began to diverge and P&G retained a greater organizational integrity than Colgate. Whereas Colgate began to fragment itself through an early internationalization and the creation of autonomous subsidiaries, P&G underwent related growth and strengthened its business through increased coordination and control of its domestic market. Colgate’s organizational culture was further hindered due to

219 the inadequate provisioning of its human resources. While Colgate placed an external President at its helm upon the Palmolive-Peet merger, which changed the company’s way of doing business, P&G developed all of its leaders from within, maintained company direction and organizational momentum.

Colgate continued to display less organizational integrity than P&G during the early Era of the Detergents. The lack of a clear succession planning in Colgate plagued the transition of its Presidents from 1928 until 1979, while P&G’s transitions were smooth and helped it foster its organizational integrity. Although both companies have nurtured their organizational culture during the late Era of the Detergents by focusing on the early provisioning of their human resources and by integrating and coordinating their global business structures, P&G has consistently sustained more adequate actions and consequently nurtured a stronger organizational integrity than Colgate.

5.4 SLACK PRODUCTION Slack production is necessary as it affects the ability of the organization to renew through growth and its ability to nurture organizational integrity. Slack may be characterized by personnel, operational or financial slack. Personnel slack occurs when individuals have the time and capability to develop initiatives outside of their routine tasks. Operational slack is observed when the company has operational flexibility to utilize its technology and equipment beyond the need to fulfill existing demand. Financial slack is characterized by a surplus of funds that may be relocated or redirected at ease for any given purpose.

5.4.1 Colgate and Procter & Gamble Founded in 1806, Colgate existed for thirty-one years when Procter & Gamble was founded in 1837. Whereas Colgate had developed a small fortune and acquired practically undisputed control of its regional market in New York in 1813, P&G was amongst the smaller competitors in Cincinnati in 1837. Although both companies have had little operational slack as plant expansions and improvements were insufficient to fulfill the rising consumer demand during the Industry Formation Period, the attitude of both companies deferred when considering personnel and financial slack. The leaders of Colgate have consistently invested a great deal of their time and money in donations to societies and institutions in the community, whereas the leaders of P&G have consistently reinvested practically all of their time and money back into their business.

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Procter & Gamble exhibited a higher degree of effectiveness and efficiency than Colgate in utilizing its limited resources, and surpassed Colgate’s leadership in the 1880s. Both, Colgate and P&G displayed a mixed slack production during the Industry Consolidation Period. Although the environment was difficult with World War I, the Great Depression, and World War II, both companies sustained their financial slack. Colgate was more conservative and prioritized the conservation of its assets while replicating its business abroad, whereas P&G aggressively raised capital to invest in the related diversification and increased productivity of its domestic business.

With respect to their operational slack, Colgate’s production ability remained limited as it added one plant to service the Midwest, and began to acquire foreign businesses merely for their local production capabilities. Colgate’s domestic and international operational slack increased with its merger with Palmolive-Peet, yet the company suffered as its international production plants were bombarded during World War II. Unlike Colgate, P&G focused on improving its domestic operational slack by building highly modern production plants with improved efficiency across the United States. Although P&G significantly increased its production capability during this period, its operational slack was also harmed during World War II as the company retooled its plants to fulfill government contracts for war time purposes.

During the Era of the Detergents, Procter & Gamble has continuously maintained a greater financial slack than Colgate, which is observed by the comparison between their investment capacities. Figure 5.7, presented next, displays a comparison of their retained earnings at the end of the year as a % of US GNP, and serves as a proxy to the internal funds- related investment capacity that each company has (Fleck, 2014).

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Proxy to Investment Capacity [Retained earnings as % of US GNP] 0.5

0.4

0.3

0.2

0.1

1952 1958 1991 1937 1940 1943 1946 1949 1955 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1994 1997 2000 2003 2006 2009 2012

P&G Colgate

Figure 5.7. Retained Earnings at End of Year as % of US GNP. Data from Moody’s The difference in investment capacity, which had been decreasing at the end of the Industry Consolidation Period, again increased after the development of the Tide detergent in 1946, propelling P&G’s leadership over the coming decades. The gap in investment capacity remained more or less constant until the new millennium, when Procter & Gamble’s retained earnings drastically increased largely due to its brand and business shedding initiatives.

The only indicator for personnel slack in academic literature is suggested by Mouse et al. (2013) and is calculated by total assets over the quantity of managers or managers with relevant experience. Since the amount of managers is difficult to obtain, Barbosa’s suggestion for a slightly different indicator with the same nature is considered. The indicator for personnel slack used is thus calculated by the total assets over the total employee count (Barbosa, 2014). When the company has a smaller indicator, it has a greater amount of personnel slack (Barbosa, 2014). Figure 5.8, presented next, compares the personnel slack of Colgate and P&G.

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Proxy to Personnel Slack [Total Assets / Total number of employees] 1,200,000

1,000,000

800,000

600,000 P&G 400,000 Colgate

200,000

1950 1985 1935 1940 1945 1955 1960 1965 1970 1975 1980 1990 1995 2000 2005 2010 1930

Figure 5.8. Proxy to Personnel Slack. Data from Moody’s

The figure displays that until the 1980s, Colgate and P&G held a similar amount of personnel slack within their organizations, however, after such period, Colgate developed a greater amount of personnel slack. It is important to note, however, that when top management is exclusively considered, Colgate has exhibited less personnel slack than P&G from the early 1900s until 1979. Whereas P&G ensured top management continuity with an adequate succession planning throughout its history, Colgate lacked top management personnel slack as evidenced by its turbulent leadership transitions and the absence of prepared personnel to assume the helm of the company.

5.4.2 Colgate

Period I: Soap Industry Formation (1806 – 1879) The Colgate Company had strained personnel, operational and financial slack during the first few years of its existence. William Colgate was initially the only employee in the company and would work longer than twelve hours a day. William Colgate was also financially under pressure and entered into a partnership for the advancement of capital in order to pay-off his father’s debts (Hardin, 1959).

By the end of the Anglo-American War, The Colgate Company had developed significant financial slack. In 1813, the company had generated a considerable fortune, which was further increased with its growth during the Industry Formation Period. “From the very first of his business earnings, William put aside one tenth for the work of the Lord. As he prospered, the percentage for the Lord also grew, and became as much as fifty per cent of his

223 earnings for the Kingdom” (Hardin, 1959, p. 52). Besides his religious contributions, William also donated his time and money to academic and other community endeavors.

Although Colgate’s financial slack improved, its operational slack remained limited throughout the Industry Formation Period. The Colgate Company grew as it increased the scale of its operations; yet, even with the significant increase in supply capacity to a scale inexistent in America, it was soon operating at its limit. By 1847, The Colgate Company had outgrown its location in New York City, and thus moved its factory to Jersey City to enable further operational growth (Hardin, 1959).

Period II: Soap Industry Consolidation (1879 – 1946) Despite adverse macro-economic conditions such as World War I, the Great Depression, and World War II, The Colgate Company retained some slack during the Industry Consolidation Period. Although the company continued to display financial slack, its operational slack remained limited. Colgate also exhibited little personnel slack amongst its top management team.

In 1906, the company displayed financial slack when it closed all of its factories and invited all of its employees and their family members to a banquet at the Grand Central Palace in New York City. In celebration of the company’s 100th anniversary, The Colgate Company also gave the generous contribution of “a five-dollar gold piece for every completed year of continuous service” to each employee, thereby costing the company a significant amount of $40,000 (Hardin, 1959, p. 67). The company also continued providing services to its community and offering large donations to educational funds under the leadership of the Colgate family and under Edward Little’s term as President of the combined Colgate-Palmolive-Peet Company.

Colgate’s operational slack remained limited as the company grew primarily through geographic expansion into new areas. Domestically, the company constructed a plant to service the Midwest, and increased its domestic manufacturing plants from two to five after the Palmolive-Peet merger. The merger also bolstered Colgate’s international presence. Internationally, The Colgate Company acquired several businesses in order to develop local production capability for its products, and by 1941, had a total of 8 foreign manufacturing plants (Moody’s).

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World War II took its toll on the Colgate Company’s production, which suffered from both sides of the war. A Colgate Dental Cream factory was destroyed in London, England, by one of the first German bombs, and a retaliation strike destroyed the Palmolive-Ketels Soap Plant in Hamburg, Germany. Although production capacity was hindered and decreased its limited operational slack, the company resumed its affected production after renting other premises and reconstructing the factory, respectively (Foster, 1975).

Colgate also exhibited little personnel slack in its top management during the Industry Consolidation Period. For over twenty years, the Colgate brothers in the third generation were the only officers, and for nearly thirty years, were the only directors of the company (Moody’s). They did not develop new top management to replace them in leading the company, and were enticed in 1928, by the solution to merge The Colgate Company with the Palmolive-Peet Company and to place its President, Charles Pearce, as head of the combined company. When the Colgates realized the havoc Pearce created, they instilled a reshuffle in management in 1933. Although S. Bayard Colgate assumed Presidency, he had also not been adequately groomed for such role, and passed on the Presidency to Little in 1938 (Collins & Porras, 1994).

Period III: The Era of the Detergents(1946 – Present) During the beginning of the Era of the detergents, Colgate continued to display a limited personnel slack in its top management. Little dominated the company with a one-man rule until 1960 and hindered top management succession at Colgate. The limited personnel slack is shown by the inability of J.H. McConnell and William Lee Sims II to carry out a Presidency term for longer than two years. Little returned to presidency, and upon his retirement, Lesch was called to become a white knight President. David Foster, who succeeded Lesch in 1970, also failed to develop top management personnel slack. Not only did Foster fail to create a succession planning, but he actively countered it (Collins & Porras, 1994).

Personnel slack began to improve in the 1980s when Reuben Mark succeeded Crane in 1984, and began to include employees in the decision making process to develop engagement, individual action and independent thinking. Mark’s successor in 2007, Ian Cook, continued to emphasize personnel development and to improve the capabilities of its employees to assume leadership roles (Steinbreder & Caminiti, 1987).

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Colgate’s financial slack was affected in the beginning of the Era of the Detergents. P&G’s development of Tide in 1946 pressured Colgate to develop and release its own detergent in 1947. Between 1951 and 1956, Colgate lost money in the detergent segment, and in 1960, the company lost its 80 year consecutive leadership in the dentifrice segment as Colgate Dental Cream succumbed to P&G’s Crest toothpaste. Furthermore, P&G began to expand overseas increasing competition in Colgate’s international businesses. P&G was consistently beating Colgate in the Personal Care battle, Colgate had no leading products, and “any new investment [in new product development] would have to come straight out of the now declining profits…” (Foster, 1975, p. 24).

In the 1970s, the little financial slack obtained from the dwindling profits were redirected towards external acquisitions. “That squeezed financially and stifled important things such as new product development and plant modernization” (Steinbreder & Caminiti, 1987). Another sign of the financial burden Colgate was undergoing through was that

Foster, desperate to keep earnings rising, was cutting back on advertising and holding down on research and development spending – the life blood of any marketing company. In short, he was borrowing from the future with the hope that tomorrow would bring a stronger economy to bail him out (Fortune, 1979, apud Collins & Porras, 1994, p. 196). Since the 1980s, Colgate has been improving its internal financial slack. The company divested most of the acquisitions it made during the 1970s, and began to refocus on its main business categories. During the 1990s, the company continued focusing on its main businesses and conducted restructuring to attain the same profit margins as those of its competitors. Despite increased competition and the increased power of retailers that affected the company’s profits, in 2004 and 2012, the company further began restructuring programs to streamline and regionalize its operations in order to free funds for other initiatives.

5.4.3 Procter & Gamble

Period I: Soap Industry Formation (1837 – 1879) During the Industry Formation Period, P&G had a limited financial, personnel, and operational slack. When considering financial slack, William Procter initially had to pay off the debt he had acquired in England prior to moving to the United States. Upon establishing P&G, William Procter and James Gamble invested nearly all the profits back in the business and only withdrew from the profits an amount that they judged essential for their personal needs. The scarcity of capital to grow the company was visible through the action of the

226 founders, who sold their personal properties to inject capital into their growing business (Lief, 1958).

Procter & Gamble’s personnel slack also remained limited. William Procter and James Gamble worked long hours and were fully devoted to heading their business. William Procter managed sales and finances while James Gamble took care of the factory work. Although they would not mettle in each other’s departments, every Saturday night they would meet to discuss their business. Work took much of their time, and while others would begin their ten-hour days at 6:30 in the morning, James Gamble would start to light the kettles in the factory at 4:30 in the morning (Lief, 1958, p.26).

As the number of employees increased and the second generation of the Procter and Gamble families joined the company, its initially strained personnel slack slightly improved. Prior to joining P&G in 1860, James Norris Gamble had graduated from Kenyon College, obtained a master degree, and enrolled in a chemistry course to study analytic and applied chemistry with a leading expert in the soap industry. His studies enabled P&G to begin analyzing the art of soap making with a scientific outlook (Lief, 1958).

P&G’s operations were also strained with the growing national demand. During the American Civil War, between 1861 and 1865, the company underwent a serious test as it stretched its operating limits and worked night and day to fulfill the large contracts that it had obtained with the Federal Government. Even after the war ended, P&G continued to work at an accelerated pace in order to complete the increased orders it received (Dyer et al., 2004). The housewives, who had to assume new responsibilities in the home as their husbands were at war, had increased their habit of purchasing manufactured soap, and the husbands who returned from the American Civil War had grown used to the Procter & Gamble Soap, which had been supplied to the victorious Union army (Adage, 2003).

Even as P&G continued to operate close to its limiting capacity in order to fulfill its orders after the American Civil War, James Norris Gamble managed to continue carrying out his periodic experimentations. He conducted an empirical trial-and-error approach in his investigations, recording what process would yield what kind and quality of soap. Through his experimentations, P&G learned to approach operations methodically with processes that would generate reliable outcomes. The entry of William and David Gamble in the company to work at the factory also provided James Norris Gamble with more time, which enabled the purchase and the adaptation of the formula that would become the famous Ivory Soap.

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Period II: Soap Industry Consolidation (1879 – 1946) During the Industry Consolidation Period, Procter & Gamble displayed a mixed slack production capability. While financial, operating and personnel slack showed an overall tendency to improve, macro-economic events created a turbulent period for slack production.

Procter & Gamble began the period with a limited financial slack, but considerably improved it through its ambitious enterprising. The Tilghman Glycerine recovery patent took a financial toll on P&G. Although P&G paid its royalties from 1858 until 1871, the prevailing law extended the validity of the patent until 1875. P&G refused to pay for the extension and was sued. As a result from the law suit, a portion of P&G’s money became tied-up in a fund, which the company began to raise in case it lost the law suit. P&G eventually lost the court battle in 1880 and was obliged to pay $260,000 in back royalties and fines (Lief, 1958, p. 53). Around this time, a Glycerine tank also exploded damaging some of the expensive equipment in the plant, and in 1884, a large portion of the plant was destroyed by fire.

Even when P&G’s financial slack was compromised, the company secured enough funds to become a continuous leader in industry advertising and in the expansion of its production capacity. Besides insurance, which covered $209,000 for plant destruction and damages, Procter & Gamble acquired a $1 million loan from the Mercantile Bank of New York to build a modern plant in 1884 (Lief, 1958, p. 61). In 1890, P&G incorporated and raised another $2,250,000 million in stocks in order to carry out its consolidation and expansion plans (Moody’s). Prior to World War I, Procter & Gamble further prepared for increased war time expenses and possible restrictions on the provisioning of loans by obtaining a $25 million financing in bonds. 39 According to William Cooper Procter, “the great advance in the cost of everything necessitates a greater amount of money to carry on the business… as it is possible the country may forbid financing of such large amounts in the future, as they have done in England and, of course, I want to be ahead of such action” (Lief, 1958, p. 122). By 1920, P&G had also authorized $72 million and issued $31.8 million in common and preferred stocks (Moody’s).

Upon the execution of P&G’s expansion plans, the company began to generate healthy financial earnings. In 1928, for instance, when Colgate-Palmolive-Peet merged to become the second industry leader, it had net earnings of $7,169,818, while P&G, which

39 The loan was retired in five years.

228 remained industry leader, obtained net earnings of $18,009,305, about 150% greater than that of the runner-up (Moody’s).

P&G also underwent significant growth in operational slack. In 1876, Procter and Gamble’s plant contained seven soap kettles and produced between thirty to forty frames of soap at a time. Instead of rebuilding the plant after it was largely destroyed by a fire in 1884, P&G opted to construct Ivorydale at a location that would permit further growth. When Ivorydale went online in 1886, although twelve kettles were still under construction, the other twelve operating soap kettles produced between 200 and 360 frames of soap at a time (Dyer et al., 2004, p.33). Besides Ivorydale, which had a production capacity double that of all other Cincinnati soap manufacturers combined (Dyer et al., 2004), P&G also constructed five other production facilities spread out throughout the United States and one in Canada (Moody’s).

Personnel slack also improved with the offering of comprehensive benefits and the enacting of a guarantee of employment policy enabled by the stabilization of the business cycle throughout the year. Such benefits attracted more and better employees and improved the company’s retention rate above the industry norm (Feis, 1928). P&G also began recruiting talent at college campuses (Lief, 1958).

The developed amount of financial, operational and personnel slack enabled P&G to develop organizational learning capabilities. As the company had time and resources to analyze the launch of its products, it began to develop a comprehensive understanding of how brands worked and started to create an analytical culture with a systematic approach to product roll-outs, and meticulous planning for the unfolding of events in precisely coordinated activities.

The launch of Ivory Soap was amongst the first products that enabled P&G to begin learning about advertising and promotional activities. Although early Ivory Soap advertising started with a wide scope of associations, as P&G came to understand what resonated more with its consumers, it gradually centered the Ivory Soap theme on babies. P&G also began to learn what worked and what didn’t in its advertising and promotional initiatives through the analysis of increasingly granular data. P&G has several notebook entries from this period with lessons that the data provided. In 1896, for instance, P&G realized that an exhibit that cost the company $3,700 in Buffalo had not increased sales as expected, and that sales in the region had in fact been decreasing (Dyer et al., 2004, p. 39).

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When P&G incorporated in 1890, it introduced an analytical laboratory at Ivorydale, one of the first corporate labs within the field of consumer goods in the United States. It helped P&G shift from an experimental approach with trial-and-error to a scientific stance, incorporating research and development into the company’s processes. The lab was (Dyer et al., 2004, p. 49).

The launch of Crisco in 1911 marked the transformation of P&G from a company that applied a trial-and-error mentality, repeating what worked and adjusting what didn’t, to a scientific approach with systematic analysis that tested for the optimal action ahead of time. In 1908, P&G set up experimental equipment to see if the hydrogenating process worked, and only after validating it, did P&G begin to construct the hydrogenation plants required for the production of Crisco (Lief, 1958, p. 104). The Crisco launch was also carefully elaborated by P&G personnel. The company sent out samples to many relevant parties requesting their endorsement as well as for their developed recipes. It conducted a comprehensive review of the shortening market and tested distinct sales-promotion strategies in different test markets, which generated a total of eight alternative launch plans. Upon comparison of the results, P&G selected the optimal one to implement the national operational launch of Crisco.

In 1924, P&G developed an Economic Research Department to analyze the fluctuation of raw material prices and to conduct price forecasting, and in 1925, P&G set up a Market Research Department to better understand the consumer market based on the broader role P&G employee, Doc Smelser carved out for himself by “posing basic questions that no one within the company had posed before or, at any rate, had figured out how to answer” (Dyer, et al., 2004, p. 57). The Market Research department grew significantly as evidenced from its increased budget of $45,000 in 1930 to $189,908 in 1942 (Dyer et al., 2004, p. 59). Prior to P&G, no company conducted market research in a systematic and sustained way (Dyer et al., 2004, p. 58), so P&G became the first company to conduct broad-based consumer research (Pepper, 2005, p. 18). In 1931 developed an important communication channel through which it began to learn how to listen to consumers. The company developed door-to-door field research, where women were hired to interview housewives and to learn about their perception of household consumer products along with their habits in using them.

The perfumed soap bar, Camay, was the first product to utilize market research for its launch. Doc Smelser recognized that the early market research “procedure was perfectly terrible by today’s standards…. Housewives were asked to choose one out of half a dozen

230 possible bar shapes. This was confusing. However, we were learning” (Dyer et al., 2004, p. 58).

Product problems also helped P&G learn to improve its research into comprehensive studies. Drene shampoo introduced in 1934 was first released into beauty parlors for acceptance with the public, and later released in drug stores to generate volume. Having passed its test markets, Drene entered several metropolitan cities with great success. After the product began to sell through drug stores, however, complaints began to arise that the shampoo would remove all of the hair’s natural oils. Upon investigation, the company realized that this had not occurred earlier as beauty parlors took care of the removed natural oil hair during the finishing touches in the salon. P&G reformulated the shampoo with a conditioning agent and the issue was corrected (Lief, 1958, p. 190).

The national launch of Teel also resulted in the complaint of customers who had their teeth stained after using the toothpaste (Lief, 1958, p.228). Upon analysis, it was realized that although Teel had been market tested, it hadn’t been tested thoroughly enough. In fact, only a small percentage of the market research budget went to product testing with the consumer. After the Teel incident, consumer product testing was extended for a longer duration and the sampling under study was renewed to ensure that no adverse side-effect would go by unnoticed.

Procter & Gamble also demonstrated enough slack to permit organizational learning with respect to large corporate changes. Although the company converted to direct-selling nationwide in 1920, it had previously gained experience when it converted New England to direct-selling in 1919, and New York City to direct selling in 1913. Furthermore, P&G thoroughly tested the new sales policy for two years prior to implementing the Guarantee of Employment Policy in 1923.

Despite the overall improvement in financial, operational, and personnel slack, which created an environment with enough time and resources for the development of organizational learning, they were hindered by adverse macro-economic conditions. The Great Depression resulted in many plant strikes, a high turnover-rate, a fall in production by half, and a reduction in the guarantee of employment policy. Many of P&G’s employees served in World War I, and 4,454 employees enlisted in the armed services for World War II (Lief, 1958). The company had to fulfill large government contracts, retool its factories for war purposes, and deal with a shortage of material supply, while retaining enough laborers to

231 continue running the company’s core business. As a result of the company’s strained resources during these difficult times, P&G prioritized the production and the advertising of certain products. The famous Chipso brand, for instance, was suspended during the World War II and failed to recover afterwards (Lief, 1958).

Period III: The Era of the Detergents (1946 – Present) The financial, personnel, and operational slack during the early era of the Detergents enabled Procter & Gamble to reduce risks associated to uncertainty with the use of its spare resources to sustain a systematic approach to problem-solving. Procter & Gamble’s slack provided it with the means to leverage its analytical culture and philosophy that “research and testing minimized the risks associated with expansion” (Dyer et al., 2004, p. 88). Its financial slack has enabled the company to attempt new endeavors in the implementation of new work methods, in research and development, in new acquisitions, and in international expansion.

The introduction of Tide in 1946 drastically improved P&G’s financial slack, which was also utilized to improve personnel and operational slack. Procter & Gamble invested about “$300,000,000 in plant and equipment in the post-war decade, to erect and staff new laboratories, and to enhance the welfare of the workers” (Lief, 1958, p. 278), and by 1956, had “invested as much money in plant and equipment as it had done in its first hundred years” (Lief, 1958, p. 253). Company spending in research and development was three times greater than what it had been in 1946 (Lief, 1958, p. 307).

Along with its extensive growth, Procter & Gamble continued to invest in its employees in order to maintain its personnel slack. The company had almost three times as much personnel working on research, development, engineering and manufacturing than it had prior to the development of Tide, and in 1956, had ten percent of its employees fully devoted to research in some form (Lief, 1958, p. 307).

Procter & Gamble also revealed personnel slack as it had the resources to experiment with new employee work methods. The technician system attempted in the Augusta plant, which was built in 1963, was successful, and was implemented in all ten new facilities P&G built between 1963 and 1975 (Dyer et al., 2004, p. 163). The Lima plant built in 1968, experimented with workforce empowerment, and became a learning center for “many other P&G operations [that] sent visitors to observe and appropriate as many techniques and lessons as they could” (Dyer et al., 2004, p. 166). The Albany plant constructed in 1971, became a “training ground for dealing with and learning from the workforce management

232 issues”, especially workforce diversity (Dyer et al., 2004, p. 172). To help with such efforts, a Racial Attitude Sensing System was developed and implemented in the plant to identify potential incidents before it had the chance to escalate (Dyer et al., 2004, p. 170).

Operational slack was also observed through the ability that P&G had to carry out meticulous testing with its products in order to avoid market blunders, prove the viability, gain credibility, and improve its products. Testing of P&G products such as its Lana and Wondra hair care permanents displayed that they would fail in the market and led them to be discontinued during the test market stage. On the other hand, in depth clinical research on the Crest toothpaste enabled it to gain the unprecedented endorsement from the American Dentist Association. P&G also revealed operational flexibility when data suggested that the all- purpose Tide detergent was a breakthrough product and led the company to compress market testing, bypass the usual blind, shipping, and advertising tests in order to gain a two year advantage over its competitors.

During the late 1950s and early 1960s, acquisitions that were enabled by P&G’s financial slack were conducted in a systematic manner. P&G only carried out acquisitions of small companies in related areas, with technological connection and similar distribution that could be leveraged by P&G’s expertise. Procter & Gamble would then display personnel and operational slack by sending its own employees into the acquired companies to learn and improve the operations and to insert its culture and methods by Procterizing the company.

According to CEO Smale, issues that appeared during the 1970s resulted from too much slack negatively affecting company. P&G made inadequate use of its resources and exhibited signs of pride, arrogance and complacency.

The philosophy that ‘we can solve the problem or meet the challenge because we are rich’ – the equivalent of the military’s ‘three Ms’ of men, money and material in the 1960s – replaces the willingness to confront new challenges not with resources but with new approaches or a new vision. And, managers who are otherwise too self-motivated to propose or initiate bold new marketplace projects or initiatives conclude that following the established pattern – continuing to do things the way they were done in the past – is the way to go ahead (Tocquigny, 2012, p. 35).

Such attitude led to a mixed result in the success of its business ventures and its slack production during the 1980s and 1990s. Although the health care business became successful, P&G failed to sustain a successful business in the beverage industry and exited after years of struggle. It also left the soft cookies business after enduring 8 years with annual losses estimated to reach $100 million. New market development through geographic expansions

233 also encountered issues. Although by 1972 “the company had up operations in more than two dozen nations in Europe, Latin America, North Africa, and the Middle East and was following a well-worn path”, it was ineffective in its entry into the Japanese market (Dyet, et al., 2004, p. 211). The Japanese business remained for fifteen years, until 1987, without attaining a profit. It resorted to the financial slack of the parent company to provide it with a “Fresh Start”, where the parent company removed all the debt of its Japanese subsidiary and gave it another chance to start debt-free (Dyer et al., 2004, p. 219). Although some slack turned into waste, the company also managed to improve its financial and operational slack through new integration initiatives and the regionalization of its business processes.

In the new millennium, P&G continued to create slack production, but began to use it more effectively. Organizational slack improved as the company began to focus on the consumer and began to shed businesses and brands with mediocre results. Besides improving its financial slack, the concentration of its resources on the more profitable areas enabled the company to develop new operational initiatives and improve its personnel development.

The company used its time and resources to simplify its work methods, review processes, and institutionalize open innovation through collaborative intra-departmental initiatives and external connections among other mechanisms. The Market Research Department was also retooled into Consumer Market Knowledge during the 2000s. Whereas the Market Research Department had been highly focused in quantitative consumer research, the Consumer Market Knowledge group became able to deploy quantitative and qualitative research, together with modelling technologies and ethnographic studies for a holistic understanding of the consumer and the market (Lafley & Martin, 2013, p. 171).

In the year 2000, Procter & Gamble also began to institutionalize its accumulated brand building knowledge. The company had done “a poor job recording institutional knowledge, which was captured on 1 page memos or passed down in story-telling” (Lafley, Martin, 2013, p. 148). As a result, Procter & Gamble developed a Brand-Building Framework, which has been reviewed and updated several times throughout the new millennium.

5.4.4 Slack Production Recap Whereas Colgate donated large amounts of its financial slack, P&G reinvested nearly all of it during the Industry Formation Period. Personnel slack was limited as the first generation worked long hours to establish and grow their business into local and regional

234 market leaders. Even as the second generation entered the business and the employee count increased with the expanding business, their operational slack also remained limited as growth in scale and scope was insufficient to meet the rising consumer demand.

Procter & Gamble utilized its resources more efficiently towards expanding its business, and during the Industry Consolidation Period, surpassed Colgate as national market leader and increased its leadership gap. Whereas Colgate continued to be more conservative in its investments and continued to conduct charitable actions with part of its earnings, P&G aggressively raised capital and continued to invest in its growth. It used its financial slack to improve its personnel slack by creating programs to hire and retain its employees, to construct modern operating plants throughout the US, and to diversify its business. Colgate, on the other hand, neglected the development of personnel slack and failed to hire and train its personnel for leadership succession. It also failed to develop operational slack as it did not invest in any new product development initiatives, and focused on acquiring foreign companies solely for their local production capability.

The development and success of Tide enabled P&G to increase its investment capacity gap in relation to Colgate. P&G has consistently obtained greater retained earnings, and consequently has had greater investment capacity than Colgate to take advantage of surging market opportunities during the Era of the Detergents.

5.5 PROPENSITY TOWARDS LONG-TERM SUCCESS Colgate and Procter & Gamble are amongst the 30 oldest public companies in the United States and are part of a select group of only 33 companies that are over 175 years old. Although both companies have been successful in maintaining their longevity, expansion moves (or lack thereof) by Colgate and P&G have affected the three elements making up the central mechanism of healthy growth and long-term survival.

Overall, during the Industry Formation Period, both P&G and Colgate responded to the growth challenges in a manner that promoted renewal through growth and strengthened their organizational integrity, thus increasing their propensity for self-perpetuation and long- term success.

Colgate and Procter & Gamble began to diverge in their responses towards the growth challenges during the Industry Consolidation Period. Although both companies grew during that phase, Colgate, which had been the leader in the Industry Formation Phase, was

235 displaced by P&G in the 1880s, and only regained its second-place position after a merger with The Palmolive-Peet Company. Colgate’s propensity for success was highly affected during the Industry Consolidation Period as it focused solely on replicating its previous successes through a geographical expansion, thus neglecting organizational renewal. It further had its organizational integrity harmed by a poor succession planning. Procter & Gamble on the other hand, nurtured both renewal through growth by undergoing related diversification, and its organizational integrity through the strength of its continuity of management and organizational culture.

In the beginning of the Era of the Detergents, P&G increased its leadership gap against Colgate. Procter & Gamble continued to renew through growth based on new product and market development, and continued to sustain its organizational integrity due to the indoctrination of its employees. Meanwhile, Colgate realized that any of its desperately needed innovations would come from its declining profits. Furthermore, the company continued to suffer from a highly fragmented business due to its early on extensive internationalization and due to its poor succession planning.

During the 1970s, both P&G and Colgate faced increased threats to their long-term survival. Whereas Colgate sought organizational renewal through unrelated acquisitions, P&G resisted change and had its organizational renewal hindered. As a result, during the 1980s, both P&G and Colgate sought to improve their propensity for long-term success and began restructuring processes that fomented organizational renewal. Their organizational integrity also improved after the restructuring, which also increased the coordination of their activities.

Although both companies have displayed a tendency to self-perpetuate since the 1980s, Procter & Gamble has historically maintained a greater consistency of constructive initiatives than Colgate by promoting organizational renewal through growth, nurturing organizational integrity, and sustaining an adequate amount of slack production. Overall, P&G has developed a greater tendency to self-perpetuate than Colgate.

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6. CONCLUSION

The notion of success is often associated to immediate prosperity and growth. When a long-term perspective is considered, growth and success are not necessarily equivalent as companies may develop practices that become unsustainable and self-destructive. In order to assure success as defined by organizational survival, organizations must ensure a qualified and healthy growth.

This history-based study of Colgate and Procter & Gamble has examined how the companies’ growth moves (or lack thereof) have affected the three components of the central mechanism that fosters or hinders the long-term survival of organizations. Consistent behaviors that constructively reinforced the renewal-slack-integrity trio reinforced a companies’ propensity for experiencing a healthy survival. On the other hand, consistent behaviors that failed to foster one or more elements of the central mechanism’s trio weakened the companies’ chances of long-term survival.

Colgate and Procter & Gamble have been successful in maintaining their continued existence throughout macro-economic, political, technological and social changes. Although they have sustained their survival for over 175 years, Procter & Gamble has historically ensured a healthier and more qualified survival than Colgate. It has more continuously maintained renewal through growth, an adequate amount of slack, and organizational integrity that have increased the likelihood and outlook of a better tomorrow for its organization. Colgate on the other hand, has spent a greater portion of its existence with efforts to restore its organizational renewal and integrity. As a result, while P&G has managed its qualified and healthy survival towards organizational growth at a faster rate than the growth of the US GNP, Colgate has spent more of its energy in sustaining a consistent growth that matched the rate of growth of the US GNP.

In both cases, the long-lived existence of these two companies suggests that growth and success do not necessarily bring about decline and failure. Rather than depicting organizational existence by means of deterministic life cycle and biological models, academics should consider organizations as having seeds of continued existence, which enables them to develop a tendency to self-perpetuate. This study has shown that with consistent constructive actions towards the growth challenges, the organization can develop

237 and sustain appropriate attitude towards the central mechanism of success that will consequently promote the likelihood of its long-term healthy survival.

Management is thus encouraged not to look for the one thing, the silver bullet, which has brought about the success of its competitor or that could potentially bring about success in their own organization. Such one element simply does not exist; rather it is a combination of constructive actions towards the growth challenges that must be continuously nurtured and propagated.

Under the lens of Fleck’s model, the comparative case study between Colgate and P&G highlighted the importance of such continued adequate actions for the development of organizational self-perpetuation. When Colgate and P&G promoted value creation through enterprising initiatives, and value capture through a proactive fashioning of the environment, they fostered organizational renewal through growth. Initiatives that hindered enterprising and were reactive measures, resulted in a decreased value creation and value capture ability, negatively affecting renewal through growth. When Colgate and P&G each revealed an early provisioning of human resources and an integrated and coordinated approach towards diversity management, they nurtured a stronger organizational integrity. On the other hand, late provisioning of human resources and initiatives that increased organization fragmentation harmed their organizational integrity.

Slack Production was also observed to have an effect in the ability for both organizations to renew through growth and to sustain organizational integrity. When an adequate amount of slack was maintained renewal through growth and organizational integrity were nurtured, whereas when too much or too little slack was present, renewal through growth and organizational integrity were harmed.

When Colgate and P&G exhibited actions promoting organizational renewal through growth, and nurturing organizational integrity, their tendency towards a healthy growth and long-term success increased, whereas actions that harmed both conditions resulted in a reduced tendency for success and even in a tendency for failure.

The organizational actions of Colgate and P&G have independently demonstrated that constructive actions increase the tendency of a company to self-perpetuate. The similarities amongst both companies have also enabled a cross-case comparison. It suggests that the more a company sustains constructive initiatives towards growth and its challenges, the more likely

238 it will experience a healthier growth; develop greater economic power and competitive advantage; and foster a greater propensity towards long-term success and self-perpetuation.

6.1 Future Research This research has developed several insights that would be interesting for further investigation. The qualitative longitudinal study has displayed that constructs in Fleck’s model for self-perpetuation propensity are in fact related to organizational success; however, it has not defined any new improvements to Fleck’s Model of Requisites for the Development of Organizational Self-Perpetuation Propensity, which may be studied in future research.

New investigations can be conducted to identify whether any individual challenge is of greater importance in developing an organizational tendency towards self-perpetuation. Further studies can be conducted to quantify and develop indicators on the effect of the growth mechanism, the relative importance of each growth challenge towards renewal through growth and organizational integrity, and in turn quantify their impact in the propensity for a healthy growth and long-term success. Research may also attempt to identify other factors contributing to organizational tendency towards self-perpetuation, and enhance Fleck’s model. It would be further interesting to validate Fleck’s model at other levels of analysis. At a higher level, it would be insightful to validate how industries and countries fair in relation to the framework for the propensity of long-term success. At a smaller level, it would be applicable to unveil if the framework remains valid for small businesses, individual practitioners and personal biographies.

This study undertook an investigation of large historical period and had a macro- organizational perspective, which leaves room for further investigation utilizing a micro- organizational perspective. Complementary studies can be conducted targeting critical organizational aspects such as ethics, corporate social responsibility, and their possible implications over the long run. These would include investigation on corporate reaction to controversial aspects of company´s products, such as P&G´s Crisco (Teicholz, 2014) and Rely Tampon, to mention a few.

Other investigation on Colgate and P&G could also explore in greater detail intra- and inter-departmental interactions and growth. The use of primary data such as interviews with Colgate and P&G employees may generate new insights to further enhance this study. Interviews focused on the characteristics and responses of individuals may also determine key success factors for employees within an organization and the organization itself.

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Furthermore, interviews with distinct stakeholders may create a 360 degree view on how distinct parties have interacted with and perceive the success of Colgate and Procter & Gamble.

An investigation of how Unilever, Henkel, Kao Corporation and Maxingvest through Beirsdorf, responded to Fleck’s growth challenges and the central mechanism of success during their growth trajectories would also add value to this study. Along with Colgate and P&G, these global competitors have also had their origins in the soap industry and were considered to be amongst the 10 largest companies in the Personal Care and Home Care Industry in 2012 (Delloite, 2014). An analysis of their organizational actions in light of Fleck’s framework may permit a cross-cultural validation of Fleck’s model. It would further permit a global analysis of the development of the Soap Industry world-wide.

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APPENDIX

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Figure 6.1. Soap & Detergent Industry Breakdown. Source: Compiled by author from naicscode.com

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Table 6.1. World's Largest Personal Care Companies, 1950 ($ million). Source: Jones, 2008

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Table 6.2. World's Largest Personal Care Companies, 1977 ($ million). Source: Jones, 2008

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Fortune 500 Ranking

1958 1997 1955 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 2000 2003 2006 2009 2012

P&G 101 Colgate 151

201 Rank based on Revenueon basedRank

Figure 6.2. Longitudinal Ranking of P&G and Colgate in the Fortune 500. Data from Fortune

Total Number of Employees 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000

1859 1866 1873 1880 1887 1894 1901 1908 1915 1922 1929 1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006

P&G Colgate

Figure 6.3. Historical Perspective on the Total Number of Employees at P&G and Colgate. Source: Moody’s

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Gross Properties, Plants and Equipments as a % of US GNP 0.30000 0.25000 0.20000 0.15000 0.10000 0.05000

0.00000

1937 1945 1989 1997 1917 1921 1925 1929 1933 1941 1949 1953 1957 1961 1965 1969 1973 1977 1981 1985 1993 2001 2005 2009

P&G Colgate

Figure 6.4. Gross Properties, Plants and Equipment as a % of US GNP. Data from Moody’s

252