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The Not-So-Dirty Secret Behind P&G’s Innovation

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How has Procter & Gamble (NYSE: PG  ) been able to maintain its innovative edge? I recently asked Inder Sidhu, senior vice president of strategy and planning for worldwide operations at Cisco (NYSE: CSCO  ) , and the author of Doing Both: How Cisco Captures Today’s Profit and Drives Tomorrow’s Growth.

Mac Greer: You began the book by talking innovation. I was expecting to read about Apple or Google and instead you cited the example of Procter & Gamble and laundry detergent. So my question is, what does “laundry detergent compaction” have to do with innovation and why is it such a big deal for retailers like Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) ?

Inder Sidhu: Laundry detergent compaction basically is a technique for really just compressing more and more cleaning powder into even smaller and smaller sizes or smaller and smaller concentrations, higher concentration, smaller size, right?  Basically in early 2000, what P&G did is they perfected a technique that could compact two or three times as much cleaning power into a liquid concentration.

Now that seems like something trivial, but if you peel the onion, you recognize consumers love this because these liquid concentrated detergents are easy to pour, easy to carry, easy to store; I know my wife loves them. The retailers like Wal-Mart love it because it takes up less floor space, it takes up less shelf space, which really means you are getting higher sale per square foot, which is what retailers are all about. Then you look at the companies which have to ship all these things, the shippers and the wholesalers, all of a sudden they look at small bottles and that means reduced fuel consumption on the trucks and so on, better warehouse space utilization and then you look at the environmentalists and they say, hmm, less packaging, less waste, this is a good thing.

So everybody sort of likes it and it is just a very simple concept, right?  I think it is a very good innovation, and P&G decided to replace all of its liquid laundry products with compacted versions a couple of years ago. What that did is it helped drive the sale of fabric and home care products, I think it is up 6% in 2008, which as you know was kind of a tough year, and adding lots of money to P&G’s bottom line.

Greer: You say that Procter & Gamble has invested a greater portion of its revenue in research and development than rivals like Kimberly-Clark (NYSE: KMB  ) and Unilever (NYSE: UL  ) . But in the book, you write about how P&G’s innovative edge isn’t just about the money, it is not just about the fact that it's investing more in R&D, so what is the secret to P&G’s innovation? 

Sidhu: Yeah, I think that probably two or three things. I think one is the emphasis on innovation that came from [former Chairman and CEO] A.G. Lafley lastly and from the highest level on down. I think the second one is that they do try to blend disruptive answers to any innovation, so every year their product managers are continuously working with their engineering and technical teams just trying to keep things better and better. The businesses that they are in are thin-margin, very competitive, entrenched position-kind of businesses, so even small, incremental changes can mean a lot. There has to be that focus on sustaining innovation, but then they also tried every once in a while to come up with disruptive innovation, the Swiffer or those kinds of products. I think that that really helps P&G.

Is P&G the best consumer-oriented company out there, or is another blue chip behemoth the better bet for investors? Take a look as we compare P&G against one of its biggest rivals.

Mac doesn’t own shares of any of the companies named. Kimberly-Clark, Procter & Gamble, and Unilever are Motley Fool Income Investor selections. Wal-Mart is a Motley Fool Inside Value recommendation. Google is a Motley Fool Rule Breakers choice. Apple is a Motley Fool Stock Advisor recommendation. Unilever is a Motley Fool Global Gains pick. The Fool owns shares of Google and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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10/24/2016 10:44 AM
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