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decoration a poster of Chairman Mao. Eight of us -- a reporter, a photographer, two local "fixers," a translator, and three executives from Procter & Gamble -- have come here so that we can watch a 29-yearold corn and potato farmer named Wei Xiao Yan wash her hair. As Western companies duke it out for a piece of the developing-market pie, Procter & Gamble is going deeper -courting not just the newly rich but also the very poor. The company's vaunted R&D operation is turning up surprises. By Jennifer Reingold, senior editor And she washes it with gusto, especially considering that she is doing it in front of a crowd while standing in the doorway of her kitchen, using a small metal basin with no more than three cups of water. Water scarcity is the rule here; the family stores rainwater in a well and must pay a private c ompany for anything more. After trying to work up some lather with a tiny bit of Rejoice -- P&G's cheapest local offering, which costs about 10 renminbi ($1.50) a bottle -- Wei Xiao Yan does a cursory rinse, then forces the family comb through her tangles. "The shampoo puts nutrients in my hair," she says, noting that it is her first bottle of real shampoo after a lifetime of using laundry soap flakes, which made her hair oily. I make the error of asking her if it might not be more practical to cut her nearly waist-length hair. She looks at me with disdain. "As a
Advertisement Wei Xiao Yan, a 29-year-old farmer in China, washes her hair in the doorway of her kitchen. P&G researchers spent a day with her at home.

We are a long, long way from Cincinnati. Getting here required a 15-hour flight to Beijing, followed by a nearly three-hour flight to Lanzhou, an industrial city on the Yellow River in China's midsection, and, finally, a bumpy, two-hour drive deep into treeless hills the color of dried clay. Our destination, in a pinprick of a town called Shahe, is a small cinder-block house framed by Szechuan pepper trees, its primary

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P&G's CEO and chairman. you should have long hair. and Melisa Liu.blogs. Wei Xiao Yan's tart response explodes the assumption by some marketers that what poor consumers look for is the most practical.what the late management thinker C. But that does not mean she won't make the effort to look pretty for her husband.cnn. "And my husband likes it." Cindy Graulty. "It's a myth to say poor people only want rusting in the courtyard. woman." P&G researcher Melisa Liu (left) is shown around a farm near Lanzhou by Gu Wen Juan.fortune. Wei may live on 900 renminbi a year ($135) and have so little water that her washing machine -. Just like us. Procter & Gamble (PG). visiting homes in Brazil.what the company calls the "$2 a day" consumer. "You have to discretely innovate for every one of those consumers on that economic curve. who has headed P&G's $2-a-day initiative since October 2009. without the obvious potential payoff from consumers with disposable income. and elsewhere. principal R&D scientist for P&G. cheapest solution. most attempts to harness it have failed.Search Results Other. populated mostly by technical folks rather than market researchers. thinks there's another way to reach those consumers.a wedding gift -. "Our innovation strategy is not just diluting the top-tier product for the lower-end consumer.FORTUNE Features ." Obvious." she snaps. give each other knowing looks. based on average income. principal R&D Liu is part of the company's "$2 a day" project. and if you don't do that. "They care about beauty.Fortune on CNNMo.. to approach the $2-a-day consumer from a new perspective. the group spends days or weeks in the field.. Prahalad termed the "bottom of the pyramid" -. My blunder led to the kind of insight that P&G is seeking as it tries to learn how best to make products for the underserved -.Other . http://features. So it has quietly launched a skunkworks." says Robert McDonald. India. right? Yet despite the growing belief that the billions of poor -.can actually make up a viable economic market. you'll fail. It's the same approach the company uses in developed markets but requires much more effort. Advertisement 2 of 8 2/05/2011 9:35 PM .. which focuses on consumers with that amount of income. a $79 billion (in sales) company better known for its middleand upper-middle-class brands than for its low-end offerings.K.php?plugin=cleanprint-lt&pr." says Graulty. China. Rather than try to invent products first or rely on market research alone..

already gets more than 50% of its sales from developing markets. P&G says developing markets are growing at 6% to 8% annually. "What Bob is doing is not wrong. which many think is poised to exhibit China-type growth. For too long. and Pampers to the middle and upper classes at a premium price.P&G must expand aggressively. triple. the company. Colgate-Palmolive (CL) has a 71% market share in toothpaste. It is this woman. a managing director at Deutsche Bank Securities who covers P&G." Yet P&G.-centric. but it will take some time." For P&G the stakes are high.fortune.FORTUNE Features . quadruple] our sales. remains committed to "mass prestige" -. Start with the fact that the global recession put a dent in P&G's up-the-curve strategy. who spent much of his career overseas. says P&G director Scott Cook. Emerging markets are in the DNA of our company. http://features. dines out. "There was debate at the board level. and P&G is no exception. who is the focus of the old saying "If every one of the 2. even if it means moving away from its core strength. "But she probably won't be a profitable consumer for a decade." Indeed. Then there is the simple paradox of growth: For a giant company to grow at the levels it has in the past -. realizing that its future success lies in the developing world.blogs... not in part because of some harsh new realities. the company ceded ground.delivering high-quality brands such as Olay. and favors P&G's SK-II skin-care products. which retail for up to $374. "As a result. Unilever (UL). has concluded that it must compete at the lower end of the spectrum as aggressively as it does at the higher one. month]." He's not exaggerating. The holy grail for companies in developing markets has always been the emerging middle class. we would [double. "We're late to those markets.and satisfy its investors. She lives in a new high-rise.." Advertisement 3 of 8 2/05/2011 9:35 PM .Fortune on CNNMo.php?plugin=cleanprint-lt&pr. with its Anglo-Dutch colonial heritage. as its stock is about where it was five years ago -. Some wonder why P&G bothers. including in Japan and the Philippines. compared with 1% to 2% in the developed world. P&G wasn't even in the category until 18 months ago. Crest. week. "P&G is still very U. its target customer is still the Shanghai bank manager we also visited." says Paul Polman.Other .Search Results Other.. "Knowing how [Wei] shampoos is great. we've got to do things smarter. Unilever's CEO (and until 2006 a P&G exec). Even as P&G has focused more on developing markets." he says.cnn. with sales there rising to 34% from 20% in 2000." says McDonald. founder of Intuit. In Brazil. The market for the poor remains largely untapped." says Bill Schmitz. "It pushed them to stop being only premium and not to give competitors a safe harbor. Tide. present in 180 countries.5 billion Chinese and Indians just bought one [Coke or package of Pampers or bar of Dove soap or insert product here] a [day.

com/index. vs. BJIC is an attempt to research. http://features.. Advertisement Consumer disparities: A sampling of markets shows big differences in spending on P&G products. "It's almost like you don't even have to pay us to do this. but instead helping improve people's daily existence.fortune. Already the company has invested more than $1 billion in China. McDonald has set a hugely ambitious goal of 800 million new customers by 2015 and says he is shifting the company's emphasis from the West to Asia and Africa. Throwing down the gauntlet.. in more parts of the world.Search Results Other.S.Other ." McDonald proclaimed at t he company's Dec." she says.cnn." What he calls "purpose-inspired growth" is meant to help his employees believe that they are not merely pushers of deodorant and dryer sheets. the idea of improving lives allows people like Graulty to feel that her project 4 of 8 2/05/2011 9:35 PM .? McDonald wants to raise the average expenditure globally from $11.. including China's vice minister of commerce. a notable success story for P&G since it entered a joint venture with Hutchison Whampoa in 1988. nearly $100 in the U. You've seen this movie before.php?plugin=cleanprint-lt&pr. it's yet another ribbon cutting for a Western company expanding in China -. a sparkling $70 million home for the company's regional R&D efforts. "Don't tell our managers that.50 in the next few years. 16 analyst meeting." he says.this time for P&G's Beijing Innovation Center (BJIC). Even in China.." Going local on R&D Beautiful Chinese women wearing red cheongsams are striking drums that seem to be made of water. more completely.Fortune on CNNMo. "It's more than a noble idea. and McDonald says it will spend another $1 billion in the next five years. per capita spending on P&G products is just $3 a year.blogs. A dragon with smoldering eyes undulates on the stage as P&G CEO McDonald and CTO Bruce Brown nod to various local dignitaries." Certainly when aimed at the $2-a-day customer. "It's a game-changing growth strategy and a powerful source of competitive advantage. he has changed the strategy of the company to "Touching and improving more lives.FORTUNE Features . "The move of the center of gravity is critical. the center is particularly important when it comes to P&G's shifting priorities. Though the company has 25 R&D centers all over the world. To communicate that approach. has meaning. Yet leaving all the hoopla aside. source.

Advertisement 5 of 8 2/05/2011 9:35 PM . http://features.came about through partnerships with outside product developers.FORTUNE Features . then make immediate changes to prototypes. and CEO McDonald (from left) at the opening of the company's Beijing Innovation Center in August BJIC is the only tech center in the developing world that operates across all the company's global business units. and develop products for China and the rest of Asia without having to rely on the company's headquarters in Cincinnati.fortune. as former CEO A. one of the top three choices among Chinese university graduates looking for jobs." says Brown.. Manager of P&G Asia R&D. One of the most important reasons for that is the masses of high-caliber talent coming out of Chinese universities.both hits for P&G -.Search Results Other. The Swiffer and the Mr. as a raucous karaoke party shows. The campus feels a bit like being at a Silicon Valley startup -except that it's a unit of a 173-year-old company. Director of P&G BJIC. Lafley pried open the company to ideas from the outside. here a simulated hutong (a typical Chinese home) lets researchers observe consumers as they brush their teeth or change a diaper. And the place is pulsing with the energy of young people who want to make it big. The hope is that a ll that brainpower will lead to innovations that will also work in the developed world.blogs.Other Only over the past decade.and left-brain abilities.G. which puts a whopping $2 billion annually into R&D. Maurizio Marchesini. Clean Magic Eraser -. Similar to the company's baby playrooms and fake supermarkets in Ohio.Fortune on CNNMo. For most of its history P&G. Bruce Brown. they seem to have both right. then pushing them out to the market in a command-and-control fashion. James Kaw.. "Now we can do end-to-end product innovation. as P&Gers.P&G's CTO. succeeded by inventing technically superior products at home. P&G is. or GBUs. tag it. amazingly. did things change. acronym lovers all.

not because of water concerns. says McDonald. and she never undresses completely -. the slums of India. and she feels she has no place to go. They loved it. they have longer facial hair than most Western men. which means that it's a potential win-win for P&G. a skinsensitive detergent for women who wash clothing by hand. has spent much of the past one trekking through the jungles of stabilize in water. a premium brand whose main r esearcher. That's why Liu.and shows Wei its use as a spray to improve the smell of clothing that can't be washed often. The technology comes from an existing haircolor product. she pulls out a plastic bag full of products -.blogs." says Graulty. http://features. and Crest Pro Health toothpaste.cnn.for her to sample. so the company went ahead with a launch in India.fortune. Wang. There is no bathroom." The key.Search Results Other. Out of the bag comes an unmarked bottle with a body cleanser formulated to clean without much water. several new products came out of China. New uses for old ideas The most valuable consumer insights for P&G's $2-a-day explorers are transnational ones.. and last October launched Gillette Guard. P&G retrenched. Wang Xiaoli. unlike much of the Indian market. "We just have so much stuff. often using a basin. says she came to P&G because "I didn't want what I learned to be published in 100 years. is making sure that technical development and testing are done locally.FORTUNE Features . That's something P&G's Gillette unit learned the hard way before P&G bought it in 2005..some new prototypes. had access to running water. Since many of them shave o nly a couple of times a week." Liu pulls out a bottle of Febreze -. Back at Wei's home. She is bringing what she learns back to Beijing -and hoping that the knowledge will lead to wins elsewhere. "Our job is finding the right match. some off the shelf -. instead of air freshener for relatively affluent customers -. Advertisement 6 of 8 2/05/2011 9:35 PM . a razor that is easier to rinse. It's kind of like Purell -except that it generates foam. Boston-based Gillette decided to try out the razor on Indian men who were studying at MIT. a new use for an old idea. a young Chinese woman who has worked in the research division of P&G for six years. and farming villages in rural China..a stronger form of fluoride -. cracked a 50-year chemistry problem by finding a way for stannous fluoride -. her father-inlaw lives in the Wei relies on a washcloth and a scrap of soap to clean her body. It flopped -because the MIT students. They included Tide Naturals. Rather than testing in India. tested locally.Fortune on CNNMo.Other . Lesson learned.. when it developed a razor specifically for Indian men. which can be easily wiped away. but because of privacy issues. who won a companywide innovation award. Even before the new center opened last August.php?plugin=cleanprint-lt&pr.

. "Promotions win quarters." McDonald told the analysts.cnn." she says." The R&D folks are now working on a colorant that uses little water -. I can't help but wonder whether this experience is touching and improving her life. but the real insight is privacy..FORTUNE Features . After a few years of skepticism. In the meantime. Brown says several are in the works. including a haircare product beginning formal testing in India." director Cook says. They need more skin-care products because they spend so much more time outside. is one that P&G doesn't even make: an off-the-shelf camping shower. and shelter. though. but not as much as the leave-in conditioner they try next. clothing." Brown says. who upgraded the stock in December largely on the company's emerging-market strategy. dye is very much in demand. http://features. And though P&G never contemplated selling hair dye to poor customers. "everyone else would wash their hands of it. to be presentable. "It's a paradigm shift. and that they are not as aspirational as the more well-to-do (they are). basically a large plastic bag that hangs on a line or a tree and lets you shower with sun-heated water. To be sure.fortune.' But to get a good job. cleanser with one." His message may be working. Though no product has been launched yet from the $2-a-day project.php?plugin=cleanprint-lt&pr. says Graulty. She likes it. I ask. apologetically. it will be a while before any of this research helps P&G make real headway. The item Wei likes most.. That's the type of thing the company might have done immediately in the past -but management now believes would be better handled locally. "If there were a $2-a-day division. the meeting took place not in Africa or Asia.Other . Last fall the group of about 100 met for the first-ever $2-a-day confab. the look on her face when she touches her hair is one of deep desire. that P&G should go into the camping-shower business? No. 'Why would they buy that? It's not like food.and is priced appropriately for a $2-aday customer. including the notion that they always want the simplest product (they don't). across silos. "We say."The logistics were better.Fortune on CNNMo.Search Results P&G is gaining fans like Goldman Sachs's Andrew Sawyer.. For her it is a breakthrough product -. (Ironically.she can wash in private.) One move McDonald has not made so far is to form a formal business unit. or tantalizing her by introducing her to something she can't have. Graulty's project has uncovered other misconceptions about poor consumers. say. they have to have beauty. the company is relying on classic tactics like price cuts and advertising to gain share. "Innovation takes decades. but in Cincinnati -. Graulty has learned that in those parts of the world. Does that mean. certainly the company might try partnering with a producer to sell.blogs." Advertisement 7 of 8 2/05/2011 9:35 PM .

Ghost town.. the company might get somewhere.blogs.Fortune on CNNMo. China Advertisement 8 of 8 2/05/2011 9:35 PM . if everyone else would simply begin to wash his hands with P&G Now.Other .. Inner Mongolia: Inside China's empty cities A Chinese consumer economy? Don't bet on it yet.fortune.FORTUNE Features .cnn.. http://features.php?plugin=cleanprint-lt&pr.. Chanos vs.Search Results Other.

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