Secret to companies that last
In 1856, brothers-in-law William Procter and James Gamble were in the soap and candle making business. Early every morning they would light fires under big kettles and employees would visit the many slaughterhouses in Cincinnati and collect the leftover animal fat. They would combine the fat with timber ash to make lye.
The lye was poured into the kettles, where it was heated and stirred before being poured into moulds to make the famous Procter & Gamble white soap.
They did not really understand the chemistry of why the soap worked but it obviously did, as by 1870 Procter & Gamble had 16 soap and candle factories. But it was not plain sailing. The Procter & Gamble candle business was being threatened by the rise of the gas lamp and Thomas Edison’s electric bulb was an ominous sign.
Procter & Gamble realised that candles were on their way out and doubled down on its soap business.
The partners started off as craftsmen hand-making soap and candles.
They then developed massproduction techniques.
By 1870, they had further progressed to fully automated production lines, some 35 years before Henry Ford.
They continued to innovate, including in the area of marketing.
The second generation was now in charge and Harley Procter was convinced that they needed to differentiate themselves from being just another ‘‘white soap’’.
Using the latest printing techniques he created advertisements that promoted Procter & Gamble soap as ‘‘ivory soap’’ with no impurities. Just for good measure, the adverts proclaimed that its soap floated. Now floating soap was a thing. Sales took off.
This sort of advertising was cutting edge stuff in the late 1800s. But Harley was not content and he embraced the new field of consumer psychology. He worked with early pioneer psychologist Walter D Scott to understand how consumers purchased.
Harley had teams of people collecting advertising data and testing headlines and advertising copy. They were using coupons with codes so they could track which advertising was effective.
Then in the 1930s, Procter & Gamble made another innovative leap and started its own daytime comedy radio show. What is a soap business doing producing a radio show?
Turns out bored housewives loved it and sales rocketed again, right in the middle of the Great Depression.
Not content, the company kept innovating through the 1940s.
This time Procter & Gamble was moving into the field of advanced chemistry.
Soap and detergents had always been made with animal fat, water and an alkali base. But it had its limitations. The natural fatty acids had long chains which did not actually work in hard water environments.
The hunt was on to find a synthetic detergent.
After 200,000 man-hours of testing and trying, Procter & Gamble gave up and concluded it could not be done.
Except for David Byerly. He was a chemical engineer and he kept working on the project in secret without his superiors’ knowledge.
Byerly discovered sodium tripoly phosphate was a good builder. Apparently, a good builder is important.
As usually happens with new innovations, he did the opposite of what was conventional thinking. Which was to have two-thirds detergent and onethird builder. He eventually tried two-thirds builder and onethird detergent and it worked.
He had created the first synthetic detergent that actually worked much better than natural detergents. This discovery became ‘‘Tide laundry detergent’’. Which is still the market leader today.
But there was great resistance among managers in the company because this new product would cannibalise the existing profitable natural soap business.
William Procter argued: ‘‘This [synthetic detergent] may ruin the soap business. But if anybody is going to ruin the soap business it had better be Procter & Gamble.’’
This willingness to continually self-cannibalise their business before it was actually in decline is the key to innovative businesses.
Apple had the hugely profitable iPod. It dropped it for the iPhone.
Kodak and Fuji had the same choice when digital photography became popular. Kodak hung on to its old profitable film business and died. Fuji abandoned film and deployed its patents into other applications and it lives on today.
It is unnatural to cut loose what we already have. We want to hold on to what we know and what is proven. This is the result of a psychological bias called the endowment effect. This bias means we overvalue what we already have or own.
The endowment effect is the reason we feel like we sell things for less than they are worth and we feel like we pay too much for things we buy.
It applies to our attitudes too. We hold on to and value old outdated ideas or old ways of doing things because we believe they are more valuable than they actually are.
Procter & Gamble sold soap, but transformed from craftsmen to mass production to automated production, to advertising to consumer psychology, to media production and again to advanced chemistry – by always being willing to let go of what was successful in the past.