P&G's leadership machine

    The consumer goods giant has a proven formula to nurture top talent.

    By Mina Kimes

    When Procter & Gamble global business units president Susan Arnold announced in March that she was leaving P&G, the question resurfaced: Who else could possibly replace A.G. Lafley, the company's longtime CEO?

    Filling his shoes won't be easy. Since Lafley took the helm at P&G (PG, Fortune 500) in 2000, he has increased sales 110%, to $84 billion, and nearly tripled profits, to $12 billion. Lafley hasn't yet revealed his succession plan, but he doesn't seem at all worried: "If I get on a plane next week and it goes down, there will be somebody in this seat the next morning," he told Fortune while sitting in his Cincinnati office.

    What makes Lafley so confident is a rigorous leadership program called Build From Within. It microscopically tracks the performance of every manager, making sure that he is ready for the next slot. At P&G, says Lafley, each of the top 50 jobs already has three replacement candidates lined up.

    One element that helps make the program successful: loyalty. While there's no hard and fast rule against hiring outsiders, P&G rarely does so. "We promote from the inside, because that's our primary source of talent," says Lafley. COO Bob McDonald says employees who are promoted internally nearly always thrive, while other companies, he reckons, have a 50% fail rate when they use headhunters. "What we're talking about is a system that's much more reliable," says McDonald.

    Business school grads start at the entry level, which is the main window of opportunity for becoming what's known in the company as a Proctoid (less than 5% of hires come from the outside at a later stage). Once a recruit is admitted - only 2,700 of about 600,000 applicants will make it through the door this year - he chooses a career track based on his goals and the company's needs.

    If a talented young brand assistant wants to become, say, a COO, P&G tries to give him as broad an experience as possible. The company might make him the assistant manager of Cascade detergent. Later he'll run laundry products in Canada, before eventually overseeing all of Northeast Asia. (That's an excerpt from COO McDonald's résumé, which reads like a shopping list of P&G products.) "If you train people to work in different countries and businesses, you develop a deep bench," says Moheet Nagrath, head of human resources at P&G.

    The company maintains a comprehensive database of its 138,000 employees, a massive constellation whose stars are tracked carefully through monthly and annual talent reviews. In these sessions Proctoids discuss their business goals, their ideal next job, and what they've done to train others. When a position opens, Nagrath can draw up a list of employees who are ready to move immediately to, say, an Eastern European country, complete with their performance reviews. "We can fill a spot in an hour," says Lafley. "That's the beauty of the system."

    Cynthia Round, an executive VP at United Way who worked as a brand manager at P&G in the '70s and '80s, agrees that its methods built "well-oiled teams" that could act quickly. However, promoting from within can create an insular culture. Says Round: "There was a sense that you were in a club. The disadvantage was, people did think in similar ways."

    Lafley himself oversees the development of the top 150 employees, and McDonald recruits at universities. All executives teach at the training center - which is just steps from Lafley's office - and hold weeklong "colleges" for employees entering new levels.

    A willingness to train others ultimately determines who advances: If your direct reports aren't ready, neither are you. "A manager who isn't good at developing others doesn't attract the best talent [to be on his team]," says Nagrath. "Internal reputation is crucial."

    And so is that next big promotion.