A tough job for P&G's new CEO

    Bob McDonald must confront the fact that consumers are trading products like Tide, Olay, and Gillette for discount names and private labels.

    By Mina Kimes

    When news broke Tuesday that Procter & Gamble CEO A.G. Lafley would step down in July, all eyes turned to his successor, COO Bob McDonald. The transition comes at a crucial juncture for P&G, which will rely on McDonald's skills as an operator going forward. But what's less known -- and perhaps equally valuable -- is that the incoming CEO is, like Lafley, an impassioned manager.

    McDonald regularly holds classes at P&G's training center and often speaks at business schools. He told Fortune in interview earlier this year, "Working here is about teaching people to fish rather than fishing for them."

    The COO, who is 55, has been the subject of succession rumors for quite some time: In 2006, Fortune named him as a rising star, and asked him if he'd take the CEO job. (His response: "I don't think I would turn it down, but it is premature.") When we spoke to A.G. Lafley about P&G's leadership development program, Lafley, who is famed for his management prowess, said he had "at least three candidates identified" to replace him, and that it was a "deep bench."

    One of the alleged candidates, global business units president Susan Arnold, dropped out of the running in March when she left the company. The spotlight then shifted to McDonald, who is head of operations at P&G (PG, Fortune 500). McDonald's path at P&G has been similar to Lafley's: He started as a brand assistant, eventually managed laundry detergents, and ran all of Northeast Asia. (One difference: Lafley oversaw all of Asia).

    'Google me'

    While Lafley is a well-known management expert, renowned for turning P&G around in the early years of the decade and penning The Game Changer with Ram Charan, far less is known about McDonald's leadership style. When speaking to Fortune, he stressed his hands-on training efforts. "We do a lot of our training at General Manager college, and I'm there myself," he said. "For the entire week, I'm there with my students. We don't go out and hire consultants."

    McDonald also said that he regularly visits business schools to recruit prospective P&G employees. "Google me -- you'll see all of the speeches I've given over the last nine months," he said.

    He noted that he was "thrilled" that the company is experiencing a surge in applications due to lessened competition from consulting firms and banks. But the COO was quick to add that the screening process will remain difficult. "We're looking for a very unique set of values -- we don't want to make any mistakes there," he said. "P&Gers have a history of doing the right thing. The quickest way out the door is to lie, cheat, or steal."

    Values are important to the former Army Captain, who spoke with admiration of the company's early CEOs. "There's a large monument in front of our Ivorydale factory of William Cooper Procter," he said. "The employees bought it to honor him because he put in place a profit sharing trust, a dividend day, and a five-day workweek."

    McDonald mentioned another P&G CEO he admired. "Richard Dupree, who was the first non-family member to lead the company, said that if you took away the buildings, the brands, the resources, the people could rebuild everything in a decade. That's still true now."

    Cheaper products

    Going forward, the new CEO won't have to rebuild P&G, but he does face a daunting set of challenges. The company's earnings have fallen over the last year as consumers traded its products -- which include Tide, Olay, and Gillette -- for discount names and private labels. Lafley announced last week at a conference that P&G would consider lowering its prices, but would also increase investment in innovative products.

    "This is a period of what we would describe as continuity with change," McDonald said today, joining Lafley in a conference call with reporters. McDonald said the company would "focus even more on winning with customers in emerging markets. We think we can reach another 1 billion customers in the decade ahead. We want to be a better, more integrated brand-building company, and an even more networked company inside and outside." Added Lafley: "We've doubled down on strategies that are working."

    Innovation was Lafley's hallmark: The CEO was able to revive the company after taking the helm in 2000 by focusing on the company's most successful brands and developing newer, better iterations of them. But P&G's current situation makes it a good time for a COO to take charge, wrote Barclays analyst Lauren Lieberman in a note Tuesday. Lieberman pointed to the company's goal of reorienting its pipeline towards cheaper products.

    "With that in mind," she wrote, "understanding that success on the top and bottom lines will hinge on the company's ability to transform its supply chain and go-to-market strategies, we think naming an operator versus a brand builder as the next CEO makes a lot of sense."

    Lieberman also noted that she expected to see a "significant push into emerging markets." McDonald told Fortune that global expansion was a major priority for the company, which regularly sends its employees abroad so that they can gain international experience.

    "When I first joined in 1980, I believed I would be in one city my whole life," he said. "Then, in 1989, one of the top leaders came to me and said, 'We'd like you to go to Canada.' We wanted to start giving leaders experience abroad because our business was globalizing -- the company was smarter than I was."

    McDonald also said that, in addition to training employees by sending them around the world, P&G develops a road map for each individual with his or her help. Now that the COO has reached his final destination, the next step is up to him.