Executive Summary
Procter & Gamble Company has grown
from its inception in 1837 to be one of the global giants in the field of
personal products. The company currently operates in more than 180 countries
and remains committed to the pursuit of further international expansion. The
business runs under 2 business units: household care, and beauty and grooming.
The business units are further divided into 6 segments which include beauty,
grooming, snacks and pet care, health care, home care, fabric care, family care
and baby care.
An analysis of the
company’s environment reveals that the company operates in an industry where
rivalry is strong. This calls for an innovative approach to strategy to
guarantee survival with the company pursuing a transnational strategy to cope
with the competition. Among the resources and capabilities that the company can
use to maintain its market leadership is its strong financial position, its
committed and highly motivated employees, its production and research and
development capabilities, and its strong brand name.
Also identified are the
challenges of the transnational strategy adopted by Procter & Gamble and
holds that it can only be sustainable if foreign markets continue to exhibit
peculiar characteristics. With the emergence of a global culture, the company
would do well to adopt the globalisation strategy when need arises.
1.0 Company background, history and
internationalisation process
Procter & Gamble is one of the
leading multinationals in the world with operations spanning across 180
countries (Procter & Gamble, 2006). The company operates under 2 business
units: household care, and beauty and grooming. The business units are further
divided into 6 segments which include beauty, grooming, snacks and pet care,
health care, home care, fabric care, family care and baby care (OneSource
Information Services, 2012). Having been started in 1837, Procter & Gamble
has grown to become the global leader in the household and personal products
industry. This status was acquired after years of gradual and incremental
involvement in the local and global circles.
The
internationalisation process can best be understood by examining the
recommendations of the Uppsala model. This model explains that the
internationalisation process is a function of market exposure and the level of
commitment of resources into such a market where additional exposure provides
the basis for additional investment (Johanson and Vahlne, 2009). It recommends
that the internationalisation process should be incremental where a company
begins with operation models that pose the least risk. According to this theory
of internationalisation, an ideal process should start with the practice of
making occasional exports with subsequent steps being the establishment of independent
sales representatives, company controlled marketing agencies and the eventual
establishment of fully operational subsidiaries with the responsibility to
manufacture and market in the host countries (Johanson and Vahlne, 2009).
By 1850 (13 years of
operation), the company had established a strong brand with moons and stars as
its symbol. The US civil war of the 1860s the company had established itself as
a premier producer of personal products; a status that enabled it to win the
tender to supply union soldiers with the products (Procter & Gamble, 2006).
Further developments saw the company expand to the rest of the United States
with the company making occasional exports to Canada and Europe by the 1890s. By
the early 1900s, Procter & Gamble was already operating sales agencies in
Canada, UK and a few other European destinations (OneSource Information
Services, 2012; Proctor & Gamble, 2009). The internationalisation process
in Canada seems to have been a step ahead of other foreign markets with the
company building its first fully fledged manufacturing facility being set up in
Canada in 1915 to produce Ivory Soap and Crisco. The company would continue
with its international engagements with direct exports dominating its approach
to international expansion. This expansion strategy was also accompanied by a
move to pursue a diversification strategy with introduction of synthetic
detergents in 1934 and hair care products in 1934 (Procter & Gamble, 2006).
Subsequent internationalisation efforts saw the company expand into Germany,
Japan, China and other countries with the company’s current operations spanning
across 180 countries where direct subsidiaries are fully operational in more
than 50 of the countries (Corporate Watch, 2012).
2.0 External audit
2.1 Industry analysis
One of the most effective tools for
analysing an industry is Porters 5 Forces model. The model explores industry
rivalry by focussing on five important dimensions in the industry which include
market rivalry among current players, buyer power, supplier power, threat of
substitutes and threat of entry (Wheelen, 2008). In the industry analysis, market
players are the producers of personal products like Procter & Gamble and
other competitors. The main buyers are specialised retailers, supermarkets and
hypermarkets with suppliers being manufacturers of chemicals and raw materials
needed for the production of the products (Datamonitor, 2011; Boateng, 2012).
Supermarkets and
hypermarkets have the ability to exert pressure due to the fact that they
purchase in bulk (Bazoud, 2011). This is especially the case where the
supermarkets are large chains. Their strategic position in the supply chain
enables them to have an influence when negotiating contracts with the industry
players. Products are rather similar with many of them offering similar
benefits. However, popular brands have been able to differentiate their
products by branding and embracing tangible attributes such as fragrance and
designs that resonate well with the clients (Datamonitor, 2011a). This
differentiation boosts customer loyalty hence reducing buyer power. Switching
costs are also low with buyers able to switch from one brand to another at no
cost. The risk of backward integration is moderate with some supermarkets
developing some personal products on their own. Overall buyer power can be said
to be moderate.
The number of suppliers is relatively small
with some of the chemicals used for production having very few manufacturers.
This boosts supplier power. The most common raw materials include foam
boosters, vegetable fats, fragrances, clarifying agents, anti oxidants,
surfactants, skin conditioners, botanical extracts, and antibacterial agents
(Datamonitor, 2011). Many of these
chemicals are produced by suppliers who have standing contracts with industry
players. However, supplier power is eased significantly by the practice of some
of the industry players to forward integrate with companies such as Procter
& Gamble establishing units for manufacturing crucial chemicals needed for
production (Datamonitor, 2011; Procter & Gamble, 2010). Overall supplier
power is therefore moderate.
Threat of entry is
lowered by the presence of major brands that have established mass production
facilities and are therefore able to keep their unit costs at the bare minimum.
This makes it difficult for new and small scale entrants to enter the industry
with the larger ones being forced to make heavy and costly investments to
compete effectively (Chew, 2010; Graul, 2006). There’s however a loophole that
small entrants could use to penetrate the market. Changing preferences in the
market that make certain qualities such as being environment-friendly can allow
entrants to charge a premium for their products and have a foothold in the
industry (Global Data, 2011). The other barriers can be found in the
unwillingness of leading retailers and supermarkets to stock the new brands.
Overall threat of entry is moderate.
Many of the products in
the industry may be hard to substitute with the healthcare products being the
hardest to substitute. However, some products such as toothpaste can be
substituted through home made solutions using locally available materials such
as baking powder, salt and peppermint extracts. However, such solutions are
time consuming and are seldom a viable option. Threat of substitutes is
therefore weak.
The industry can be
considered fragmented with the top three players having a market share of about
23% (Datamonitor, 2011). However, the industry is characterised with many of
the products offering similar benefits. Companies such as Procter & Gamble
have diversified production in order to lower the impact of the existing
rivalry. The rivalry is heightened by the fact that switching costs from brand
to brand is very low (Chew, 2010). The cost of investment is also very high and
that heightens the exit costs. Rivalry can therefore be said to be strong.
Considering all the other elements, industry rivalry can also be said to be
strong.
2.2 Macro environment
Macro environment analysis considers
factors that affect more than one industry and entire economies to some extent.
Analysts propose the use of the PESTEL model in order to facilitate the conduct
of an objective analysis of the macro environment (Haberberg and Rieple, 2007;
Dunning, 1993). PESTEL considers political, economic, social, technological,
environmental, and legal factors.
The global economy has
been converging around the creation of market economies with countries such as
China and India that have traditionally leaned towards communism changing their
orientations significantly (Johnson and Whittington, 2011). Countries around the
world are embracing the role of the private sector in national economies and
are increasingly taking measures to be an attractive FDI and business
enterprise (Johnson and Whittington, 2011; Fox and Hamilton, 2007). Cases of
political instability are also on a decline with democratic governance becoming
more common around the world. The world is therefore a safer place to do
business today and this is good for the industry and Procter & Gamble.
Having recovered from
the recent global recession, the world economy is recovering at a modest rate.
There are however differences in the rates of economic growth with emerging
markets maintaining impressive rates of economic growth. For instance, China
and India have been growing at above 8% since the global recession while much
of the developed economies grew at around 2% (OneSource Information Services,
2012). This disparity provides an opportunity for multinationals to strengthen
themselves by focussing on establishing a stronger presence in the emerging
economies. The poverty levels are also on a decline and this implies that
demand for personal products could rise in the medium and long term with
countries with high populations such as China and India seen as the most
lucrative prospects (Johnson and Whittington, 2011).
Socio cultural factors
refer to consumer trends in terms of preferences and habits (Drejer, 2002;
Hubbard, Jeamish and Rice, 2008). Consumers are increasingly aware of
developments around them with the average consumer tending to search for more
information on prices and other product attributes (Johnson and Whittington,
2011). This puts pressure on industry players to offer the best deals or risk
losing out on the market share. Industry players are also compelled to invest
heavily in research and development and keep up with changing preferences. For
instance, the growing popularity in environment-friendly solutions has seen
many companies refine their product formulae and manufacturing processes in
order to keep or gain market shares (Johnson and Whittington, 2011). The
growing popularity of the internet and social media has also seen businesses
endeavour to ensure that product descriptions and other relevant information
are availed online. The growing popularity of E’ commerce also has industry
players setting up online transactions.
Technological factors
affect advances in technology and the ease with which such technologies can be
accessed (Jennings, 2004). Technological advancements around the world have
made it easy for businesses to promptly come up with innovations. This enables
them to respond quickly to changing market preferences. It can also be a source
of disadvantage with competitors being able to duplicate product features
before the initial investors can recoup their investments (Grant, 2007; Adams,
1004).
Environmental concerns
continue to dominate agendas around the world. Businesses are continuously
under pressure to review their supply chains to minimise wastage with those
dealing in potentially harmful chemicals required to invest in safe disposal
systems to avoid affecting the environment negatively (Datamonitor, 2011). Some
of the environmental concerns have been entrenched in law with companies in
Europe required to have an official policy on how they intend to ensure that
the sustainability goal is achieved (Johnson and Whittington, 2011).
3.0 Company resource audit
A resource audit helps organisations in
understanding their internal strengths and weaknesses (Barney, 2010). This
helps them in their strategic approach with an aim to identify ways in which
they can have a competitive advantage in the market. Internal audit can be done
under a number of frameworks with the dominant theory being the resource based
view of the firm. This theory envisions organisations as bundles of resources
which can be used singly or in a synergetic combination to produce the desired
result in the organisation (Barney, 2010). The VRIO framework outlines the
characteristics that resources should have for them to yield a competitive
advantage for the organisation. The framework defines sources of a competitive
advantage as resources that are valuable, rare, inimitable and organisation (De
Wit and Meyer, 2010; Barney, 2000). Procter & Gamble has a number of
resources which can help yield a competitive advantage when combined in a
manner that yields synergy.
Procter & Gamble
boasts of a strong financial performance which has remained relatively
consistent over the past decade. The company recorded a net income of $11.8
billion in 2011 with an asset base of about $138 billion (OneSource Information
Services, 2012). This strong financial performance provides them with the
ability to invest in research and development and in prompt investments through
mergers and acquisitions aimed at acquiring additional market share. This
financial muscle combines well with the company’s well developed Research and
Development capabilities with the company running research and development
units dedicated towards the identification of new products and product features
that can serve the market more effectively (Procter and Gamble, 2012). The
company also possesses large manufacturing plants that enable them to automate
and exploit the gains of mass production (Procter and Gamble, 2012). This
standardisation of production processes enables them to keep their unit costs
low hence they are able to compete effectively in the market.
Sources from the
company indicate that the company considers their employees as their greatest
source of strategic advantage. The employees at the company are said to be
highly motivated and very innovative (Procter and Gamble, 2012). They act as
the greatest source of market intelligence for the company with a commitment to
transmit any clues gathered from their interactions with the market to the
company for further investigation and analysis. The employees also record high
productivity rates hence keeping the relative cost of labour low despite the
fact that the company has consistently remained committed to paying above
average wages to their employees (Chew, 2010). This important resource combines
well with the management structures at the company that allow for free flow of
information and dynamic approach to decision making.
Procter & Gamble
has a strong brand name that forms a special bond with the consumers
(Datamonitor, 2011). Having dominated the industry for decades, the brand has
distinguished itself as a reliable source of products that meet the market
demand. A strong brand improves the effectiveness of the marketing endeavours
of a company (Datamonitor, 2011). It also helps with the diversification
strategies where new product lines are adopted by the company and sold in the
market with ease in view of the fact that the brand is trust worthy.
The resources
identified give the company a number of capabilities that may not be easily
replicated by competitors. A combination of well established research and
development facilities combines well with the keenness of employees to identify
areas of potential improvement for new products and product features. This
gives the company the ability to distinguish itself as a premier innovator in
the industry. The strong financial position enjoyed by the company also boosts
these innovation abilities. This financial strength also enables swift
investments whenever opportunities arise with the company being able to take
over other companies and participate in mergers and acquisitions with
ease.
4.0 Evaluation of company’s current
strategy
The company remains commitment in its
objective to pursue international expansion. With operations in over 180
countries, Procter & Gamble emphasises the need to remain relevant to the
markets in which it operates (OneSource Information Services, 2012). This
brings to the fore the tradeoffs between the pursuit of a globalisation
strategy and the pursuit a localisation strategy. The globalisation strategy
allows for economies of scale to be realised at the global level. It involves
the provision of similar products across the foreign subsidiaries, embracing the
same approaches in operations and at times even transferring marketing messages
across the countries (De Wit and Meyer, 2010; Kogut and Zander, 1993). This
strategy may not be a valuable alternative in view of the fact that different
markets may have special needs that may not be satisfied satisfactorily by
pursuing this strategy. The localisation strategy on the other hand allows some
level of independence in the subsidiaries where they are allowed to modify
their products and business processes to suit the local markets (Luo, 2003; De
Wit and Meyer, 2010). It may also call for the refining of the supply chains to
make subsidiaries truly local. This approach forfeits the gains of global scale
of production. The third approach is the transnational approach which pursues
both a localisation and a globalisation strategy. It seeks to strike a balance
that ensures that the subsidiaries can win local support benefiting from global
scales of production.
Procter & Gamble
pursues the transnational strategies: it localises its products to suit the
needs of the different markets in which it operates (Global Data, 2011). It
also tries to ensure that the products manufactured by its subsidiaries remain
competitive by taking advantage of the global scales to procure some of the key
raw materials and chemicals and availing them to such subsidiaries.
The company settles for
mergers, acquisitions and takeovers as its primary tools for expansion (Procter
& Gamble, 2006). This is in realisation of the fact that the possession of
market intelligence and relevant exposure is the key to success in business. By
merging and acquiring existing companies, Procter & Gamble is able to tap
into their intelligence and exposure and is able to convert them into important
tools for achieving growth for the business.
The sustainability of
the strategy depends on the extent to which the transnational strategy can be
used while keeping the costs low. Companies that produce globally have a better
chance at keeping their unit costs low and therefore more likely to compete
based on price in a world where consumers are increasingly price sensitive (De
Wit and Meyer, 2010). It is anticipated that with globalisation, consumer
trends are likely to develop similarities across the globe. This means that
organisations are likely to enjoy the benefits of global scales without bearing
the risk of losing out on market share in the different countries. The company
may therefore need to maintain this strategy only for as long as market
characteristics are distinct and pursue a globalisation strategy whenever the
market characteristics allow.
5.0 Strategy implementation and
organisational structure and culture
To ensure that subsidiaries can attend
to the needs of specific markets effectively, the company gives some level of
autonomy with subsidiary executives given the authority to influence operations
as they appropriate (Haile, 2002). The operations are coordinated under 2
strategic business units: Beauty and Grooming, and Household Care. All products
are aligned along the two units with subsidiary heads expected to report to the
headquarters on the progress made in line with the SBUs (OneSource, 2012). The
approach taken in regards to corporate culture allows for marginal differences
in various subsidiaries with operational excellence being the focus. Where the
host economies have peculiar characteristics, such characteristics are factored
in the operations. For instance, work schedules and allocation of duties in the
Chinese and Japanese subsidiaries allow for a unique sense of teamwork with
responsibility being mainly on the teams (Chew, 2010). This differs from the
approach in the parent company in the US where responsibility mainly lies with
the individual.
The company has also
been able to demonstrate its ability to gain market share through mergers and
acquisitions. Some of the recent acquisitions/ takeovers include the 2009 Zirh
skincare, and Ambi Dur (Global Data, 2011). Other approaches have included the
formation of joint ventures with some of the agreements made in 2010 being for
the provision of pet products with Natura Pet Products Inc (Global Data, 2011).
The guiding philosophy
for the company is the provision of value for consumers profitably while
upholding the highest standards of corporate social responsibility (Procter and
Gamble, 2012). The company emphasises transparency in its dealings. It has well
established mechanisms for risk control and strategy implementation strategies
with proper reporting systems that allow for quick identification of flaws in
the organisation. This keeps the company stable.
6.0 Arising issues on global
strategy and recommendations
The main issue that can be identified
from the analysis above is the tradeoffs between the need to pursue a global
strategy and compete based on price; and the need to localise products and
therefore remain more relevant to the host markets. Localisation makes it
difficult for organisations to optimise on the scale of production and that
keeps their unit costs higher than for companies pursuing a purely global
strategy. It is also notable that global cultures seem to be converging around
a global culture and it is expected that consumers in different parts of the
world are likely to develop similar product preferences. This is likely to
culminate into a situation where the gains of globalisation may outweigh the
gains of a localisation strategy. The company should therefore consider the
tradeoffs and pursue a globalisation strategy whenever the situation permits
it.
Mergers, Acquisitions
and Takeovers work best when the employees of the organisation being taken over
are retained as they are the ones with the market intelligence to inform the
company’s strategy. Their retention poses a challenge in terms of the need to
ensure that they can adapt to the company culture without significant
disruptions. Induction should therefore be done carefully and comprehensively.
Any failure to do so could render the new outfits ineffective in their
mandates.
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