Thursday, September 19, 2019

Procter & Gamble: A strategic analysis


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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