Question

Firms diversify because there may be new technological or economic opportunities in another industry, or a firm could enter a complementary industry, keeping a similar market base or production line. Leveraging one’s core competencies by applying them to additional businesses, allows the firm to make the most of their competitive advantage. If the firm is a cost leader, it may be able to reduce costs for an acquired firm as well.

Proctor and Gamble has been and continues to get rid of some of its brands. Why are they doing so and what does this say about their earlier diversification strategy?

Answer 1

While it us totally right that firms look to diversify to tap the new technological or economic opportunities in another industry or even seek to diversify product portfolio in same industry by tweaking the value proposition. Proctor and Gamble (P&G), a leader in the consumer business segment has been and continues to get rid of some of its brands under their new business strategy of refocusing on the business behind its 70 to 80 remaining best-selling brand names by shedding some 100 brands from business.

P&G, struggling with low profit margins on many of its products and diminishing value proposition has changed its business strategy by making the most interesting move of playing with only the winners. The company removed even big brands from its portfolio due to less attractiveness among users, low margins as well as declining growth. The firm, focused to become a core beauty, fabric care and other businesses, has planned to transform itself into a company with only best products. The CEO went on indicating during a 2004 interview that even a brand having $2 billion market cap bit is not a core product, will be divested.

Let us analyze the business proposition in 2004 for P&G when it had 23 brands with sales of more than $1 billion, 14 brands with around $500 million to $1 billion sales and 30 to 40 brands with sales of $100 million to $500 million. The firm looked to be more agile and adaptive with a core objective of growth with only reliable generation of cash and profit, a new and independent strategy in the consumer business segment. P&G also had to take this decision because due to its larger brand portfolio was breaking the firm into two, a consumer and non-core businesses.

The new strategy is totally different form the initially used because it was opposite of what the P&G used to do previously. With this new strategy, P&G broken the shadows of its past business of diversification into various industries rather it seek to focus only on its core business of beauty, fabric care and other businesses but only in consumer segment. This new strategy gave P&G an excuse to cut costs and invest back into the market with maximum profitability.