Question

Founded in 1837, Cincinnati-based Procter & Gamble has long been one of the world's most international companies. Today P&G is a global colossus in the consumer products business with annual sales in excess of $50 billion, some 54 percent of which are generated outside of the United States. P&G sells more than 300 brandsincluding Ivory soap, Tide, Pampers, IAM pet food, Crisco, and Folgers-to consumers in 160 countries. Historically the strategy at P&G was well established. The company developed new products in Cincinnati and then relied on semiautonomous foreign subsidiaries to manufacture, market, and distribute those products in different nations. In many cases, foreign subsidiaries had their own production facilities and tailored the packaging, brand name, and marketing message to local tastes and preferences. For years this strategy delivered a steady stream of new products and reliable growth in sales and profits. By the 1990s, however, profit growth at P&G was slowing. The essence of the problem was simple; P&G's costs were too high because of extensive duplication of manufacturing, marketing, and administrative facilities in different national subsidiaries. The duplication of assets made sense in the world of the 1960s, when national markets were segmented from each other by barriers to crossborder trade. Products produced in Great Britain, for example, could not be sold economically in Germany due to high tariff duties levied on imports into Germany. By the 1980s, however, barriers to cross-border trade were falling rapidly worldwide and fragmented national markets were merging into larger regional or global markets. Also, the retailers through which P&G distributed its products were growing larger and more global, such as Wal-Mart, Tesco from the United Kingdom, and Carrefour from France. These emerging global retailers were demanding price discounts from P&G. In the 1990s P&G embarked on a major reorganization in an attempt to control its cost structure and recognize the new reality of emerging global markets. The company shut down some 30 manufacturing plants around the globe, laid off 13,000 employees, and concentrated production in fewer plants that could better realize economies of scale and serve regional markets. It wasn't enough! Profit growth remained sluggish so in 1999 P&G launched its second reorganization of the decade. Named "Organization 2005;' the goal was to transform P&G into a truly global company. The company tore up its old organization, which was based on countries and regions, and replaced it with one based on seven self-contained global business units, ranging from baby care to food products. Each business unit was given complete responsibility for generating profits from its products, and for manufacturing, marketing, and product development. Each business unit was told to rationalize production, concentrating it in fewer larger facilities; to try to build global brands wherever possible, thereby eliminating marketing difference between countries; and to accelerate the development and launch of new products. P&G announced that as a result of this initiative, it would close another 10 factories and lay off 15,000 employees, mostly in Europe where there was still extensive duplication of assets. The annual cost savings were estimated to be about $800 million. P&G planned to use the savings to cut prices and increase marketing spending in an effort to gain market share, and thus further lower costs through the attainment of scale economies. This time the strategy seemed to be working. For most of the 2000s P&G reported strong growth in both sales and profits. Significantly, P&G's global competitors, such as Unilever, Kimberly-Clark, and Colgate-Palmolive, were struggling during the same time period. 1. What strategy was Procter & Gamble pursuing when it first entered foreign markets in the period up until the 1980s? 2. Why do you think this strategy became less viable in the 1990s? 3. What strategy does P&G appear to be moving toward? What are the benefits of this strategy? What are the potential risks associated with it?

Answer 1

(1): The strategy that P&G was using when it first entered foreign markets in the period up until the 1980s was that of adaptation and customization. De-centralization was the hallmark of this strategy. In this strategy P&G used semiautonomous foreign subsidiaries for the purpose of manufacturing as well as marketing. The different aspects of the P&G’s portfolio of product were adapted as per the local tastes and preferences of consumers in each country.

(2): This strategy became less viable in the 1990s because of the fact that in the 1990s the markets of different countries were no longer segmented from each other. This was because barriers to cross-border trade ceased to exist in the 1990s. National markets were no longer fragmented and the market was getting unified as one large global market. As such due to this changing market dynamics the company’s old strategy became irrelevant in the new context.

(3): The strategy that P&G is moving towards is standardization. Centralization will be the hallmark of this strategy and P&G will have global business units. Each business unit will function independently and will be responsible for the revenues, costs and profits of its products.

The benefits of this strategy are that it will significantly reduce duplication of assets, of marketing efforts, of administrative efforts. Thus the strategy will rationalize and optimize the company’s business model and operations as well.

In terms of potential risks the company will lose its ability to manufacture products that will serve a specialized market. Focus will be more on economies of scale and hence in future there will be a tangible risk that P&G might lose its agility and flexibility to respond to changing needs and requirements of its customers.