Proctor and Gamble – Strategic Management Case Study

EXECUTIVE SUMMARY

Proctor and Gamble (P&G) over its journey of about 175 years has become one of the world’s largest consumer goods Company with sales of nearly $80 billion and a net profit of about $10 billion. P&G has a presence in more than 180 countries with brands that accumulate to in excess of $25 billion. The company has achieved success by creating high quality brand recognized products that are sold on multinational level.

It enjoys one of the largest brand names in household products like Pampers, Gillette, Tide, Ariel, Downy, Pantene, Head & Shoulders, Olay, Oral-B, Crest, Dawn, Fairy and Always and segments like household care, beauty, grooming, and personal health care. Although, P&G has world renowned brands, P&G needs to adopt strategies that enable it to maintain its competitive advantage over its rival. Consumer Goods industry where P&G operates has matured reaching the consolidation stage and competition amongst rivals is intense.

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P&G has many strategic options create competitive advantage over its rivals such as further market penetrations by rebranding its current line of products and selling them at a lower price. Another option for P&G is to expand in the emerging markets by collaboration or alliances with local businesses in various geographical regions. Lastly, P&G can specialize in skin care/beauty segment of consumer industry. P&G can provide consumers with products that are made with natural ingredients as trend in health and wellness is growing along with providing specialized products for men.

INTRODUCTION

P&G is a part of a competitive industry, and as such faces very stiff and fierce competition from its rivals. The competition faced by the company is virtually on every front like, market share, product line up, innovation of new products, R&D for new and existing products. It has witnessed a drop in market share and revenue from the developed market and but sustained appreciable performance in the developing markets.

This report provides a thorough internal as well as external analysis of P&G, identifies its mandate, along with certain strategies that would help it increase its profitability, profit growth and sustain its competitive advantage in both developed and developing markets. The limitations of this report are due to the fact that it primarily relies on the information and facts as presented in Case 27, Proctor & Gamble: The Beauty/Feminine Care Segment of the Consumer Goods Industry.

External references were also used and information was sought from the Proctor & Gamble Company 2012 Annual Report and the Proctor & Gamble website.

COMPANY OVERVIEW

Procter & Gamble was founded in 1837, by William Procter and James Gamble, who laid the foundation of P&G by initially making and selling soap and candles. By 1879, founders of P&G developed Ivory soap and established their own laboratory, and by 1935 the company established another factory in the Philippines after its acquisition of the British soap manufacturer, Thomas Hedley & Sons.

In January 2005, P&G announced an acquisition of Gillette, forming the largest consumer goods company and placing Unilever into second place. At present, Procter & Gamble sells more than 300 leading brands, such as Pampers, Tide, Pringles, Ariel, Downy, Pantene, Head & Shoulders, Olay, Cover Girl, Pantene, Crest, Duracell, Secret, Folgers, Hugo Boss, Mr. Clean, Oral-B, Old Spice, Clairol and Zest. The company markets its products through mass merchandisers, grocery stores, membership club stores, drug stores, high-frequency stores, department stores, perfumeries, pharmacies, salons, and e-commerce.

It markets its products to over 160 countries, and operates a total of 115 plants in more than 80 countries all over the world. Procter & Gamble’s headquarters are located in Cincinnati, Ohio and it employs more than 98,000 employees worldwide. Off late, the company’s performance has dwindled as the company has been shuffling its strategy and has not been able to keep competitors at bay (Chung, 2012). Recently the company’s Board has unanimously accepted CEO McDonald, who had joined in July 2009, as the one who would plan and head the company’s turnaround of performance (Chung, Jul 2012).

As such the company has adopted a multi-fold strategy to cut costs by a big chunk and bring up new and innovative products to shore up sales and profits. Example being the fact that “the company will launch at least nine new products in the next four months, many of them priced at a premium to generate higher profit margins” (Monk, 2012). MANDATE The mission of the company is to “provide branded products and services of superior quality and value that improve the lives of the world’s consumers, now and for generations to come”.

And this would automatically generate value for all its stakeholders in form of higher sales and returns. The vision of the company is to be recognized as “the best consumer products and services company in the world”. P&G has kept is vision powerful and yet pretty clear. This vision of the company is simple enough be easily comprehended by all its stakeholders. The core values of the company rotate around the consumers, its brands and its employees. These values are leadership, ownership, integrity, passion for winning and trust.

The company, through all its core values, has tried to address the fact that they seek to work and deliver a trust to their consumers with the help of their employees, who are expected to work with leadership and ownership and must have a passion for winning so that they can together work to strive to achieve the vision of the company. Just like the vision of the company, the core values also are very clear and straight forward that define the reason for the existence of the company.

P&G’s stakeholders are its customers, shareholders, employees, uppliers and communities in which it operates. P&G’s customers are the ones who ultimately use the products and given the fact that the industry is highly customer oriented and demand driven. The shareholders invest in P&G’s shares providing the company with capital and the company rewards them by consistently creating and increasing the shareholder value. Proctor and gamble employees worldwide are considered its most important asset who are the back bone of this giant corporation, they expect ethical treatment along with fair wages and good working conditions.

Another important stakeholder of P&G is its suppliers whose organizations heavily rely on the business agreements with P&G, and the businesses who sell and distribute P&G products. Also, different communities all over the world from Cincinnati, Ohio to the many communities around the world who are provided with jobs, employee education, stability and who pay taxes because of Procter & Gamble.

EXTERNAL ANALYSIS

Competitive Rivalry: The industry that P&G operates in is highly competitive and it has emerged as one of the leaders in the industry.

This industry has five major competitors and has reached the stage of consolidation. Due to industry consolidation, changes made by one company forces other competitors to react and follow suit. This increases rivalry and might lead to price wars. The demand for beauty and personal hygiene products is on the rise due to many factors such as; the growth in the economies of developing world has improved the standard of living of people in those regions; men are becoming more interested in beauty and skin care; and also due to the growing demand for products made with natural ingredients and raw materials.This increase in demand and potential for growth has provided stability in the industry.

Threat of New Entrants: Five major competitors in this industry have captured most of the market share through economies of scale and brand loyalty. The wide range of products in major competitor’s portfolio makes it extremely difficult for the new entrants to compete and gain any significant market share. Potential entrant would require an enormous amount of capital for manufacturing alongside a huge budget for marketing activities, R&D, supply/sales channel in order to compete at the same level as major competitors.This creates a very high barrier to entry in the industry that makes the threat of new entrants, very low for the industry. The patents held by the company on various products also act as barriers to entry.

Bargaining Power of the Buyers: Businesses in this industry rely heavily on its buyers to generate a considerable portion of revenue. Buyers of this industry are mainly distributors like Walmart, Macy’s, Target etc. These distributors buy in large quantities which increases their buying power allowing them to bargain lower prices.As a result, over exposure of sales to any single buyer could pose a serious threat to this industry if competitors do not have their own customized distribution network.

Bargaining Power of Suppliers: There are almost no substitutes for raw materials being used in products manufactured by this industry which is a cause of concern. Suppliers seem to enjoy high bargaining power but the sheer size and quantities purchased by major competitors in this industry tends to scale back the supplier power as competitors can move towards vertical integration.Hence, the buying power of suppliers is medium.

5. Threat of Substitutes: There are no known substitutes for this industry which places the threat of substitutes at a very low level. Macro Environment The raw materials used to manufacture products in various segments of Fast Moving Consumer Goods (FMCG) industry are regulated by governments in many countries. There is a risk that currently used raw materials may be considered potentially dangerous and therefore restricted in their use due to the increase in health consciousness especially in western markets.

Product testing can take months even years before getting an approval for consumption and during this time regulations can change preventing a product from ever being introduced to the market resulting in large R&D expenses which may never be recovered. Social forces can have an effect on this industry such as the desire for organic products as consumers become concerned that chemicals currently being used can cause long-term health ailments like cancer and skin diseases.

Men are also fast becoming more interested in beauty and hygiene products and populations in developing countries are also turning towards beauty and personal hygiene products as their living standards improve. The future for this industry is bright with potential for growth but for some companies this can be a threat if they fail at product innovation and strategizing their business as per the changing trends. Technological changes such as exponential growth in internet and ecommerce provides a great platform to this industry to market its products directly to target demographics and also to raise awareness of personal hygiene.

On the internet, there is a massive potential to target consumers based on their web searches, previous online purchases, etc. Advancement in technology can also help this industry’s distribution systems such as emergence of real-time inventory systems allows inventory levels to be replenished on time and prevent excessive inventory on-hand in factories or warehouses. The reduced barriers to international trade give companies in the industry the opportunity to expand into various regions of the world. Many regions like China, India, and South America are opening up to the world providing an excellent opportunity for expansion.

However, the reduced barriers to international trade can also be considered a threat if international companies expand into home bases such as Europe and North America which will in turn give rise to the local competition.

INTERNAL ANALYSIS

P&G is the industry leader because of its ability to maintain a competitive advantage over its rivals resulting in higher than average profitability. P&G has many resources that contribute towards gaining and maintaining competitive advantage over the rival. One of

P&G’s main strength is its strong financial position which allows it to acquire other companies. P&G has acquired Gillette boosting its competitive advantage over its rivals as Gillette mainly caters to Men which is growing market. Strong financial position also allows P&G to incur high R&D costs i. e. in excess of 2. 2 billion dollars. P&G is constantly investing in product innovation and improving its current line of products. The company over the past many years has successfully launched and managed new products.

As such, P&G has the ability to push for innovation and ensure faster commercialization than any of its competitor in the industry. This investment in improving brands and innovation also promotes brand loyalty. P&G operates in various segments of FMCG industry such as Personal hygiene, Household care, and Beauty. This variety of products offerings from P&G caters to almost all demographics; throughout different ages, genders, countries and cultures. P&G operates in various regions across the globe and has successfully managed to establish itself as a leader in these markets across many segments.

This diverse range of product offerings along with its operation in various geographic regions allows P&G to reel through the recessions in the economy and maintain its profitability. Any slowdown in the economy of anyone region or segment is countered by growing economy and segments in other regions. Also, type of products offered by P&G are considered to be recession proof as they considered to necessity such as soaps, shampoos, personal health products etc. P&G derives its strengths from its various capabilities. First of all is that P&G has the marketing of its products in the industry.

This enables P&G to convince its consumers to buy products and also keeps them up to date with new products as well as about any improvements in the current line of products. P&G also has an efficient distribution system which allows it to distribute its products in various region of the globe at a lower cost than its competitors. P&G also collaborates with distributors like Wal-Mart, Target etc. to keep supply chain functioning efficiently. This allows restocking of shelves at distributors much easier as it provides real time data to P&G as stock levels deplete.

This allows P&G to save costs associated with huge inventories and warehouses. Also, P&G owns and operates almost 115 manufacturing facilities across 80 countries around the globe. This is a great asset of the company which provides it with the capability of saving on cost of shipping products from one region to another. All these sets of co-related resources and capabilities allow P&G to save on costs and provide high quality products at a reasonable people which in turn has generated above average profits in the industry making P&G the industry leader.

Along with strengths, P&G also has certain weaknesses and threats that can offset its competitive advantage and affect its profitability. In the current global down turn commodity prices across the globe are increasing due to transportation costs associated with higher oil prices. This will force P&G to raise prices on many of their products which might affect market share because some consumers may switch to cheaper low quality products. This is further exacerbated by the fact that switching costs for consumer are quite low between the competitors in many segments of this industry.

While P&G has great collaboration with Wal-Mart, which allows it to maintain an efficient supply chain management but this is also one of the weaknesses of P&G as Wal-Mart is its number one buyer as considerable amount of P&G sales are accounted to Wal-Mart and followed by other major retailers like Target, Zellers, etc. This provides buyers with immense buying power and any decrease of sales at any of the top customers can affect P&G effecting its revenues and subsequent profitability.

P&G is also exposed heavily towards the matured markets of Europe and North America. STRATEGIC OPTIONS Further Market Penetration – In this strategy, P&G should increase market penetration its current skin care and personal hygiene segments. P&G should look towards in its customer base and specifically targeting low income consumers in mature markets. P&G can achieve economies of scale in its current product mix by rebranding such as packaging or size/volume of the product. This way P&G will be altering its existing products at a low fixed cost.

By harbouring this strategy, P&G will be able sell its products at a cheaper price and increase its revenue and subsequent profits. This is low risk strategy because P&G has managed to achieve strong brand recognition and customer loyalty so P&G does not have to incur huge marketing costs in order to introduce its products to the market. P&G already and effective supply chain management and it has good relationship with mega distributors like Wal-Mart, Target etc. so it will be much easier for P&G to introduce these rebranded products to consumers.

Furthermore, P&G has a strong financial position which is essential in case the strategy fails to garner expected results.

There are some drawbacks in this strategy which must be considered such as the lack brand loyalty in low income consumers. Low income consumers tend to prefer products that are competitively priced so if another competitor implements the same strategy they can take away P&G’s market share. Hence, this strategy is only viable from short to medium term. Global Expansion in Emerging Markets – P&G derive most of its revenues from matured market of North America and Europe where market has reached the saturation point and revenue growth is stagnant.

Unlike the mature markets, emerging or growth markets have a lot of potential for growth and there is a lot of market share up for grabs. As P&G looks to gain greater share in the developing countries, it needs to adjust its planning according to the demographics of such country i. e. ethnic groups with different skins, hair types etc. As P&G already has a strong set of products, it must be relatively easier for P&G to penetrate into emerging markets especially in terms of brand recognition, mass market presence, and brand loyalty.

P&G can avail this opportunity by introducing quality products based on the specific needs of the local population or by acquisition of businesses who produce such products. This strategy would help P&G in the long run as it would allow P&G in keep its revenues up during the economic downturns in mature markets as sales in emerging markets will offset the recessions in the mature markets. Rules and regulations vary country to country so some countries can have stringent rules for Multi-national Corporation to protect its local businesses.

Global Strategic Alliance or collaborations with local businesses will enable P&G to expand in to the local market in areas such as China, India or South America. The extensive knowledge of consumers, market trends, laws and regulations that Partner Company brings to the table can be considered an excellent distinctive competency. Global Expansion in to emerging Markets| Arena| Emerging Markets| Differentiator| Price, Quality| Vehicles| Collaborations (Global strategic alliances), Acquisitions,| Staging| Collaboration with local businesses and then move towards acquisition of the same. Economic Model| Provide quality product at reasonable price to consumers in the emerging markets| Pros| Great long term potentialDiversification through operations in various regions which provides an opportunity to keep revenues up during recession in one region P&G must form a structure where the share, responsibilities of each party is clearly defined along with contingency plans to mitigate various risks involved. P&G should protect its trade secrets and product formulas so manufacturing facilities must have separate units, and PG should also get all its patents recognized in the region where it will operate. Some of the cons of this strategy are embedded with the collaborations with local businesses and the instability in the emerging markets.

Also, P&G will essentially be rebranding most of the products it sells in mature markets along with selling some products of its partners which means there will be less spending on R&D and company might lag behind in innovation of new revolutionary products. Differentiation in Beauty/Skin Care Segment – In this strategy, P&G will offer unique and innovative products that address special needs of various market segments and demographics such as products with natural/organic ingredients, products for certain demographics such as men, ethnic groups etc.

Beauty/skin care segment of consumer goods industry is growing as consumers are more interested in grooming themselves with better products and growing trends in health/wellness. P&G can create a competetive advantage by specializing in products made for men and products made with natural/organic ingredients. This strategy will require acquisition of products or spending in R&D to innovate such products in house. This will also require aggressive marketing and branding of such products to introduce them to the consumer.

These products must be priced at a premium price based on the advertising costs, acquisitions and R&D spending. Many features of the products along with quality will offset and justify the higher price for such products. With continuous R&D spending over time, advancement in technologies and increasing competition, prices will eventually reduce. If P&G is able to acquire or create new line of specialized products which caters to certain market segments or demographics, it will be a competitive advantage for P&G over its rivals.

This strategy has some disadvantages as well such as it requires a lot of capital investment either for acquisition or R&D to create new products.

REFERENCES

• Mockler, R. J. (2007). “Procter & Gamble: The Beauty/Feminine Care Segment of the Consumer Goods Industry” In C. W. L. Hill & G. R. Jones, Strategic Management: An Integrated Approach, 6th Edition.
• Boston: Houghton Mifflin Chung, J. (2012). “P&G's Board 'Unanimously Supports' CEO McDonald” Retrieved from http://online. wsj. com/article/SB10000872396390444464304577534930564069566. tm l Monk, D. ( 2012) “Procter ;
• Gamble planning nine new product launches” Retrieved from http://www. bizjournals. com/cincinnati/blog/2012/09/procter-gamble-planning-nine-new. html Annual Report (2012) Retrieved from http://annualreport. pg. com/annualreport2012/files/PG_2012_AnnualReport. pdf
• P;G History (2012) Retrieved from http://www. pg. com/translations/history_pdf/english_history. pdf P;G Purpose, Vision and Principles. (2012) Retrieved from http://www. pg. com/translations/pvp_pdf/english_PVP. pdf

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