Corporate and Business Strategy of Procter & Gamble - Essay Example

? CORPORATE AND GLOBAL STRATEGY Executive Summary This report will try to throw some light on global, corporate and business strategy of Procter & Gamble. The study will analyze global strategy of the company in terms strategic business unit and transnational model. Corporate strategy of the company is analysed with the help of core competency and overall scope availability. The study used VRIN model and porter’s value chain analysis for auditing business strategy of the company. The report used tools such as PESTLE and Porter’s Five Forces in order to measure external opportunity for the company. Finally the study tried to some useful recommendation in terms of research & development and value chain cost for the company. Table of Contents Table of Contents 3 1.0 Procter & Gamble 5 2.0 Corporate Strategy 6 2.1 Core Competency of P&G 7 2.2 Overall Scope 8 3.0 Business Level Strategy 8 4.0 Internal Analysis 10 4.1 Porter’s Value Chain 10 4.2 Barney’s VRIN model 13 5.0 External Analysis 16 5.1 PESTLE 16 5.1.1 Political Environment 16 5.1.2 Economic 16 5.1.3 Social Environment 16 5.1.4 Technological 16 5.1.5 Environment 17 5.1.6 Laws and Regulations 17 5.2 Porter’s Five Forces 17 5.2.1 Threat of New Entrants 17 5.2.2 Buyer Power 18 5.2.3 Supplier Power 18 5.2.4 Competition 18 5.2.5 Threat of Substitutes 18 6.0 Evaluation of Strategy 19 7.0 Conclusion 20 7.1 Internationalization of P&G 20 7.2 History of Global Expansion of P&G 21 References 22 1.0 Procter & Gamble Proctor & Gamble is a famous American consumer product company. The organization is headquartered at Cincinnati, Ohio, USA. The company was founded by William Procter and James Gamble in the year 1837. The company operates over ninety five countries internationally. Sales volume of the company has crossed a record mark of $82, 00 billion in the year 2011. The organization has established product leadership in various categories such as Skin Care, House Care and Oral care. More than 125,000 employees work in the Procter & Gamble. The consumer product company sells more than two hundred and sixty brands across the globe. The organization enjoys leadership in more than twenty four brands globally and able to obtain billion of dollars per annum from each of the product category. The consumer product organization has established more than twenty eight technical centres internationally (PG-Global, 2012). Proctor & Gamble emphasizes on adopting modern technology integrated with state of art research and development facility in order to achieve competitive advantage over competitors. They have incorporated market research intelligence process in order to take strategic decision to expand business in foreign market (Kotler, 2009, p. 253). The company has expanded their business extensively in last twenty years and achieved phenomenal sales growth from their international business operation hence analyzing their business and corporate level strategy will help management practitioners to understand key ingredients required to develop a sustainable strategic model. Strategic analysis of Procter & Gamble will not only help management practitioners to gain insight about strategic choices but to gain knowledge about global business practices. These study will do strategic analysis of Procter & Gamble in the below mentioned manner. Step 1- Analyzing corporate strategy of P&G, Step 2- Analyzing business strategy of P&G and Step 3- Internal and External environment analysis. 2.0 Corporate Strategy The Cincinnati based company has realized the significance of globalization to survive in the hyper competitive market and adopted themselves (read Clay Street Think Tank) according to the prerequisite of situation (Weiner, 2006, p. 22). The organization has shifted focus from delivering products to American consumers and established SBU or strategic business units internationally. Procter & Gamble has increased level of plant capacity with the intention of achieving economies of scale and deliver product mix in cost effective manner (Lofgren, 2005, pp. 102-115). Globalization strategy adopted by the company helped them to achieve not only product diversification but better return on investment also. Researchers have pointed out that A. G. Lafley (CEO of Procter & Gamble) played significant role on changing the strategy in accordance to global perspective. A. G. Lafley has transformed standardized international product structure into hybrid matrix product system. Hybrid product portfolio model emphasizes on altering product category in accordance to demand situation of particular local market and also redesigning steps of value chain in accordance to product specification. The globalization model adopted by the company is often classified as Front Back Hybrid Matrix by industry insiders. Procter & Gamble not only transformed product portfolio in accordance to demand of local market but changed other elements of marketing mix such as pricing strategy, distribution channel and promotional strategy also. In Front Back Hybrid Matrix strategic business units operate under the supervision of Global Business Units or GBU. The company centralized core functions such as research and development while functions while functions like sales and marketing and value chain activity remained decentralized in local market. The company has changed the existing management functions and integrated state of art applications such as ERP, Oracle in information delivery system (Shang and Seddon, 2000). The organization took more than six years to incorporate global business model. They have invested more than two billion US dollars during the restructuring phase. Global business model of Procter & Gamble is explained in the following diagram. (Source: Dyer, Dalzell, and Olegario, 2008, p. 295) 2.1 Core Competency of P&G The company is known for their marketing and branding capabilities while industry insiders have pointed out that P&G contributed hugely for developing modern advertising strategies. The company uses glocalization strategy for developing brand in context to local market. They spend huge amount of money on promotional activities in order to generate product awareness among customers. P&G follows from within strategy to promote existing employees to new job designation instead of hiring external candidates. Long association with the organization helps employees to perform well in terms of fulfilling objective of the organization. The organization emphasizes heavily on research & development in order to develop new offerings for customers. The company tries to adopt state of art technology for developing products satisfying ever changing demand of customers. They also hire external academicians for research and development purpose (Silverstein, 1997, p. 13). 2.2 Overall Scope There is scope for the company to develop competency in the field of value chain management. P&G needs to follow value chain integration of Wal-Mart in order to increase their efficiency in supply chain management. They need to enhance their expertise in Radio frequency identification technology to enhance their supply chain management capability. Technology integration will help them not only to decrease value chain cost but to increase efficiency of process management. 3.0 Business Level Strategy SWOT analysis is needed to be done in order to understand business level strategy of Procter & Gamble. Strength The company uses economies of scale in their production in order to reduce total cost of production and offer product at competitive price to customers The company has strong brand equity among customers due to their prolonged existence for more than 170 years P&G invests huge amount money on research and development in order to develop quality products Weakness Analysis of financial statement shows that cash flow level is shrinking for the company Domestic market is already got saturated for the company due to presence of huge number of competitors. For example Unilever (major competitor for P&G) competes fiercely with the company in the detergent segment hence P&G forced to follow competitive pricing strategy in order to survive in competition. Operating cost for the company has increased manifold in recent years hence the company has started adopting retrenchment strategy to minimize cost Opportunity The company has the opportunity to expand their portfolio in health and beauty segment Market share of the company in developing countries such as Brazil, India, China is low hence they should focus on increasing penetration in that region Domestic retail market for the company is strong growth trend for last few years hence P&G has the opportunity to cater demand of local market Threat In developing market local players are giving stiff competition to the company while developed market is getting saturated day by day due to presence of multinational companies Value chain cost has increased manifold in recent years hence it is getting tougher for the company rip off the benefits of economies of scale (Source: Graul, Henricks, Olp and Strohecker, 2006) 4.0 Internal Analysis 4.1 Porter’s Value Chain Porter’s Value chain model can be used to analyze internal strength of companies (Overbeck, 2009, pp. 26-27). Following section will cover value chain analysis of Procter & Gamble. Primary Activities Inbound Logistics The company uses localized raw material supply in order to decrease value chain cost. They have incorporated compliance labelling for raw materials and finished goods in order decrease complexity of supply chain. P&G has established strategic partnership with Cisco in order implement wireless technology in inbound logistics. Operations The company started corporate restructuring program in the year 1999 and since then 15% decrease in internal business operation cost. P&G has established extended distribution network in more than 155 countries. The company is planning to implement RFID technology in manufacturing operations located in more than 40 countries. The company has created a unique linking platform for B2B customers, retailers and financial institutions. Outbound Logistics P&G establishes partnership with logistics specialists in order to support outbound activities such as warehousing, transportation and pickup facility. For example the company formed partnership with Exel for distributing products in France, Argentina, Morocco, USA, Canada and China. Interesting thing is that P&G has also developed software application designed for truck loading and case picking. The company started selling the software solution to B2B users with the assistance of Moore and Associates. Marketing and Sales The company is named as sales & marketing machine by industry insiders. They try to use local brand ambassadors to sell their product in foreign market. The company has established category leadership in 24 brands (each of the brand contribute annual sales revenue of more than $1 billion) with the help of their sales and marketing strategy. Customer Service P&G follows enterprise IT integration strategy to collect feedback from customers and arrange customer database. They have also introduced low cost customer service facilities for developing countries such as Philippines, Costa Rica, China, Brazil and India. Secondary Activities Firm Infrastructure The company operates through four strategic initiatives such as Global Business Services, Global Business Units, Market Development Organizations and Corporate Functions. The company has additionally diversified their business into four global divisions such as P&G Family Health, P&G Beauty, P&G Household and Gillette. Human Resources Management “Build from Within” strategy adopted by the company helped them to create strong human resource pool capable of achieving business excellence. Technology/R&D The company has already created more than 29,000 patented technologies in the field of consumer products. They have established 20 technology innovation labs across the globe. P&G has founded "Connect & Develop" model in order to find innovation partners for enhancing quality of packaged products. Procurement Procter & Gamble has leveraged their buying power by developing global procurement system and implementing software application to decrease lead time in supply chain management. (Source: Graul, Henricks, Olp and Strohecker, 2006) 4.2 Barney’s VRIN model VRIN analysis is a useful technique for analyzing internal strength of the company from the view point of organizational resources (Mitchell, 2010). Following VRIN model can be used to analyze internal strength of P&G. Rare Valuable Inimitable Non substitutable Core Competencies Product Innovation The company has introduced more than 300 products under four product division Yes Yes Competitors will face challenging task in order to copy large volume of product offered by P&G Only possible by investing huge amount of money on research and development Brand Equity Yes Yes It is very difficult to overtake market leadership of the company by their competitors Difficult for competitors due mutual exclusivity of products Product Patents The company has issued 29,000 product patents Yes Yes Only possible for Unilever due to their capability to invest huge amount of money on product innovation Not possible for small companies Resources & Capabilities R&D The company has established 20 technology hubs across four continents Yes Yes Requires high entry cost for competitors Difficult for small companies to replace Intellectual Property of P&G Global Operation Yes Yes Requires high replication cost Although possible but not probable due to high replication cost Economies of Scale Large volume manufacturing by the company through their 42 international operation hubs Yes Yes Not Possible Not possible for regional companies EDI or Electronic Data Interchange No (many companies are already using the technology) Partly (because the technology is limited only in North America) No No (ERP technology can replace it) (Source: Graul, Henricks, Olp and Strohecker, 2006) 5.0 External Analysis 5.1 PESTLE 5.1.1 Political Environment P&G has established Political Action Committee (PAC) in order to handle government issues of particular country. Political Action Committee (PAC) helps the company to handle issues regarding voluntary financial contributions, personal, product safety in order to continue business without any obstacle. 5.1.2 Economic Procter and Gamble changes their marketing strategy in accordance to economic condition of local market. For example the company changed product pricing strategy (they adopted economies of scale to decrease product price at $1 for low income Russian customers in comparison to $6 in USA) in order to gain access to Russian detergent market (Ahlstrom, and Bruton, 2009, pp. 148-152). 5.1.3 Social Environment Leaders of the company emphasizes in developing amicable work environment for local employees. They changed their business operation according to demand of local market. For example the company has changed product packaging of Tide to attract customers in China. 5.1.4 Technological Technological issues vary in accordance to business situation of a particular country. The organization has implemented ERP or enterprise resource planning and electronic document management system in order to achieve competitive advantage over domestic and international competitors. The organization has successfully adopted OTC medication in order to earn $1 million from everyday sales operation. The Cincinnati based company has incorporated electronic document management technology in order to monitor activities regarding global value chain. Procter & Gamble has incorporated IT Integrator Cardinal Solution in their global process management function in order to gain business excellence (Raine, and Cegielski, 2010, p. 155). 5.1.5 Environment The company emphasizes on following guidelines related to environment protection mentioned by R.E.S.O.L.V.E or Responsible Environmental Steps, Opportunities to Lead by Voluntary Efforts. The company has planned to reduce total carbon emission from manufacturing process by 25% within next five years. 5.1.6 Laws and Regulations Procter & Gamble tries to deliver products in local market without violating laws directed by local government. In 2011 Procter & Gamble has identified organic and microbial contamination in Oral-B product in China. In this situation Government of China had asked them to solve the issue immediately hence Procter & Gamble announced complete withdrawal of contaminated products. This example shows that P&G always try to maintain their operation in accordance legal and safety issues mandated by local government (Global Times, 2011). 5.2 Porter’s Five Forces 5.2.1 Threat of New Entrants It is clear from the VRIN analysis that P&G has established competitive advantage over their competitors with the help of large product portfolio. It is very difficult for a resource constrained new entrant to copy marketing strategy of P&G. New will face financial resource constraints in order to copy moves of P&G hence threat of new entrant is low. 5.2.2 Buyer Power Total retail sales of the company rely heavily on demand of customers. Wal-Mart contributes 16& of retail sales for the company hence losing Wal-Mart can impact overall sales revenue earned by the company. The mentioned situation indicates that buyer power is high for the company. 5.2.3 Supplier Power Supplier switching cost is low for the company due to sheer size of business operation maintained by them. Supplier power is low for the company. 5.2.4 Competition P&G faces competition from not only global giants such as Unilever and Nestle but from regional players also. North America and European market is getting saturated day by day due to increasing presence of global as well as local player. Competition is high in the market. 5.2.5 Threat of Substitutes Majority of products offered by P&G are classified as consumer staples hence they don’t have any substitute available in the market. Few substitutes are available for products (such as snacks and fragrances) offered by the company hence it can be inferred that threat of substitute is moderate for P&G (Garrett, Mickey, and Reynolds, 2011). 6.0 Evaluation of Strategy The above mentioned strategic analysis has found following issues regarding corporate and global strategy of Procter & Gamble. Model proposed by Rumelt in 1980 can be used in order to do strategic recommendation for P&G. Consistency The company tries to maintain consistency between their corporate and global strategy. P&G follows same strategy for all their business units in order to achieve sustainable business growth. Consonance Procter & Gamble changes their strategy in accordance to requirement of external environment hence consonance factor is high for the company. Feasibility VRIN analysis done in the previous section suggests that the company adopt strategies in accordance to their resource capability. The company invests money on developing corporate level strategy according to their capability. Advantage P&G has achieved competitive advantage over their competitors with the help of product innovation and research & development capabilities. Industry report suggests that the company has achieved category leadership in more than 20 brands with the help business strategy adopted by them. 7.0 Conclusion Strategic evaluation in terms of global context shows that P&G adopts corporate and business strategy simultaneously in accordance to demand of the situation. Both of the strategy heavily influences the outcome of global operation. 7.1 Internationalization of P&G P&G has developed three competencies in order to achieve success with their global strategy. Three competencies of the company can be summarized in the following manner. Understanding the foreign market Achieving the ability to manage staffs in foreign market Using the skills to manage foreign subsidiaries. The company gained the capability to serve demand of local market by hiring local managers and provide them training through global knowledge centres. The company has designed flattened value delivery structure complemented by developing relationship with local value chain partners. Procter & Gamble has established knowledge and research centres in nine locations. They did it in order to manufacture products in accordance to local market demand. For example, P&G launched low priced beauty products to Russian market after doing careful market research on consumer purchase behaviour while the same company launched premium priced beauty products such as Olay for European market because European customers have higher purchase parity than Russian people. 7.2 History of Global Expansion of P&G Region Expansion Strategy China and Viet Nam Joint Venture with local companies Eastern Europe Acquisition of local brands such as Betrix, Max Factor, Gillette, Clairol Asia and Latin America Strategic alliances such as co-marketing in order to promote their pharmaceutical product line (Source: Graul, Henricks, Olp and Strohecker, 2006) It is recommended that P&G needs to design their value chain cost effectively for developing countries in order to completion barrier for local players. Focusing exclusively on designing localized supply chain can help them to reduce cost. Using local supplies extensively will not only decrease overall cost of operation but will increase market penetration in developing countries for P&G also. The company should use existing “Connect and develop” model for developing courtiers to increase efficiency of research initiatives (Research Technology Management, 2006, p. 63). References Ahlstrom, D. and Bruton, G. D., 2009. International management: Strategy and culture in the emerging world. Stamford, Connecticut: Cengage Learning. Dyer, D., Dalzell, F. and Olegario, R., 2008. Rising Tide: Lessons from 165 Years of Brand Building at Procter & Gamble. Harvard: Harvard Business Press. Garrett, R., Mickey, S. and Reynolds, J., 2011. Procter and Gamble. [pdf] Available at: [Accessed 31 October 2012]. Global Times., 2011. P&G Recall Criticized. [press release], 18 July, 2011, Available at: [Accessed 31 October 2012]. Graul, L. A., Henricks, S., Olp, S. and Strohecker, C., 2006. 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