Transnational Corporation: Procter & Gamble - Case Study Example

___________ ____________ ____November 2007 Transnational Corporation -A profiling of Procter & Gamble (P&G) Introduction Procter & Gamble (P&G) is one the leading FMCG companies of the world that has wide acceptability for its goods and has an international market. It is in fact one of the oldest of the corporations to be classified as a transnational corporation (TNC). Like many of it competitors P&G has faced recession and reemergence of the FMCG markets in the several decades that it has been in existence. What is important to note is that the company has survived with a growth and expansionary strategy with profits. Riding the wave of globalization wherein the same very markets-which were hitherto carefully developed and nurtured with foreign capital deployment permissions from the foreign governments-are now opening up with standing foreign government permissions to deploy and sell in such foreign markets ;this has implied that in most industries there has been a move towards capturing and selling in foreign markets. P&G is no exception .It has launched a systematic expansion strategy in such foreign markets to acquire a truly international hue. This paper addresses the issue of globalization of P&G and explores the details of the strategy adopted by P&G within the framework of an examination of strengths, weaknesses, opportunities and threats. A Primer on the Company P&G is a US company and has its main office in Cincinnati; USA.P&G is one of the largest manufacturers of fast moving consumer goods (FMCG) in the world. P&G enjoys a noticeable proportion of market share in numerous product categories: beauty care (Pantene, Olay, Cover Girl), paper goods (Bounty, Charmin, Pampers), food and beverages (Folgers, Pringles, Duncan Hines), laundry and cleaning (Tide, Cascade, Dawn), and health care (Crest, Scope, Metamucil). A literature piece in the Fortune Europe edition (April 17th, 2006) reported that Procter & Gamble ( ranked number 24 in the Fortune 500 list) had as many as 22 brands in its stable with each exceeding 1$ billion in sales. P&G had acquired 5 of these brands during the course of its $61 billion acquisition of Gillette (which was acknowledged as the largest merger of the year 2005). The strength and size of P&G was conclusively certified by ACNielsen, which surveyed and found that 99% of U.S. households use one or the other P&G product. P& G completed the acquisition of The Gillette Company for approximately $53.43 billion on October 1, 2005. At that point of time Gillette was the leading consumer products company that had $10.48 billion of sales in its most recent pre-acquisition year ended December 31, 2004. (Annual Report 2006). Theory behind the strategy of Globalization Dunning (1981) posits that three conditions need be met concurrently in order to initiate an FDI decision. The investing organization should derive both an ownership (O) advantage and an internalization (I) advantage, as the foreign market presents a clearly calculated and reckoned locational (L) advantage. P&G has been carefully vetting all three in its strategy for globalization. Globalization has brought about intense competition for global markets amongst the major multinational companies. These companies have been looking outwards to reorient their organizational structures and strategies to capture the global markets by positioning their products strategically. A recent study of the US and European companies revealed that 75 percent were taking up the above strategic reorganization in order to stay competitive and staying competitive was considered the single most important external issue on their agenda. Past experiences have shown that poor planning further embattled by rudimentary understanding of the cultural aspects of the global market places had ruined the huge marketing campaigns of even the multinational companies. Coke CEO stated," Coke has had to come to terms with a conflicting reality. In many parts of the world, consumers have become pickier, more penny wise, or a little more nationalistic, and they are spending more of their money on local drinks whose flavors are not part of the Coca-Cola line up. (Rance, 2000). In 21st century international marketeer should seek solution to choice problem between standardization and adaptation. (Ghemawat, 2003). A vital challenge for the international marketing strategy of a firm is the need to understand the different milieus the company needs to operate in. That is comprehending different cultural, economic, and political environments is necessary for the success of a company. Culture is one of the most challenging and devious elements of the international marketplace. These challenges encouraged numerous researchers to take up international marketing studies concerning behavioral differences in consumers across nations (e.g. Lynn, Zinkhan et al. 1993; Nakata and Sivakumar 1996: Brass 1991; McCarty and Hattwick 1991; Hafstrom, Chae et al. 1992; Steenkamp, Hofstede et al. 1999; Chu, Spires et al. 1999; Husted 2000).P& G has also been adopting a strategic globalization stance and has been a forerunner in this race as explained below. Globalization of P&G Since 1990s, when globalization concepts caught on finally in the international trade terminology, and riding on the unprecedented innovative growth in communications and information technology the FDIs have shown an increasing trend. In fact he international capital flows have been largely comprised of flows of private capital. For instance, in 1990 44% of all international capital flows were private, by 1996 85% were private, and FDI was the largest single type of flow. (IFC, 1997) Foreign direct investment has even left behind growth in international trade in that the FDI grew at an average rate of 13 percent per year from 1980-97, whereas exports registered an annual growth rate of just about 7%. (Mallampally & Sauvant, 1999) P& G is patently a multinational corporation (MNC) with substantial direct investment in foreign markets which is in addition to its normal lines of exports.P& G is also involved in the active management of this portfolio of foreign investments without being just a passive financial investor of funds. Through its various business unit structures it has adopted an integrated management of its operations. On July 1, 2006, nine months after closing the (Gillette) acquisition, P&G completed the largest wave of business systems integration so far. P&G integrated systems in 26 countries, spanning five geographic regions, representing about 20% of sales. This brought the number of integrated countries to 31; P&G is now taking orders, shipping products, and receiving payments as a single company in these countries (Annual Report, 2006).A unique organizational structure comprised in independent but organically controlled clutch of international companies has made this internationalization possible at the P&G." P&G is the only consumer products company with global business unit profit centers, a global Market Development Organization, and global shared business services, all supported by innovative corporate functions. P&G is essentially running a number of highly focused companies that share common go-to-market operations and business services. P&G made it possible for each business unit to focus on its individual consumers, customers and competitors while capturing all the capability, knowledge and scale of a $70 billion global company. (Annual Report, 2006) A SWOT Analysis for P&G Strengths The main advantage of focused orientation of business units towards consumers, customers and competitors in their individual categories is reflected in the growth of P&G's Skin Care, Oral Care, Feminine Care, and Home Care businesses." These four businesses have delivered 11% average sales growth over the past six years, adding nearly $1 billion per year in sales since the beginning of the decade".(Annual Report,2006)The main strength of P&G appears to be its unique organizational structure put in place after the acquisition of Gillette. This structure is organized around three types of organizational units." Global Business Units (GBUs) focus solely on consumers, brands and competitors around the world. They are responsible for the innovation pipeline, profitability and shareholder returns from their businesses; Market Development Organizations (MDOs) are charged with knowing consumers and retailers in each market where P&G competes and integrating the innovations flowing from the GBUs into business plans that work in each country and Global Business Services (GBS) utilizes P&G talent and expert partners to provide best-in-class business support services at the lowest possible costs.(Annual report,2006). P&G has made substantial leeway in making market research and products R&D as a global effort to comprehend consumer behaviors and demand. The R& D function at P&G is also inordinately strong and it utilizes the consumer research outputs to the hilt in developing successful products."P&G interacts with more than four million consumers a year in nearly 60 countries. P&G conducts more than 10,000 research studies each year, and invests more than $200 million per year in consumer and market understanding. P&G research spans more than 25 product categories, providing a more complete understanding of consumers than companies focused more narrowly on a few categories. P&G sees innovation opportunities that others fail to. (Annual Report, 2006) Weakness Complex product lines and pricing cause many problems for retailers who have to work hard with rebates and discounts to push sales.Ex P&G CEO Durk Jager had once remarked: "We created a whole plethora of allowances and deals and conditions which were just simply confusing and added cost to the system." Starting late 1990s, P&G took various measures to rationalize the above problems. However given a heavy products menu its complications simply would not go. The company is coming to terms with these problems since then by streamlining many of its marketing practices and pruning costs through the new organizational structure. P&G has also achieved a considerable success in reducing complexity from its product line essentially through standardization of product formulas and packages worldwide and floating marginal brands. The main weakness of P&G was observed first in 1990s when a survey conducted by the consulting firm, Kurt Salmon Associates Inc, had startlingly found that nearly one fourth of P&G's products recorded sales of less than one unit a month in a standard supermarket .As against this, its other 7.6% of the products accounted for 84.5% of sales. Even as of date the revenue generated from product lines remains highly skewed. Its 22 star brands have clocked $1 billion and more of sales but quite a few of the others lag behind severely. These remaining products go almost unnoticed by consumers. Opportunities P& G describes it growth strategy in following words, "P&G's growth strategies are clear and robust. - Continue to grow P&G's core businesses: Leading brands, big growing markets, and winning retail customers, leveraging P&G's core strengths and core technologies. - Develop faster-growing, higher-margin, more structurally attractive businesses in which P&G has significant potential to achieve global leadership. - Grow disproportionately in developing markets to serve more low-income consumers". .(Annual report,2006). Most commonly used word n business circles is globalization.However, only a few businesses have been able to achieve truly global dimensions. However act local and think local is also becoming a popular byword in global markets. The major global markets are represented by developing countries particularly Asian and Latin American countries.China,India, Mexico, Brazil and Argentina present the juiciest chunks of global markets not only for P&G but also for most global marketeers. P& G has already made a concerted attempt at penetration of the developing market; the business results speak for themselves. P&G found the developing market profit margins to be comparable to those derived by it from the developed markets. P&G sales in developing market rose at an astounding rate of 16% per year. Nearly one-third of total-company sales growth from developing markets." In the categories in which P&G competes, developing countries represented a $200 billion market and it was expected to approach $250 billion by 2010. P&G currently competes in only about 10 of P&G's top 25 categories in most developing countries. There is more than $20 billion of growth opportunity over the next several years through expansion of P&G's category presence and increased share growth".(Annual Report,2006)This opportunity is unprecedented given the wide USP of P&G inherent in its other popular brands in such markets. A concerted internal marketing plan which has at its core carefully researched localization of products can help P&G skim these markets. Threats A major threat for P&G comes from its cost of operations which includes in a major way the cost of funding its operations and the exchange risk cost in foreign markets.P&G describes this threat in following words," Our costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, cost of labor, foreign exchange and interest rates. Therefore, our success is dependent, in part, on our continued ability to manage these fluctuations through pricing actions, cost savings projects, sourcing decisions and certain hedging transactions. We also must manage our debt and currency exposure, especially in volatile countries. We need to maintain key manufacturing and supply arrangements, including sole supplier and sole manufacturing plant arrangements. We must implement, achieve and sustain cost improvement plans, including our outsourcing projects and those related to general overhead and work force rationalization." (Annual report, 2006). However it was a large and a growing constituency of competitors that made fro the strongest and the largest perceived threat. P&G competes not only competes against some of the best run multinational companies in the world, who have great brands and strong marketing capabilities but also faces a very strong competition from domestic manufacturers -both small and large scale- in domestic markets of developing countries. The latter category is utilizing their understanding of the local culture of domestic consumers in putting up products that have larger appeal.P&G must make more initiatives in locating its R&D facilities in developing markets so that localization of its products is prompt to competitor launches and innovation. In addition, many retailers are creating retailer brands and product lines that compete more directly with manufacturers' brands. Thus P& G has to be reoriented to be more local and low-cost in developing countries. Conclusion This global orientation was essentially focused to emerging markets in developing world with aggressive market entry strategies. Adler(1991,7-8) and Herbert(1984,259-71) list out four stages of international evolution of a multinational organization.P&G has taken up organization 2005 with a view to reorient its strategic orientation from multinational to global; redefining its stage of development from that of explosion to global; moving from an organizational structure which was essentially worldwide geographic and product oriented to a transnational and matrix type of organization structure and reassessing its market potential from being very large and multinational to the whole world. The mechanism deployed for this institutional adaptation appears to be mimetic with main reasons of seeking adaptability being the uncertainty faced in growth and earnings; and this uncertainty is expected to be overcome by events involving innovation and visibility and the entire adaptation is sought to have social and cultural acceptance with in the organization.(Scott,1995) References Adler, Nancy J. (1991). 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