Procter and Gamble and Resource-Based View - Case Study Example

Managing Capabilities Table of Contents Part An Introduction to Procter and Gamble and Resource Based View 3 1 Objective 3 2 Introduction 3 3 Capabilities, strategy, competitive advantage RBV 4 1.4 Limitations of the RBV 5 Part 2: Analysis of Resources and Capabilities of P&G 5 2.1 P&G resources 6 2.2 P&G capabilities 6 Part 3: Analysis and evaluation of Competencies, Core competencies, Competitive advantage and Dynamic Capabilities of P&G 7 3.1 Competencies 7 3.2 Core Competencies 8 3.3 Competitive Advantage 8 3.4 Dynamic Capabilities 9 Part 4: Evaluating P&G’s strategic capability using Value Chain Analysis and VRIN 10 4.1 Diagnosing Strategic Capabilities 10 4.2 Value Chain Analysis 10 4.3 VRIN Analysis 12 Part 5: Conclusions and Recommendations 13 5.1 Conclusion and Recommendation 13 APPENDIX 18 Part 1: An Introduction to Procter and Gamble and Resource Based View 1.1 Objective The objective of the study highlights on the Resource based Value analysis of the company Proctor and Gamble. In order to do this the concepts of core competencies, competitive advantage, dynamic capabilities are understood. The report studies the resource and capabilities of Procter and Gamble and analyses the competitive advantage of the company. The strategic evaluation of the company has been done using the VRIN and Value Chain analysis. 1.2 Introduction A business firm is an entity that employs resources, to produce goods and services that are to be sold to the consumers, other firms and government. Strategy provides the firm with direction that helps the firm to manage their business towards an environment that leads the firm to offer a competitive advantage (Kirsch, 2007). The resource based view explains the internal sources responsible for the firm’s sustained competitive advantage (SCA). In order to achieve the SCA the firm needs to control and acquire valuable, rare, inimitable and non sustainable capabilities and resources (Barney, 1991, 1994, 2002) and analyze the core competencies, dynamic capabilities and knowledge based views. Proctor and Gamble (P&G) is renowned American company dealing in consumer products like health care, skin care, hair care, oral care and home care products. The company is operating in more than eighty countries all around the world. Its products are available in more than 180 countries. The company has recorded a sales volume of $82,559 million for the year 2011. The company sells consumer products of about three hundred brands. It gets billion dollar of revenue every year from each category of its product. The company runs twenty eight technical centers globally. P&G is recognized as a twenty four billion US dollar company (PG-Global, 2013). 1.3 Capabilities, strategy, competitive advantage RBV The central concept of resource-based perspective says that the firm’s capabilities and resources forms the basis of competitive advantage if it is backed by the characteristics of heterogeneous allocation among the industry participants, inadequate mobility and fortification from competition (Barney, 1991; Dierickx and Cool, 1989; Lippman and Rumelt, 1982; Peteraf, 1993). Within this line of thinking, firms in respect to their resources and capabilities are heterogeneous because they are bestowed with various levels of capabilities to collect, expand and organize those assets that are essential in the formulation and implementation of value creating strategies. The foundation of competitive advantage is constituted by the firm’s internal quality that is denoted by “resources, invisible assets, skills, capabilities, intellectual capitals, stocks, flows and competencies” (Spanos and Prastacos, 2004, p. 32). At the same time it also refers to the invisible knowledge based phenomenon (Stalk et al., 1992). Moreover capabilities are nurtured over time and are developed by the multifaceted interaction between the employees of the organization (Amit and Schoemaker, 1993). The capabilities that are strategically important provide a synthesis of various elementary capabilities and skills that comprises of activities that are unique and enables the organization to deliver fundamental customer benefits (Hamel, 1994). Hence the discussion suggests that organizational capability is the socially created entities organized in a network of knowledge that carries relation among the individuals and inanimate assets of the firm that aims towards the effectively and efficiently performing a task. Competitive advantage can be defined as asymmetry in the attributes or factors of a firm that allows it to serve better to the customers than any other and hence achieves advanced performance and creates healthier customer values. Some instances of such attributes may be superior location as in case of Walmart who monopolized their location in the rural areas of USA; supremacy of ‘shelf-space’ in retail like supermarket dominance as in case of Pepsi or CocaCola; restricted access to any particular market like the access of De Beers to the diamond market; well recognized brand name like Cartier, know-how of the employees like the expertise of the well trained employees of Lincoln Electrics; efficiently running business organization like just in time manufacturing and inventory system of Toyota. If the firm scores higher than its rival in any of these attributes then greater is the competitive advantage. The framework of competitive advantage integrates the proactive effort of the firm to enhance the generic sources of advantage namely access, ownership and proficiency and undertaking preventive steps from getting it imitated by the rivals. It also integrates the internal working of the organization with the factors influencing the external environment that is resources and capabilities of the firm. These resources and capabilities are incorporated with the market position and the relationship of the firm with the external entities. 1.4 Limitations of the RBV RBV is not sufficiently connected with the market. It is a pensive view and concentrates too much on the firm. There exists problem between the relationship of RBV and Data. It is seen as a tautology. RBV seems to assume too much of static situation where the firm possesses competitive advantage in form of resources. RBV assesses the resources of the firm by comparing it with the competitor’s resource. But the information about the competitor’s resource will not be readily available. Part 2: Analysis of Resources and Capabilities of P&G There is no explicit difference between capabilities and resources. According to Amit and Schoemaker (1993) resources are the assets that are possessed and controlled by the firm whereas capability refers to the capability of the organization to utilize and combine resources, through organizational schedules such that the target is accomplished. The distinction between capabilities and resources is based on the difference of ‘having’ that is what the organization owns and ‘doing’ that is what the organization does (Bogaert et al., 1994). Clearly capabilities refer to the ability of the firm to deploy its current resources and get its activity or task done (Grant, 1991). 2.1 P&G resources Resources are denoted by the tangible or intangible assets that are semi permanent for the organization (Maijoor and Wittleloostuijin, 1996). Tangible assets are denoted by the financial resources and other investment based resources that are used and controlled by the organization. On the other hand intangible resources includes brand name, technological know-how and competencies, effectiveness of organization’s work force, production and services, trade contacts and so on. P&G is rich in both tangible and intangible assets. They have huge product line catering to the demands of various customer segments. They invest heavily in R&D that provides it with better products, technology and marketing strategy. The company has a brand name that differentiates it from other companies. P&G owns a huge number of patents to its name. 2.2 P&G capabilities Capability presupposes that both knowledge and specific task can be accomplished be it technological or functional. Tangible resources like machinery, financial capital and IT can be the tools that promote firm’s ability to act. But capability signifies the active participation of human actors as doers or knowledge subject. The firm can expand ownership by possessing and gaining superior capabilities in managing and accomplishing its business processes (Prahalad and Hamel, 1990). The pilot study initiated by P&G in the year 2001 aimed towards creating $100 million worth capability around the world that can influence the demand of each business unit. This has resulted in relocation of 600 people to low cost locations of P&G. Also the positions of the contractors were consolidated and were taken offshore through outsourcing. This made P&G to benefit hugely. The company was able to build more dynamic operating structure. Resources can be deleted and added more easily. The information technology of the company can be moved up and down more easily. Economies of scale were created. Part 3: Analysis and evaluation of Competencies, Core competencies, Competitive advantage and Dynamic Capabilities of P&G 3.1 Competencies Competencies are the bundle of skills that allows the firm to achieve new resources that evolves within the market or industry in which it competes. Marketing competencies signifies gathering, interpreting and analyzing the market information, ability to handle the relationship with the customers and the suppliers, improvement and delivery of product and services, commercialization of new products and supply chain management (Mohr, Sengupta and Slater, 2009). The success of any multinational company is not just based on what products or services they sell in the foreign nation but it depends large on the distinctive competencies. Distinct competencies signify the unique skills that are responsible for better marketing and production of its goods and services. The global success of Procter and Gamble is largely based on the mass marketing skill of the company for its consumer goods and not due to the huge portfolio of product that it provides. In a very short span of time Proctor and Gamble showed a huge expansion in the international market, which was only possible because of its mass marketing skills. It out market many of its competitor in the nation it operated. Thus global expansion was the way to generate high return from its competencies in marketing (Charles and Jones, 2007). 3.2 Core Competencies When the firm widens its competencies over a certain period of time and polishes and nurtures it as an art to compete against the rivals by using the competencies exceedingly well, then these competencies turn into the core competencies of the firm. Procter and Gamble is exclusively known for its branding and marketing strategies. The company is renowned for its modern marketing strategy and they invest heavily into the promotional activities to create product awareness among the customers. P&G follows the strategy of promoting their old employees into new job designation instead of recruiting external candidates. This leads into long association of the employees with the firm that in turn allows the organization to fulfill its objective. The company heavily invests into research and development in order to develop new products to cater the changing demand of the customers. They adopt state of art technology and hire academicians for the purpose of research and development (Silverstein, 1997). 3.3 Competitive Advantage For a winning firm it is important to supersede its rival on strategically significant vectors. Creating a set of multiple competitive advantages and renewing it from time to time leads to readily achievable, unrelenting superior performance (Ma, 1997). In order to gain competitive advantage and superior performance the firm needs to gain individual competitive advantages one by one. The firm that enjoys competitive advantage is one who constantly accumulates, learns and increases its knowledge base and intellectual capital. Therefore in order to gain competitive advantage the firm should see what resources it has, how they can be utilized optimally and what they can get. In order to achieve competitive advantage over the rivals P&G emphasizes on the integration of modern technology with the development facilities and state of art research. In order to achieve strategic decision of expanding their business in the foreign market, P&G have integrated ‘market research intelligence process’ (Kotler, 2009, p. 253). The business of the company has grown extensively and achieved extraordinary growth in terms of sales from its business operations in the international market. P&G has also implemented electronic document management system that helps in monitoring the activities related to global value chain. They have also implemented Enterprise Resource Planning (ERP). The company earns about $1 million from its day to day operations due to the successful adaptation of OTC medication. P&G has integrated ‘IT Integrator Cardinal Solution’ that helps in gaining business excellence (Raine and Cegielski, 2010, p. 155). 3.4 Dynamic Capabilities Dynamic capability refers to the ability of the managers in rising and leveraging the existing capabilities, assets and core competencies of the firm in order to build up sustained competitive advantage. Thus dynamic capabilities involve the capability to learn, utilize knowledge and innovate (Haberberg and Rieple, 2007). The partnership between P&G and Clorox can be cited as an example of dynamic capability. Both the companies were rivals in water purification and cleaning products. The researcher of P&G invented a wrap that seals tightly only in the places where it is pressed but did not have the plastic wrap category. The managers of P&G negotiated and entered into a partnership with Clorox and marketed the wraps with the name of Glad brand and Glad Press & Seals that became the most popular product of the company. Though the two brands competed with each other quite fiercely but they co-operated together happily through this collaboration (Daft, Kendrick and Vershinina, 2010). Part 4: Evaluating P&G’s strategic capability using Value Chain Analysis and VRIN 4.1 Diagnosing Strategic Capabilities For understanding the strategic capabilities of Procter and Gamble, VRIN and Value Chain Analysis are done. Value Chain Analysis theory is used to define a framework that highlights on the interface between various functions that specifically affects the values of the customer (Khosrow-Pour, 2006). This analysis helps in identifying the activities that are undertaken by the business and the one that can be outsourced and hence gives a clear understanding about the competitive advantage of the company. In this context the business activities of P&G can be grouped under two categories primary and secondary. On the other hand VRIN Analysis helps in analyzing the internal strength of an organization by studying the internal resources. (See Table 1 in Appendix) 4.2 Value Chain Analysis Primary activity: The activities that are directly concerned with the delivering and creating of product are defined as primary activities. Inbound Logistics: In order to reduce the cost and increase efficiency P&G follows a localized supply of raw material. The company uses compliance labeling by using wireless technologies and bar coding for their suppliers in order to reduce cost and improve efficiency. P&G has entered into strategic partnership with Cisco in order to employ wireless technology for inbound logistics. Operations: Since 1999 P&G has adopted restructuring program that minimizes cost in sales and production. This has lead to a decrease in the product service cost of the business and has increased the product supply services and sales per employee. They have a very strong and good partnership with large and renowned retailers. It has a distribution operation in more than 180 countries. They have incorporated latest technologies like RFID for sustaining operation like large scale manufacturing in about more than eighty countries. They also use “Value Added Networks for B2B Customers” (Graul, et al, 2006, p. 46), which links the retailers, transportation delivery services and various financial institutions. In order to provide value to the customers P&G has incorporated business development structure that includes various departments like finance, marketing, logistics, Information Technology and sales, which looks towards working with trade customers. Outbound Logistics: P&G has extended contract with Excel to provide special type of logistic services like warehousing, picking up and transportation to its distribution centers like China, Canada, Argentina, Morocco, France, Mexico and United States. P&G has developed specialized software for supporting truck filling and case picking and now they have entered into a joint venture with Moore and Associates to sell the same software to others. Sales and Marketing: It is awarded with the first rank for sales and marketing by The Times Top 100 Graduate Employers UK (P&G, 2012). It has superior quality of sales and marketing techniques. They fall under the best category of consumer marketing and management. To create an impact on the influential teens, P&G focuses more on the word of mouth program. Customer Service: P&G is regarded as an expert in IT strategy that impacts positively on the customer and social service. They recognized to provide the customers with helpful and vital shoppers and consumer information. They provide high quality and low cost business at their locations like United Kingdom, Costa Rica and Philippines (Graul, et al, 2006). Secondary Activities Infrastructure: the four foundation pillars of the firm are Global Business Services, Global Business Units, Market Development Organizations and Corporate Functions. This four division works together in developing business for P&G. They have got additional four global divisions like P&G health care, household care, beauty care and Gillette. They serve the seven segments of the market through their wide range of products that includes Healthcare, Baby care, Beauty care, Fabric care, Household care, Snacks, Blades and razors and batteries. Human Resource Management: P&G has a diverse team of leaders where half of the presidents are not from United States. In the position of GM and VP the number of women and minorities from US has doubled the numbers. P&G provides their employees with various programs like stock purchase plan, relocation program and profit sharing program that helps in the motivation of the employees. P&G has strong recruitment program and provides extensive training to their employees that helps in sharing of knowledge. They have strong reimbursement programs. Research and development: Through research and development the company is able to develop new technologies and obtain patents. In the year 2012 they incurred an expense of about $2 billion. They have patents and technology that amounts to Gross carrying amount of about $3,164. Procurement: P&G has leveraged the buying power by going for global procurement and has developed software as result of supply chain management (Graul, et al, 2006). 4.3 VRIN Analysis Core Competencies Innovation: The innovation done by P&G in developing the four areas of its business is rare and valuable. However imitation of these innovations is possible but since the volume is very high so it becomes difficult for the competitors to imitate. They can be substituted but it requires implementation of heavy Research and Development. Patents: The patents received by P&G are valuable and rare and potential of imitation and substitution are high but not probable. In order to substitute the competitors requires heavy investment and focus. Brand Equity: The recognition, leadership and trust that P&G has is rare and valuable. Imitation is possible but the leadership position that P&G currently holds makes it difficult to overtake. Substitution of brand name is not possible in non commoditized market but possible in other. Resource and Capabilities Research and development: P&G has established 20 hubs for technological development and has invested heavily into this section. This is valuable and rare. The competitors can imitate and substitute them but it requires a high entry cost and replacement of Intellectual Property is difficult. Global Scope: P&G is at an advantageous position due to its global operations. They have quite a large sales and distribution channel that is stretched all over the world. It is valuable and rare but imitation and substitution though possible but not probable since it incurs high replication cost. Economies of Scale: They have large scale manufacturing unit spread all over world that has extensive operation in the areas of finance, marketing, logistics, R&D and technology. It is valuable and rare but imitation and substitution though possible but not probable since it incurs high replication cost (Graul, et al, 2006). Part 5: Conclusions and Recommendations 5.1 Conclusion and Recommendation P&G needs to design a more cost effective value chain system for the developing countries in order to create barrier for the local players. By designing localized supply chain the company can effectively reduce cost. The company will be able to penetrate the market more easily and it will also lead to the reduction in cost. To increase the efficiency of research initiatives the company needs to use their existing models more effectively. REFERENCES Amit, R. and Schoemaker, P., 1993. Strategic asset and organizational rent. Strategic Management Journal. 14, pp. 33-46. Barney, J. B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management. 17, pp. 99-120. Barney, J. B. 1994. 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Competing on capabilities: The rules of corporate strategy. Harvard Business Review. 70, pp. 57-69. Spanos, Y.E. and Prastacos, G., 2004. Understanding organizational capabilities: towards a conceptual framework. Journal of Knowledge Management. 8(3), pp. 31-43. APPENDIX Table 1: VRIN Analysis of P&G Resources Valuable Rare Inimitable Non substitutable Sustainable Partially Sustainable Temporary Core Competencies Innovation Yes Yes Possible Possible No Yes No Patents Yes Yes Possible, not probable Possible, not probable Yes No No Brand Equity Yes Yes Possible Possible, not probable No Yes No Resources and Capabilities Research and Development Yes Yes Possible Difficult Yes No No Global Scope Yes Yes Possible Possible No Yes No Economies of Scale Yes Yes Possible, not probable Possible, not probable Yes No No Read More