How Did Procter&Gamble Globalize - Essay Example

HOW DID PROCTER & GAMBLE GLOBALIZE SCHOOL How did Procter & Gamble Globalize When and Where" Procter & Gamble have been able to achieve sustainable international growth over the last decade by leveraging company capabilities in branding, innovation, and superior organization (P&G Annual Report 2005). Established in 1837 in USA, the company first initiated international manufacturing in 1915 in Canada (P&G History). During 1940s P&G's international strategy was to export its products to build demand locally and then establish local sales companies or productions sites. P&G employed overseas the same policies that were successful in the United States. As a result, it took P&G 15 years to launch Pampers in 70 countries. In the early 1990s the company changed its marketing strategy, by introducing products worldwide early in their product development. Today P&G manages a world roll-out within 18 months (Ball et al, 2005, p. 479). Since 1980 P&G has increased four times the number of consumers the company serves to five million people around the world. P&G today has operations in more than 80 countries employing 110,000 people; its products are sold in over 140 countries, transforming P&G into one of the biggest consumer goods companies (Ball et al, 2005, p. 9). With global headquarters in Cincinnati, Ohio, USA, P&G has manufacturing facilities in 114 plants in 42 countries worldwide (Graph 1) (Sustainability Report 2004). It manufactures and markets nearly 300 products and is one of the world's most successful brand creation companies (Graph 5). P&G has one of the strongest portfolios of quality brands, including Pampers, Tide, Ariel, Always, Whisper and many others (Datamonitor, 2004). Most of the company's products are produced and assembled by P&G-owned facilities; approximately 10 percent of products are outsourced to third parties (Graph 2). P&G purchase annually more than $25 billion materials and services to manufacture and market their products. In company-owned plants P&G purchases the majority of raw materials within the regions where products are manufactured (P&G Sustainability Report, 2004). P&G's globalization strategy is straightforward. The company is focused on its core businesses and leading brands, countries and customers. The global company structure has established regional organizations for seven world regions - North America; Latin America; Western Europe; China; ASEAN, Australasia and India; North Asia; and Central and Eastern Europe, Middle East and Africa (Graph 3) (P&G Sustainability Report, 2004). The company's majority of sales come from the mature markets of USA and Western Europe (Graph 4, 6). A balanced future growth has drawn investment in developing countries and low-income markets that represent majority of world population (P&G Annual Report 2005). As a result, sales in those segments are growing, and China has become P&G's sixth largest market (Ball et al, 2005, p. 479). 2. "Why" Market access Procter & Gamble's globalization strategy is focused on customer similarities worldwide. In this aspect market access has been the major driver for P&G's global expansion, whereby relatively standardized products have been produced in similar manufacturing facilities around the world and then sold under the same brand names globally (Ball et al, 2005, p. 9). This "brand internationalization" (Enke et al, n.d.) has increased P&G's competitiveness. Sustained further market expansion requires P&G to look to other consumer segments. P&G's sales have been focused on premium-priced branded products in relatively affluent Western consumers. Still, according to P&G CEO A G Lafley the company has "a tremendous opportunity to serve lower income and value-conscious consumers around the world" (cited by Mitchell, 2005). The rationale behind this strategy is simple. Mature markets, where P&G is present face intense competition and slow growth in demand. This impedes organic growth and forces P&G to look for alternative markets, like the developing countries in Asia the lower income groups in Western countries. Efficiency Competition in FMCG sector during the last decade has been intense, with increasing perceived sameness of brands (Enke et al, n.d.). This has put great pressure on costs and value chain efficiency. Beyond global presence, P&G's growth in the past years has been bound to efficiency considerations. P&G has found it increasingly tough to sustain organic growth, especially where markets are mature. Alternatively, acquisitions and alliances have been a fast way to boost sales and profits (Dyer et al, 2004). P&G have been challenged to develop a sophisticated approach and carefully to select partners for alliances and acquisitions. An unsuccessful example is P&G's joint venture with Coca-Cola in 2001. The idea was that Coke would benefit from P&G's expertise in nutrition to develop new beverages, whereas P&G's sales would be boosted by Coca Cola's international distribution. Still, the joint-venture was not a natural fit, because it did not improve efficiency for both parties, especially for Coke. As a result, in July 2001 the alliance was broken (Dyer et al, 2004). Unlike the case with Coca Cola, P&G's acquisition of Gillette in 2005 is complementary to the P&G business. Since the company's strength is in women's beauty and personal care, Gillette's dominance in men's grooming category is expected to improve global procurement and to lead to revenue and cost synergies of more than $14 billion (Alexander, 2005). Similarly, Wella's acquisition in 2003 provides potential for significant synergies with P&G's existing hair care business worldwide (P&G Sustainability Report 2004). 3. "How" Procter & Gamble have pursued a combination of growth strategies, including acquisitions, joint ventures, FDI, and partnerships. Acquisitions for P&G have been a successful way to gain market share and production facilities where the company has none. This is valid not only for international regional expansion, but also for new product segments and brand acquisitions. There are many examples of purchases of local manufacturing facilities, like the Philippine Manufacturing Company in 1935, which established P&G's operations in the Far East; or the first entrance in England in 1930, when P&G established their first overseas subsidiary through the purchase of Thomas Hedley & Sons Co Ltd (P&G History). The most recent attempts for quick market share growth through acquisitions are the deals with Wella in 2003, and of Gillette end of 2005. September 2003 P&G acquired 79.2% of Wella total shares, which contributed about $3.3 billion in sales to P&G's beauty business (Datamonitor, 2004). Similarly, P&G's recent acquisition of Gillette has aimed to achieve cost and growth synergies. Because major acquisitions require compliance with anti-monopolistic laws and regulations, the two companies have had to divest some brands with overlapping businesses, in order to avoid breach of regulations (PG Investor, 2005). Another approach for expansion where local markets limit direct ownership of foreign investments is joint ventures. In 1988 P&G announced a joint venture in China, which was the company's first entrance in the largest consumer market worldwide (P&G History). The Chinese and Indian markets were characterized with tough restrictions for foreign investors; multinational companies had and still have to comply with strict governmental regulations that hinder investment opportunities. Another country that was entered through a joint venture was Vietnam in 1995 after US lifted sanctions against the country (P&G History). Further on, the company was engaged in foreign direct investments in a number of countries. The first manufacturing facility outside US was through FDI investment, whereby the company built a manufacturing facility in Canada in 1915 (P&G History). Production in France was initiated by leasing a small plant in Marseilles in 1954, operations in Germany started in a similar manner 6 years later (P&G History). Partnerships with retailers have been another source for fast international expansion. What is more, joint initiatives such as retail research have improved consumer experience and increased sales volumes (P&G Western Europe). In 1985 P&G began a retailer-supplier partnership with Wal-Mart that involved a "vendor managed inventory (VMI) system" (Solis, 2001). This cooperation dramatically improved P&G's on-time deliveries to Wal-Mart and other retailers and increased inventory turnovers (Solis, 2001); today Wal-Mart accounts for nearly 20% of P&G sales worldwide (Datamonitor, 2004). In general, joint ventures are the preferred method where market uncertainty is high, or where competition is low and companies are expected to benefit from mutual cooperation. Acquisitions are preferable where resources are redundant and where competition is intense so that P&G have full control over the undertaking (Dyer et al, 2004, p.114). Interestingly, P&G's worldwide expansion through joint ventures or acquisitions alone is not the major driver for the company's leadership position in many product categories over the last 10 years. P&G's global position has been achieved through a combination of unique organizational structure and know-how in R&D and new products introduction. Organizational structure P&G restructured its global operations in 1999, in order to create a structure that would allow the company to "think globally and act locally" (Hitt et al, 2003, p. 350). P&G formed a version of the cooperative multidivisional structure, featuring five global business units (GBUs), baby, feminine and family care, fabric and home care, food and beverage, health and beauty care), seven market development organizations (MDOs) (Graph 3), each one around a world region, and a Global Business Services (GBS) division based in three high quality low-cost hubs. Global consistency is achieved through the five business units. GBUs are able to develop clear long-term growth strategies for P&G brands; they identify common consumer needs and quickly expand product innovations to different markets (P&G Western Europe). MDOs ensure that P&G fully capitalize on local opportunities. They know local markets and market structures, consumer characteristics, retailers, supply chains and governmental specifics (P&G Western Europe). Finally, Global Business Services (GBS), located in San Jose, Costa Rica, Manila, Philippines, and Newcastle, UK (Annual Report 2005) support operations by promoting "best practices" in terms of company operations, such as finance, payroll, marketing or production (Hitt et al, p. 351). R&D and product development Central to P&G's global expansion strategy is the company's capability to develop and introduce new products within short time limits. Former CEO Edwin Artzt changed the way P&G launched new products. Because new product development represents a key source for competitive advantage, P&G began to introduce their new products on a worldwide basis early in their development, rather than postpone global launch until enough marketing experience is accumulated (Ball et al, 2005, p. 450). Company R&D follows a "connect and develop strategy" that links P&G with external innovation partners around the globe (Huston et al, 2006). It is a consumer-driven strategy, and buyer preferences are at the bottom of innovations. Annually the company spends $2 billion on focused R&D in 150 science areas. The company manages its "connect and develop strategy" through a network of partnerships in 6 hubs in China, India, Japan, Western Europe, Latin America and the USA. Each hub is focused on finding products and technologies that are more specific to local regions. Suppliers are another major source of innovation, active work with suppliers has lead to 30% increase in innovation projects jointly staffed by P&G's and suppliers' researchers. Finally, open networks with external R&D organizations like InnoCentive, NineSigma and others that help P&G find and develop new ideas. Beyond search for new ideas, this R&D strategy has required an internal cultural change (Huston et al, 2006). On the overall, P&G global strategy has proven successful in terms of sales and growth figures. P&G results are exceeding expectations and achieving above forecast results. P&G's organic growth for 2005 is 8% in 16 top countries (Graph 7); net sales have risen to $56.7 billion by 13 billion within 3 years alone (Graph 8) (P&G Annual Report 2005). 4. Choices for market expansion Managers are constantly under pressure to boost sales, improve profits and expand market shares. Globalization of operations requires careful revision of all elements of corporate business processes from manufacturing to value chain management, marketing and post-sales services. The choice of global manufacturing facilities is tightly bound to local business environments. Although not specifically announced in the resources available, companies like P&G prefer low-cost regions where labor is cheap and investment conditions promise stability and business sustainability. P&G's choice for local manufacturing is based on seven international regions, where business units are responsible for local product adaptations. As previously discussed, these manufacturing facilities source locally, which does not improve value chain efficiency, due to unrealized economies of scale. Alternatively, P&G are obviously pursuing efficiency using expansion strategy through joint ventures and acquisitions. Expansion strategy through organic growth is visible in P&G's focus on markets and segments, where the company has established presence. As a result of P&G's focus on mature economies, emerging markets today represent only 35% of total sales and account for a smaller market share than P&G's major competitor Unilever (Datamonitor, 2004). Still, the saturated Western markets allow for limited organic growth and this is inconsistent with P&G's sustained growth strategy (Datamonitor, 2004). The developing markets in Asia and Latin Americas have shown attractive growth in consumption and purchasing power over the past years, and P&G can only benefit from revising its regional strategies and addressing markets that can sustain long-term success. The change in the target market is self-explanatory. From two billion affluent consumers the company is now heading to six billion consumers in developing countries (Mitchell, 2005), with long-term implications on sales and profits. 5. Conclusion Today Procter & Gamble is the global leader in four core categories - fabric and home care, beauty care, baby and family care, health care (Datamonitor, 2004) and is one of the leading retail manufacturers of mass consumer products. A striking fact is that through the years the company has sustained the average number of marketed brands to about 300. Given the rate of product development and acquisitions, such a stable number suggests a continuous divestment process in brands and products that are less attractive or profitable to the company. In general, this process requires a constant reassessment of present brands profitability and is a source of positive cash flow that can be used for investment purposes. P&G's expansion efforts have turned extremely successful after the company underwent strategic change in the early 1990s, when fast new product introduction became part of P&G's core competencies. Today, the company's leading global position is sustained by internationally renowned brands, strong innovation, fast market access and large scale of operations (P&G Annual Report 2005, p. 3). The company is seeking partnerships and acquisitions in market segments where it has not attained strong position. Although not secured from failures, this is the fastest way to gain market share and a promising approach to obtain economies of scale, synergies and efficiency. The outlook looks positive for P&G, with a balanced brand portfolio and investments in developing markets. References 1. Alexander A. (2005) "P&G, Gillette Deal Reshapes PBC" Drug Store News February 14 2005. Vol. 2 p. 6 Retrieved February 16 2006 from: http://search.epnet.com/login.aspxdirect=true&db=bch&an=16138233 2. Ball, McCulloch, Frantz, Geringer, Minor (2005) "The Nature of International Business. The Rapid Change of International Business" The McGraw-Hill Companies, pp. 2-32 3. Ball, McCulloch, Frantz, Geringer, Minor (2005) "The Nature of International Business. International Trade and Foreign Direct Investments" The McGraw-Hill Companies, pp. 34-71 4. Ball, McCulloch, Frantz, Geringer, Minor (2005) "The Organizational Environment. Export and Import Practices." The McGraw-Hill Companies, pp. 448-477 5. Ball, McCulloch, Frantz, Geringer, Minor (2005) "The Organizational Environment. Marketing Internationally" The McGraw-Hill Companies, pp. 479-507 6. Ball, McCulloch, Frantz, Geringer, Minor (2005) "The Organizational Environment. Organizational Design and Control" The McGraw-Hill Companies, pp. 508-533 7. Enke M., Geigenmueller A. [n.d.] "Truly Global The Relevance of Regional Brands in an Enlarged European Market" Technical University Bergakademie Freiberg. Paper 228 Retrieved February 16 2006 from http://www.handels.gu.se/ifsam/pdf/Index%20paper%20no%20and%20title1.pdf 8. Forbes (2000) "The Largest 100 U.S. Multinationals" July 24 2000 pp. 335-36 9. Datamonitor (2005) "Procter and Gamble. Company Profile" August 2005. Retrieved February 17 2006 from: http://search.epnet.com/login.aspxdirect=true&db=bch&an=19559310 10. Dyer J., Kale P., Singh H. (2004) "When to Ally and When to Acquire" Top-Line Growth July-August 2004. Harvard Business Review Vol. 82 Issue 7/8 pp. 108-115. Retrieved February 16 2006 from: http://search.epnet.com/login.aspxdirect=true&db=bch&an=13621041 11. Hitt, Ireland and Hoskisson (2003) Organizational Structure and Controls Chapter 11 Strategic Management: Competitiveness and Globalization. pp. 338-371 12. Huston L., Sakkab N. (2006) "Connect and Develop. Inside Procter & Gamble's New Model for Innovation" March 2006 Volume 84 Issue 3 Harvard Business Review pp. 58-66 Retrieved February 17 2006 from: http://search.epnet.com/login.aspxdirect=true&db=bch&an=19707485 13. Mitchell A. (2005) "Two-Way Traffic" Brand Strategy February 2005 Issue 189 Centaur Communications p. 9 Retrieved February 16 2006 from: http://search.epnet.com/login.aspxdirect=true&db=bch&an=15989090 14. P&G Western Europe (2004) "Focus on P&G in Western Europe 2004-2005" Retrieved February 16 2006 from: http://www.eu.pg.com/downloads/FocusonPGinWE.pdf 15. P&G Investor (2005) "FTC Clearance Received" Retrieved February 16 2006 from http://www.pginvestor.com/phoenix.zhtmlc=104574&p=irol-newsArticleMain&ID=762873&highlight= 16. P&G (2004) "Sustainability Report 2004" Retrieved February 16 2006 from: http://www.pg.com/content/pdf/01_about_pg/corporate_citizenship/sustainability/reports/sustainability_report_2004.pdf 17. P&G (2005) "Annual Report 2005" Retrieved February 16 2006 from: http://www.pg.com/investors/annualreports.jhtml 18. Solis A. (2001) "Some Success Stories in Supply Chain Management" The Criterion May 2001 Newsletter of the El Paso affiliate of the National Association of Purchasing Management. Retrieved February 16 2006 from www.utminers.utep.edu/.../Criterion%20Articles/Academic%20Advisor's%20Corner%20may%202001.doc Appendixes 1. Graph 1: Plant Locations (P&G Sustainability Report, 2004, p.9) Plant Name City Country GBU Owner Akashi Akashi Japan Baby Care Albany Albany United States Family Care Alexandria Pineville United States Fabric & Home Care Amiens Amiens France Fabric & Home Care Anaheim Anaheim United States Snacks & Beverages Anchieta Anchieta Brazil Fabric & Home Care Apizaco Apizaco Mexico Family Care Atlanta Atlanta United States Snacks & Beverages Auburn Auburn United States Feminine Care Augusta Augusta United States Fabric & Home Care Aurora Aurora United States Health Care Avenel Avenel United States Fabric & Home Care Bangkok Bangkok Thailand Beauty Care Barquisimeto Barquisimeto Venezuela Fabric & Home Care Beijing Beijing China Fabric & Home Care Bekasi Jakarta Indonesia Health Care Belleville Belleville Canada Feminine Care Binh Duong Binh Duong Vietnam Fabric & Home Care Blois Blois France Beauty Care Borispol Borispol Ukraine Feminine Care Brockville Brockville Canada Fabric & Home Care Budapest Csomor Hungary Feminine Care Cabuyao Cabuyao Philippines Fabric & Home Care Cairo Cairo Egypt Fabric & Home Care Campochiaro Campochiaro Italy Fabric & Home Care Cape Girardeau Cape Girardeau United States Baby Care Casablanca Casablanca Morocco Fabric & Home Care Cayey Cayey Puerto Rico Beauty Care Chengdu Chengdu China Fabric & Home Care Chochiwon Chochiwon Korea Family Care Chonan Chonan Korea Feminine Care Cincinnati Cincinnati United States Fabric & Home Care Coevorden Coevorden Netherlands Health Care Crailsheim Crailsheim Germany Feminine Care Dammam Dammam Saudi Arabia Fabric & Home Care Dover Dover United States Baby Care Escuintla Escuintla Guatemala Fabric & Home Care Euskirchen Euskirchen Germany Baby Care Gattatico Gattatico Italy Fabric & Home Care Gebze Gebze Turkey Feminine Care Goa Goa India Health Care Green Bay Green Bay United States Family Care Greensboro Greensboro United States Health Care Gross-Gerau Gross-Gerau Germany Health Care Guatire Guatire, Miranda Venezuela Baby Care Hamburg Hamburg Germany Snacks & Beverages Havant Havant United Kingdom Feminine Care Henderson Henderson United States Health Care Huangpu Guangzhou China Beauty Care Hub Hub Pakistan Beauty Care Hunt Valley Cockeysville United States Beauty Care Ibadan Ibadan Nigeria Feminine Care Iowa City Iowa City United States Beauty Care Istanbul Istanbul Turkey Fabric & Home Care Jackson Jackson United States Snacks & Beverages Jeddah Jeddah Saudi Arabia Baby Care Jijona Alicante Spain Baby Care Kansas City Coffee Kansas City United States Snacks & Beverages Kansas City F&HC Kansas City United States Fabric & Home Care Kuantan Kuantan Malaysia Fabric & Home Care Leipsic Leipsic United States Health Care Lewisburg Lewisburg United States Health Care Lima Lima United States Fabric & Home Care London London United Kingdom Fabric & Home Care Longjumeau Longjumeau France Health Care Louveira Louveira Brazil Feminine Care Lucca Lucca Italy Family Care Manati Manati Puerto Rico Health Care Manchester Manchester United Kingdom Family Care Mandideep Bhopal India Fabric & Home Care Mariscala Apaseo El Grande Mexico Beauty Care Mataro Mataro Spain Fabric & Home Care Materiales Lima Peru Fabric & Home Care Mechelen Mechelen Belgium Fabric & Home Care Medellin Medellin Colombia Fabric & Home Care Mehoopany Mehoopany United States Family Care Mequinenza Mequinenza Spain Baby Care Mohammedia Mohammedia Morocco Fabric & Home Care Montornes Salida Spain Feminine Care Naucalpan Mexico City Mexico Health Care Nenagh Nenagh Ireland Beauty Care Neuss Neuss Germany Family Care New Orleans New Orleans United States Snacks & Beverages Novomoskovsk Novomoskovsk Russia Fabric & Home Care Orleans Saint Cyr En Val France Family Care Oxnard Oxnard United States Family Care Pescara Pescara Italy Feminine Care Phoenix Phoenix United States Health Care Pilar Pilar Argentina Fabric & Home Care Pomezia Pomezia Italy Fabric & Home Care Porto Custoias Portugal Fabric & Home Care PUR Minneapolis United States Health Care Rakona Rakovnik Czech Republic Fabric & Home Care Rydalmere (Clairol) Sydney Australia Beauty Care Sacramento Sacramento United States Fabric & Home Care Santiago Santiago Chile Baby Care Seaton Delaval Whitley Bay United Kingdom Beauty Care Sherman Sherman United States Snacks & Beverages Shiga Shiga Japan Beauty Care South Brunswick New Jersey United States Snacks & Beverages St. Louis St. Louis United States Fabric & Home Care Stamford (Clairol) Stamford United States Beauty Care Takasaki Takasaki Japan Fabric & Home Care Talisman Mexico City Mexico Beauty Care Targowek Warsaw Poland Baby Care Tepeji Tepeji Mexico Baby Care Tianjin Tianjin China Beauty Care Timisoara Timisoara Romania Fabric & Home Care Vallejo Mexico City Mexico Fabric & Home Care Villa Mercedes Villa Mercedes Argentina Baby Care Weiterstadt Weiterstadt Germany Health Care Witzenhausen Witzenhausen Germany Family Care Worms Worms Germany Fabric & Home Care Xiqing Tianjin China Beauty Care 2. Graph 2: Reliance on Third-Party Manufacturers (percent) (P&G Sustainability Report 2004 p.10) 3. Graph 3: Seven MDOs (P&G Sustainability Report, 2004) 4. Graph 4: Geographic Sales Split (FY 2005 Net Sales) (P&G Annual Report 2005, p. 20) 5. Graph 5: Foreign Sales and Profits of Largest U.S. Multinationals ($ Billions) (Forbes, 2000) Company Foreign sales Rank in Forbes Largest 100 U.S. Multinationals Total sales Rank in Fortune 1000 Foreign sales as percentage of total sales ExxonMobil $115.46 1 $160.88 3 71.8% IBM 50.38 2 87.55 6 57.5 Ford Motor 50.14 3 162.56 4 30.8 General Motors 46.49 4 176.56 1 26.3 General Electric 35.35 5 111.63 5 31.7 Texaco 32.70 6 42.43 28 77.1 Citigroup 28.75 7 82.01 7 35.1 Hewlett-Packard 23.40 8 42.37 13 55.2 Wal-Mart Stores 22.73 9 165.01 2 13.8 Compaq Computer 21.17 10 38.53 20 55.0 American International Group 20.31 11 40.66 17 50.0 Chevron 20.02 12 45.20 35 44.3 Philip Morris 19.67 13 61.75 9 31.9 Procter & Gamble 18.35 14 38.13 23 48.1 6. Graph 6: Local Operations in Western Europe (P&G Western Europe) Country Since Principal National Office or Representation Office Manufacturing Facilities Austria 1966 Vienna Belgium 1955 Strombeek-Bever Mechelen Denmark 1992 Aarhus Finland 1971 Espoo France 1954 Neuilly sur Seine Amiens, Blois, Longjumeau, Orleans Germany 1960 Schwalbach Crailsheim, Euskirchen, Gross-Gerau, Hamburg, Neuss,Weiterstadt, Witzenhausen,Worms Greece 1960 Athens Ireland 1980 Nenagh Nenagh Italy 1956 Rome Campochiaro, Gattatico, Lucca, Pescara, Pomezia Luxemburg 2003 Luxemburg Netherlands 1964 Rotterdam Coevorden Norway 1993 Sandvika Portugal 1989 Lisbon Porto Spain 1968 Madrid, Barcelona Jijona, Mataro, Mequinenza, Montores Sweden 1969 Stockholm Switzerland 1953 Geneva United Kingdom 1930 Newcastle, Egham, Brooklands London, Manchester, Seaton Delaval 7. Graph 7: Top 16 Countries (Volume Growth) (P&G Annual Report 2005) 8. Graph 8: Net Sales (in billions of dollars) (P&G Annual Report 2005) Read More