Essay Instructions: You are to write a 4-page paper. Read the Case Study below, after reading the case study. Answer the Discussion Questions at the end of the case study. State the Question First and then continue to answer. *Do Not Use Outside Sources*
The Evolution of Strategy of Proctor & Gamble
Founded in 1837, Cincinnati-based Procter & Gamble has long been one of the world’s most international companies. Today P&G is a global colossus in the consumer products business with annual sales in excess of $50 billion, some 54 percent some of which are generated outside of the United States. Procter and Gamble sells more than 300 brands including Ivory soap, Tied, Pampers, Iam pet food, Crisco and Folgers-to consumers in 160 countries. It has operations in 80 countries and employs close to 100,000 people globally. Procter & Gamble established it first foreign factory in 1915 when it opened a plant in Canada to produce Ivory soap and Crisco. This was followed in 1930 by the establishment of the company’s first foreign subsidiary in Britain. The pace of international expansion quickened in the 1950s and 1960s as Procter & Gamble expanding rapidly in Western Europe, and then again in the 1970s when the company entered Japan and other Asian nations. Sometimes Procter & Gamble and indignation by acquiring an established competitor and its brands, as occurred in the case of Great Britain and Japan, but more typically the company set up operations from the ground-floor.
By the late 1970s, the strategy of Proctor and Gamble was well established. The company developed new products in Cincinnati and then relied on semiautonomous foreign subsidiaries to manufacture, market, and distribute those products in different nations. In many cases, foreign subsidiaries had their own production facilities and tailored the packaging, brand name, and marketing message to local tastes and preferences. For many years this strategy delivered a steady stream of new products and reliable growth in sales and profits. By the 1990s, however, profit growth and Procter & Gamble was slowing.
The essence of the problem was simple; Procter & Gamble’s costs were too high because of extensive duplication of manufacturing, marketing, and administrative facilities in different national subsidiaries. The duplication of assets made sense in the world of the 1960s, when national markings were segmented from each in other by barriers to cross-border trade. Products produced in Great Britain, for example, could not be so economically in Germany due to high tariff duties levied on imports into Germany. By the 1980s, however, barriers to cross-border trade were falling rapidly worldwide and fragmented national markets were merging into larger regional or global markets. Also, the retailers through which Procter & Gamble distributed its products were growing larger and more global, such as Wal-Mart, Tesco from the United Kingdom and Carrefour from France. These emerging global retailers were demanding price discounts from Procter & Gamble.
In 1993, Procter & Gamble embarked on a major reorganization in an attempt to control its cost structure and reorganizing the new reality of the merging global markets. The company shut down some 30 manufacturing plants around the globe, laid off 13,000 employees, and concentrating production in fewer plants that could better realize economies of scale and serve regional markets. These actions cut some $600 million a year out of Procter & Gamble’s cost structure. It was not enough! Profit growth remained sluggish.
In 1998, Procter & Gamble launched its second reorganization of the decade. Named “Organization 2005,”the goal was to transform Procter & Gamble into a truly global company. The company tore up its old organization, which was based on countries and regions, and replaced with one based on seven self-contained global business units, ranging from baby care to food products. Each business unit was given complete responsibility for generating profits from its products, and for manufacturing, marketing, and product development. Each business unit was told to rationalize production, concentrating it in fewer larger facilities; to try to build global brands whenever possible, thereby eliminating marketing difference between countries; and to accelerate the development and launch of new products. In 1999, Procter & Gamble announced that as a result of this initiative, it would close another 10 factories and lay off 15,000 employees, mostly in Europe where there was still extensive duplication of assets. The annual cost savings were an estimated to about $800 million. Procter & Gamble planned to use the savings to cut prices and increase marketing spending in an effort to gain market share, and thus further lower costs through the attainment of scale economies.
This time the strategy seemed to be working. In 2003 and again in 2004, Procter and Gamble reported strong growth in both sales and profits. Between 2002 and 2004 revenue surged 28 percent from $40.2 billion to $51.4 billion, while profits increased an impressive 46 percent from $4.35 billion to $6.34 billion. Significantly, Procter & Gamble’s global competitors, such as Unilever, Kimberly-Clark and Colgate-Palmolive, were struggling in 2003 and 2004.
Discussion Questions
1.What strategy does Procter & Gamble appear to be moving toward?
2.What are the benefits of this strategy?
3.What are the potential risks associated with it?
