Proctor and Gamble was established in 1837 and was one of the largest manufacturers of customer products. It has operations in 80 countries and employs 100,000 people globally. It established its first foreign plant in 1915 in Canada and the company’s first subsidiary was established in 1930s in Britain. The business expanded to many countries by 50s and 60s. By the late 1970s, P&G had a decentralized market with the production units in many countries, which served as a profitable strategy to the company until 1990s. The company had to reorganize their strategy with the goal of transforming P&G into a truly global company.
Case Discussion Questions
1. What strategy was Procter & Gamble pursuing when it first entered foreign markets in the period up until the 1980s?
P&G established its first foreign factory in 1915 in Canada to produce Ivory soap and Crisco. The company’s first foreign subsidiary was established in 1930 in Britain. Since then till the 50s and 60s, the pace of international expansion became very quick. P&G entered a nation by acquiring an established competitor and its brand and then promoted its business through that company. But it many cases, it started everything from the scratch. By 1970s, the strategy for the company was well established. They developed new products in Cincinnati and then relied on semi autonomous foreign subsidiaries to manufacture, market and distribute those products in different nations. The foreign subsidiaries had their own packing, brand name and marketing message to local tastes and preference.
But as the company continued to move on, the growth of the company gradually was slowing down which was indicated by a decrease in the profit growth. They had the strategy of decentralized market, that is, every nation had its own production unit. Having the production unit in each country was justified, as the import tariffs rates were very high then which would make the product very expensive. As the products would be produced locally, it could address the needs of the local market avoiding the need for local responsiveness. Thus, the decentralized organization of P&G until 1980s was considered to be the best strategy for the company as it first entered the foreign market.
2. Why do you think this strategy became less viable in the 1990s?
The strategy was working well for the company till 1990s but from 1990s a decrease in the growth of the profit was marked which suggested that the strategy was becoming less viable from 1990s. A number of reasons can explain why the profit growth was declining and the major reason being the high cost of P&G products. The products had a high cost because of extensive duplication of manufacturing, marketing and administrative facility in different national subsidiary. Until 1960s, the duplication of products made sense when barriers to cross-border trade segmented the national market from each other. Product produced in one country could not be sold in another country, as the price would be too high due to the high tariff duties charged on imports.
But as the barrier to cross-border trade was eliminated, the products could be easily exported to another country or imported from another country. The retailers through which P&G distributed its product were growing larger and global and these emerging global retailer were demanding price discounts from P&G. Initially retailer chain like Wal-Mart and Tesco needed product from P&G to sell but now P&G needed retailer chain like Wal-Mart and Tesco to sell its product. In other words, bargaining power shifted from P&G to these Retailer chains. But as P&G had their manufacturing plants in many countries which caused the duplication of their product and they lacked economics of scale which led to high price of the product.
3. What strategy does P&G appear to be moving towards? What are the benefits of this strategy? What are the potential risks associated with it?
As the company’s growth rate was declining, it had to come up with new business strategy. In 1993, P&G embarked on a major reorganization in an attempt to control its costs structure and reorganize the new reality of emerging global market. The company shut down 30 of its manufacturing plant around the world and 13,000 employees were out of job. They concentrated production in fewer plants that could better realize the economics of scale and serve regional market. Even with such reorganization, the profit growth remained sluggish. In 1998, the company came up with another strategy named “organization 2005” with a goal of transforming the company into a global company.
The company tore up its old organizations, which were countries and regions and replaced it with one based on seven self-contained global business units. 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 and concentrate on eliminating marketing difference between countries. This strategy seemed to work for the company as it increased both profit and sales. But, as every coin has two sides, it too had benefits as well as risks.
• The company could reduce the cost of its product due to the economies of scale, lower factor costs, flexibility to seek lowest cost and enhance bargaining power to reduce input costs. • As the numbers of production units were lowered, the company now could focus on the quality of the product resulting in the improved quality of the product.
• Since many production units were shut down, the reorganization of existing plants would require a significant management costs for coordinating the staff and designating new authority employees. • The standardization of the product may not satisfy all customers. • The integrated competition may lead to losses in particular countries.