This study is being undertaken in order to review the strategic plans of Procter and Gamble. The Human Resource activities of the company will be identified including their estimated costs and benefits. Also, the study will identify the strategic activities and how it match the strategic goals of the company.
Finally, this study will formulate recommendations on how the organization might better match its human resource activities with its strategic benefits.
Procter and Gamble Company is a U.S. based global corporation based in Cincinnati, Ohio. It manufactures a wide range of consumer goods. The company is the 25th largest U.S. company by revenue in 2007. It is the 18th largest by profit, and 10th in Fortune’s most admired companies list as of 2007.
The company was founded by William Procter, a candle maker, and James Gamble, a soap maker in 1837. These two men were immigrants from England and Ireland respectively. The company grew tremendously and throughout the twentieth century, it continued to prosper. The firm expanded into other countries and introduced Tide laundry detergent in 1946 and “Prell” shampoo in 1950. In 1955, the company began selling its first toothpaste to contain fluoride which is known as “Crest” (Dyer et al., 2004).
Currently, the company is ranked in the top ten by the Harris Interactive/Wall Street Journal list of companies with the world’s best reputation, the number one ranking in Fortune’s U.S. Household and Personal Products most admired list. It is ranked number two on the Hay Group list of Best Companies for Leaders, and the Market Sector Leader for Household Products in the Dow Jones Sustainability Index (P&G Annual Report, 2007).
P&G ranks among the top companies for Executive Women (National Association for Female Executives), African Americans (Working Mother and Women of Color Magazines), Working Mothers (Working Mother Magazine), and Best Corporate Citizens (Business Ethics Magazine) (Ibid).
Supplier diversity is a fundamental business strategy of the company. In 2007, the firm spent over $1.9 billion with minority-and women-owned businesses. It is a member of the Billion Dollar Roundtable, a forum of 14 corporations that spend more than $1 billion annually with diverse suppliers (Ibid).
Overview of Operations
The business of Procter and Gamble is focused on providing branded consumer goods. The company’s goal is to provide products of superior quality and value to improve the lives of consumers around the world. The company believes that this will result in leadership sales, profits and value creation, allowing employees, shareholders and the communities in which the company operate to prosper (Ibid).
The firm’s products are sold in more than 180 countries mainly through mass merchandisers, grocery stores, membership club stores and drug stores. It is continuing to expand their presence in “high frequency stores,” the neighborhood stores which serve many customers in developing markets. The firm on-the-ground operations in over 80 countries.
The market is highly competitive, with global, regional and local competitors. In most markets and industry segments wherein the company is selling their products, it compete against other branded products as well as retailers’ private-label brands. In addition, many of the product segments in which it compete are differentiated by price. Essentially, Procter and Gamble compete with premium and mid-tier products and are well positioned in the industry segments and markets in which it operates. It is most often holding a leadership or significant share position (Ibid).
Currently, the organizational structure of the company was comprised of three Global Operations Units (GBUs) and a Global Operations group. The Global Operations group includes the Market Development Organization (MDO) and Global Business Services (GBS). The heads of the three GBUs and Global Operations each would report to the Chief Executive Officer (Ibid).
Global Business Units
During 2007, the three GBUs were Beauty and Health, Household Care and Gillette GBU. The main responsibility of the GBUs is to develop the overall strategy of the brands. They identify the common needs of the consumer, develop product innovations, marketing and sales. In the United States, the business units comprising the GBUs are integrated into seven segments: Beauty; Health Care; Fabric Care and Home Care; Snacks, Coffee, and Pet Care; Blades and Razors; and Duracell and Braun (Ibid).
Growth and Strategies
Procter and Gamble’s sales have grown from $39 billion to $76 billion in the past seven years. The firm have more than doubled the number of brands that generate $1 billion or more in sales each year, and now have 23 of these leading billion-dollar brands in its portfolio. The company also have more than quadrupled the number of brands that generate at least $500 million in sales, and today have 18 of these brands poised to be the next billion-dollar brands. The firm have nearly doubled the number of countries in which it generates a billion dollars or more in sales each year, and now have 12 billion-dollar countries (Ibid).
Procter and Gamble (P&G) have more than a billion dollars in sales each year with seven retail customers, up from two in 2001. P&G have generated more than $43 billion in net earnings and $50 billion in free cash flow. P&G’s market capitalization has increased more than $100 billion since 2001. Currently, the company is among the ten most valuable companies in the United States (Ibid).
Procter and Gamble designed a diversified business portfolio to grow consistently and reliably. It designed its core strengths to win in the industry. It designed strategic, operational, and financial processes that ensure discipline to deliver. It also designed a management team and organization to lead (Ibid).
2007 Results of Activities
The year 2007 brought results to the company’s strategic plan for growth. It was the most demanding year that the company faced since the beginning of the decade. As energy and commodity costs continued to rise, competitive pressure also intensified. Nevertheless, the company continued to grow well and attained its target growth range. The following were the highlights of its operations:
- Net sales increased 12% to $76 billion. Organic sales increased 5%.
- Diluted net earnings per share increased 15% to $3.04.
- Free cash flow from operating activities was $10.5 billion, or 101% of net earnings.
- Fabric and Home Care grew organic sales 8%, with double-digit growth in developing markets and mid-single-digit growth in developing regions. The key growth drivers included Tide Simple Pleasures, Gain Joyful Expressions, and Febreze Noticeables.
- Blades and Razors organic sales grew by 8%.
- Beauty organic sales increased 5%, led by strong growth in feminine care, prestige fragrances, and hair care. Billion-dollar brands Always, Olay, and Head & Shoulders each grew sales double-digits for the year.
- Health Care organic sales incremented 6% which is driven by very strong growth in oral care. In the United States, Crest extended its category market leadership to 38% behind the success of the Pro-Health line.
- Baby and Family Care organic sales increased 4%. This growth was due to the continuing expansion into developing markets and robust results on Pampers Baby Stages of Development and Baby Dry Caterpillar Flex products in North America.
Growth across geographic regions was also broad-based. This was led by mid-single-digit organic volume growth in North America and double-digit organic growth in developing markets. Also, it made excellent progress on the integration of Gillette. This was the biggest acquisition in the consumer products industry and in the history of the company (Ibid).
Growth Strategies, 2001-2007
The basic strategy is to grow from its core competence. This is done through maximizing on its leading brands, big markets, and top customers. Specifically, this strategies are as follows (Ibid):
- Volume up 7% on average, for P&G ‘s 23 billion dollar brands;
- Volume up 8% on average, for P&G’s top 16 countries;
- Volume up 8% on average, for P&G’s top 10 retail customers.
Develop faster-growing, higher-margin, more-asset efficient businesses and this is done specifically through:
- Beauty sales doubled to $23 billion profit more than doubled to $3.5 billion;
- Health Care sales more than doubled to $9 billion; profit increased 6-fold to $1.5 billion;
- Home Care sales up nearly 85% profit more than tripled.
Accelerate growth in developing markets and among low-income consumers as follows:
- Developing market sales up 18% per year;
- Over one-third of total company sales growth from developing markets;
- Developing market profit margins comparable to developed market margins.
New Strategic Design
The first element of the company’s strategic design is a portfolio that balances growth and consistency.
In the 1990’s, two businesses accounted for 85% of all the value created by the firm through the decade. Today, the firm have a much stronger and more robust business portfolio. It is competing in 22 categories that include a balanced mix of faster growing, higher-margin asset-efficient businesses, such as beauty or home care, and large, foundation categories such as laundry, or baby care. P&G also have an attractive geographic mix, with about half coming from the rest of the world. The firm is focusing on achieving disproportionate growth in fast-growing developing markets.
These markets have contributed more than a third of the company’s top-line growth over the past five years, and their contribution has been accelerating. Nearly 40% of P&G sales growth came from developing markets this past fiscal year, and it is expected that the contribution would be even greater in the year ahead. The company’s diversified portfolio reduces exposure to single and competitive events, and maximizes future growth opportunities. Traditional businesses, like fabric care and baby care, are strong and growing in their own right, and they create scale that makes P&G’s beauty and health care businesses more competitive (Ibid).
Geographically, the firm’s North America home base is rock solid, with dependable growth that allows them to invest in developing markets. Also, the breadth and diversity of the firm’s businesses and the breadth and diversity of the technological expertise that supports these businesses enable the company to transfer technologies from one business to another. For example, Crest Whitestrips was created by combining bleach stabilization technology from laundry care with film technology from corporate Research and Development (R&D) to provide in-home teeth whitening. The Swifter Wet Jet pad combines absorbent cores from feminine care with flexible surface lawyers from baby care.
Olay Daily Facials combines structured paper from family care with skin conditioning and mild cleansing from beauty to provide a mini-facial in the home. The company’s ability to combine technologies from so many diverse businesses cannot be rivaled in the industry because no other consumer products company has the scope of science and technology found at P&G. The firm’s business portfolio is not static. It uses the operating total shareholder return (TSR) delivered by each business to continuously ensure its portfolio is maximizing shareholder value. TSR is a cash flow return on investment (CFROI) model that measures sales growth, earnings growth and cash flow to determine the rate of return that each business earns (Ibid).
The firm’s researchers and entrepreneurs around the world working in areas that are relevant to their business. They are establishing the company as the preferred commercialization partner for these external innovators, and it is making a huge impact. The firm’s ability to innovate is most evident in the net present value of its innovation pipeline and the organic incremental sales growth generated by innovation. Innovation-driven value creation for shareholders and incremental sales growth from innovation have nearly doubled in this same time period (Ibid).
These are just two examples of how the company designed an institutional capability to grow. The firm’s core strengths create sustainable competitive advantages, and it is continuing to get stronger in every area.
The third element of the company’s design for growth is the disciplined way it managed its business. Discipline is part of the company’s culture and it is applied to every aspect of the business: strategic, operational, and financial. The company set and stick with clear strategies. It does its homework before going to market with new products and ideas (Ibid).
The second element of the firm’s design for growth is its combination of core strengths. Early in the decade, the firm determined that it did not have sufficient competitive advantage in the five areas that are critical to winning in consumer products: consumer understanding, brand building, innovation, go-to-market capability, and scale. It invested substantially in every area and it is paying off. For example, the company invested more than a billion dollars in consumer understanding since 2001.
It transformed one of the industry’s more traditional market research organizations into a consumer understanding powerhouse. Its external benchmarking indicates that the company has the industry’s strongest suite of proprietary consumer research tools and methodologies. These tools make the firm learn faster and more effectively, and it helps discover the often unarticulated needs and aspirations that lead to breakthrough innovation (Ibid).
Innovation has always been the firm’s lifeblood, and it created significant advantage in this area. It has the best-in-class expertise in about a dozen technology areas that are the foundation for innovation in the industry, including enzymes, perfumes, and flavors, polymers, structured substrates, and surfactants. The firm multiplied this internal capability through an effort we call “connect + develop,” which is proving to be an enormous source of innovation and competitive advantage. It has about 8,500 researchers within the company and another 1.5 million outside the company (Ibid).
The growth strategy of the company will exploit opportunities focusing on these areas:
- P&G’s Core. The firm is widening its share advantages versus competition. For example, in fabric care, it is the number two player worldwide in the early 1990s. Today, the firm has a 34% share of the global fabric care market, almost double the next competitor, and its share has grown for six consecutive years. There are plenty of opportunities to keep growing all of the company’s billion dollar brands. It is proving in category after category that a leading share, even a relatively high share, is not a barrier to growth. The company aims to continue leverage its brand line-up and category-leading innovation to keep core businesses healthy and growing.
- Faster-Growing. Higher-Margin Businesses. The company has even greater upside in businesses such as beauty and health care. The beauty and health categories in which P&G competes are a combined $360 billion market today, and are projected to grow 3% to 4% a year for the balance of the decade. The firm has almost doubled its share of beauty and health over the past decade although the firm’s share of this combined market is only about 10% globally.
- Developing Markets and Lower-Income Consumers. The firm can still grow significantly in developing markets by increasing household penetration and consumer usage frequency, and by entering categories where it has not yet competed. For example, the average U.S. householder buys five to ten times as much P&G product per year as the average household in developing markets. In addition, there is a large number of households in developing regions that do not yet purchase any P&G product. Closing this gap, the company is confident that it can do it over time.
- It will continue to drive strong growth for years to come. There are significant bottom-line growth opportunities as well. The firm will continue to leverage its economies of scale. It will reduce overhead costs by simplifying work and eliminating duplication between global business units and market development organizations. It will be more effective and efficient in how it will manage smaller country organizations and brands. It will continue to increase productivity in all of its businesses. It will continue to improve gross margins. The company’s current margin is about 52% (Ibid).
Human Resource Management
Procter and Gamble have the most diverse and broadly experienced leadership team in its history. The top 45 leaders came from a dozen countries, and most of them have experience leading businesses in both developed and developing markets (P&G Annual Report, 2007).
The firm is proud that they have recognized as one of the world’s best leadership development companies. P&G have been ranked as one of the three best companies for leaders. Human Resources Executive magazine ranked P&G as the best company among the Fortune Most Admired for “management quality”(Ibid).
The Human Resource department of P&G have developed advanced leadership training or senior managers. The new General Manager College is targeted to the 135 general managers who run P&G businesses globally. GM College focuses on Purpose and Value, leadership strategy, capabilities, systems, and culture. They have also designed a sequel to GM College which is called the Executive Leadership Program. This program is targeted to the most-senior managers in the company and focuses on agility and flexibility, embracing leading change, and sustaining growth (Ibid).
The firm is concerned with getting the right people into the right jobs at the right time is always a primary responsibility of management. Also, equally important and more difficult is the need to anticipate leadership capabilities that will be required in the future, and ensuring that managers get the experiences and coaching they need to be ready (Ibid).
One of the most visible example of the company’s ability to develop strong leaders is the number of former P&G employees who are now CEOs of major companies. The president of P&G himself is personally involved in succession planning for every organization in the company. They review succession plans and the progress of key leaders with the Board once a year, and with the senior management team three times a year (Ibid).
The human resource management values and culture of P&G is reflected in their principles as follows (www.pg.com):
We show respect for all individuals.
- We believe that all individuals can and want to contribute to their fullest potential.
- We value differences.
- We inspire and enable people to achieve high expectations, standards and challenging goals.
- We are honest with people about their performance.
The interests of the Company and the Individual are inseparable.
- We believe that doing what is right for the business with integrity will lead to mutual success for both the Company and the individual. Our quest for mutual success ties us together.
- We encourage stock ownership and ownership behavior.
We are Strategically Focused on Our Work.
- We operate against clearly articulated and aligned objectives and strategies.
- We only do work and only ask for work that adds value to the business.
- We simplify, standardize and streamline our current work whenever possible.
Innovation is the Cornerstone of Our Success.
- We place great value on big, new consumer innovations.
- We challenge convention and reinvent the way we do business to better win in the marketplace.
We are Externally Focused.
- We develop superior understanding of consumers and their needs.
- We create and deliver products, packaging and concepts that build winning brand equities.
- We develop close, mutually productive relationship with our customers and our suppliers.
- We are good corporate citizens.
- We incorporate sustainability into our products, packaging and operations.
We Value Personal Mastery.
- We believe it is the responsibility of all individuals to continually develop themselves and others.
- We encourage and expect outstanding technical mastery and executional excellence.
We Seek to be the Best.
- We strive to be the best in all areas of strategic importance to the Company.
- We benchmark our performance rigorously versus the very best internally and externally.
- We learn from both our successes and our failures.
Mutual Interdependency is a Way of Life.
- We work together with confidence and trust across business units, functions, categories and geographies.
- We take pride in results from reapplying others’ ideas.
- We build superior relationships with all the parties who contribute to fulfilling our Corporate Purpose, including our customers, suppliers, universities and governments.
As such, it is very clear in “Our Principles” of P&G that they really value their human resources and that they value the individual, the team and their development to become leaders and their corresponding search towards excellence (www.pg.com).
The company sponsor several post-employment benefits throughout the world. These include pension plans, both defined contribution plans and defined benefit plans, and other post-employment benefit (OPEB) plans, which is comprised mainly of health care and life insurance for retirees (P&G Annual Report, 2007).
The company have a primary stock-based compensation plan under which stock options are granted every year to key managers and directors with exercise prices equal to market price of the underlying shares on the date of grant. A total of 229 million shares of common stock were authorized for issuance under plans approved by shareholders in 2001 and 2003, of which 73 million remain available for grant. An extra 20 million shares of common stock were authorized for issuance under a plan approved by Gillette shareowners in 2004 and assumed by the firm in conjunction with the acquisition of the Gillette Company in October 2005. A total of 14 million of the shares remain available for grant under this plan.
There are also five million shares available for grant under this plan. There are also five million shares available for grant under Future Shares Plan approved by the Board of Directors in 1997. This plan will terminate in October 2007. Grants issued under the firm’s shareholder approved plans since September 2002 are vested after three years and have a 10-year life. Grants issued under these plans from July 1998 through August 2002 are vested after three years and have a 15-year life, while grants issued prior to July 1998 are vested after one year and have a 10-year life. In addition to the key manager and director grants, the company makes other minor stock option grants to employees for which vesting terms and options lives are not substantially different (Ibid).
Total stock-based compensation expense for stock option grants was $612 million, $526 million, and $459 million for 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for these stock-based compensation arrangements was $163 million, $140 million and $125 million for 2007, 2006 and 2005, respectively. The company also makes minor grants of restricted stock, restricted stock units and other stock-based grants which are generally expensed at grant date was $56 million, $59 million and $65 million in 2007, 2006, and 2005 respectively (Ibid).
Defined Contribution Retirement Plans
Procter and Gamble have defined contribution plans which cover the majority of U.S. employees as well as employees in other countries. These plans are fully funded. The firm generally make contributions to participants’ accounts based on individual base salaries and years of service. The main U.S. defined contribution plan comprises the majority of the balances and expense for the firm’s defined contribution plans. The contribution rate is set annually.
Total contributions for this plan approximated 15% of total participants’ annual wages and salaries in 2007, 2006 and 2005. Procter and Gamble maintains the Profit Sharing Trust and Employee Stock Ownership Plan (ESOP) to provide a portion of the funding for the D.C. plan in the United States as well as other retiree benefits. Total defined contribution expense was $273, $249 and $215 in 2007, 2006, and 2005, respectively. The accumulated benefit obligation for all defined benefit retirement pension plans was $ 8.6 billion and $8 billion at June 30, 2007, and June 20, 2006, respectively (Ibid).
MATCHING OF HUMAN RESOURCES WITH STRATEGY
The development of key managers through the General Managers’ College of P&G matched its strategy of growth and diversification as discussed above. The continuous growth of the company requires a constant supply of managerial talents. The employee benefits also matched the strategic goals of the company since these benefits are the motivators that will make the employees and managers work hard since the company spends a lot of money for their insurance, health care, pension plan, and stock-based compensation wherein the company spends billions of dollars.
Also, the “ Our Principles” of the company as discussed above is also supportive of the strategy of the company wherein these principles promote a culture of independence and at the same time work as a team. It also encourages hard work and excellence for employees in their jobs.
P&G is an excellent company. Most of its strategic management practices are state of the art as well as its HRM practices. However, in order to match the strategic goals of the company, the human resources function should do the following:
- Conduct intensive training to all of its employees and not only their candidates for senior managers.
- These trainings should be in line with their respective functions of the employees in their respective divisions, and
- In order to motivate employees, the stock compensation option should be offered to everyone and not only for key managers.
P&G’s infrastructure requirements consist of those functions and activities necessary for the effective management of a company’s human resources. The major purposes of these activities traditionally have been to attract, retain, and motivate employees. We refer to them as human resource management (HRM) practices (Schuler, 1984), and the key HRM practices include:
- Human resource planning
- Staffing, including recruitment, selection, and socialization
- Training and development
- Union-management relationships
The result of effectively managing human resources is an enhanced ability to attract and retain qualified employees who are motivated to perform, and the results of having the right employees motivated to perform are numerous.
They include greater profitability, low employee turnover, high product quality, lower production costs, and more rapid acceptance and implementation of corporate strategy. These results, particularly if coupled with competitors who do not have the right people motivated to perform, can create a number of competitive advantages through human resource management practices.
Although there are many ways by which companies can gain a competitive advantage, as MacMillan (1983) has suggested, one way often overlooked is through their human resource management practices. HRM practices enable companies to gain a competitive advantage in two major ways: One is by helping themselves and the other is by helping others. So there appears to be a significant benefit from having HRM considerations represented in the strategy formulation stage rather than only in the implementation stage.
Once the strategy is formulated and the appropriate HRM thrust identified, specific HRM practices need to be developed. These practices, such as staffing and compensation, are the ones that actually create the competitive advantage for the company. In addition, selection of the most appropriate practices should be appropriate to the strategy and
lead to behaviors that are supportive of the strategy; for example, if cooperative behaviors are needed among employees, then group or organizational level compensation incentives should be provided rather than an individual-level incentive system. If product quality is critical, quality circles and union-management cooperation should be developed.
Once the strategy is formulated, the determination of the needed behaviors comes from job analysis. The HRM practices that stimulate those behaviors must be identified. They must be implemented so as to ensure consistency across HRM practices. It is this hard-won consistency which will help ensure that a competitive advantage through HRM practices is gained and sustained because of the barriers we have just discussed.
In addition to using their HRM practices on themselves, companies can also gain a competitive advantage through using their HRM practices on others. Specifically, companies can gain a competitive advantage by helping their suppliers, customers, or servicers/distributors with their practices
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