Case Study

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CASE

THE EVOLUTION

OF STRATEGY

AT PROCTER &

GAMBLE

Founded in 1837, Cincinnati-based Procter & Gamble (P&G) has long been one of the world's most interna­ tional companies. Today, P&G is a global colossus in the consumer products business with annual sales in excess of $80 billion, some 54% of which are generat­ed outside of the United States. P&G sells more than 300 brands-including Ivory soap, Tide, Pampers, JAMS pet food, Crisco, and Folgers-to consumers in 180 countries. Historically, the strategy at P&G was well established. The company developed new products in Cinc!nnati and the11 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 years, this strategy delivered a steady stream of new products and reliable growth in sales and profits. By the 1990s, however, profit growth at P&G was slowing.

The essence of the problem was simple: P&G's costs were too high because of extensive duplication of manufacturing, marketing, and administrative fa­ cilities in different national subsidiaries. The duplica­ tion of assets made sense in the world of the I 960s,

when national markets were segmented by barriers to cross-border trade. Products produced in Great Britain, for example, could not be sold economically in Germany due to high tariff duties levied on im­ ports into Germany. By the 1980s, howevet; 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 P&G distributed its products were growing larger and more globalized. Wal-Mart, Tesco (from the United Kingdom), and Carrefour (from France) were demanding price discounts from P&G.

In the 1990s, P&G embarked on a major reorga­ nization in an attempt to control its cost strncture and recognize the new reality of emerging global markets. The company shut down some 30 manufac­ turing plants around the globe, laid off 13,000 em­ ployees, and concentrated production in fewer plants that could better realize economies of scale and serve regional markets. It wasn't enough. Profit growth remained sluggish, so in 1999, P&G launched its second reorganization of the decade, "Organization 2005," with the goal of transforming P&G into a truly global company. P&G replaced its old organization, which was based on countries and regions, with one

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C-30 Case 7 The Evolution of Strategy al Procter & Gamble

based on seven self-contained, global business units, ranging from baby care to food products. Each busi­ ness unit was given complete responsibility for gener­ ating profits from its products and for manufacturing, marketing, and product development. Each business unit was told to rationalize production, concentrat­ ing it in a few large facilities; to try to build global brands wherever possible, thereby eliminating mar­ keting differences among countries; and to accelerate the development and launch of new products. P&G announced that, as a result of this initiative, it would close another 10 factories and lay off 15,000 employ­ ees, mostly in Europe where there was still extensive duplication of assets. The annual cost savings were estimated to be about $800 million. P&G planned to use the savings to cut prices and increase marketing

CASE DISCUSSION QUESTIONS

I. How did global expansion by P&G create eco­ nomic value for the company and its shareholders?

2. What multinational strategy was P&G pursuing when it first expanded overseas?

3. What were the problems with this strategy? Why do you think these problems didn't become evi­ dent until the 1990s?

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 work . For most of the 2000s, P&G reported strong growth in both sales and profits. Significantly, P&G's global competitors such as Unilever, Kimberly-Clark , and Colgate-Palmolive were struggling during the same time period.

Sources: J. Nen: "P&G Outpacing Unilever in Five-Year Battle,"

Ad,•ertlsi11g Age, November 3, 2003, pp. 1-3; G. Strauss, "Firm Re­

structuring into Truly Global Company," USA Today, September 10, 1999, p. B2; Procter & Gamble !OK Report, 2005; M. Kolba­

suk McGee, "P&G Jump-Starts Corporate Change," b1/ormatio11

Week, November I, 1999, pp. 30-34.

4. What were the goals of the reorganization that P&G embarked upon in the late 1990s? What mul­ tinational strategy is the company now pursuing? How should this benefit the company? Can you see any drawbacks?

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