International Business Strategies - Procter & Gamble - Case Study Example

STRATEGIC RRPORT – Procter & Gamble (P&G) P&G focuses on internationalization The economic crisis that began in 2008 had a severe impact on sales of FMCGs across the globe. However, emerging economies such as China, Brazil and India were less affected by the downturn and have been quicker to recover. Hence, these emerging markets have become a hotbed of activity for multinational FMCG companies like Nestle, P&G and Unilever P&G, which is already the world’s largest consumer goods company, has an enormous presence overseas, already generating 32% of its revenues from emerging markets. The company has an ambitious goal of adding another one billion consumers to its global business by 2015, driven largely by growth in emerging markets Hence P&G plans to increase the number of brands and products it offers in emerging markets to make the most of the growth potential they hold. According to P&G CEO, Bob McDonald, more than half of the company’s growth is expected to come from emerging markets in the coming years Radio model WWBH 1. Why did the company internationalize? P&G places high focus on global expansion to underpin its business growth. With the onslaught of economic downturn, P&G has aggressively diversified its geographic presence to make itself less dependent on a particular market. P&G aims to leverage the growth in the developing nations, resulted from rising income levels, rising young population with increased inclination towards branded products. Further, due to relatively static sales in the developed nations of Americas and Europe, P&G has committed itself to focus more on its internationalization strategy so as to improve its profit margins From the above graph we can derive that P&G’s has geographically diversified its revenue stream, which provide the company more strength to deal with any economic uncertainty of a particular region 2. Where did they go? P&G has invested heavily in India with an aim to gain market share and leverage the country’s growth P&G is highly ambitions for India, where according to Neilson, the $24 billion consumer packaged-goods industry is growing at 12% a year. Already, The combined turnover of P&G Health & Hygiene (PGHH) and P&G Home Products (PGHP) India pegs the company as the second largest FMCG company in the country at Rs 3000 crore In sync with the company’s objective to expand its customer base, P&G India has reduced the prices of some of its selected products by as much as 20%. The company has also recently brought several new products to its Indian customers. Some of these include: P&G has recently launched one of its biggest global brands-Wella hair colours to strengthen its health and beauty business in India. This is the first time that a detergents-to-diaper maker has entered the Indian hair colour market During FY2010, the company introduced a new, lower cost version of its Tide detergent in India, called Tide Naturals, which is priced 30 per cent below the regular Tide product, targeting the lower-income households P&G is also foraying into India’s billion-dollar toothpaste market with Oral-B, after selling toothbrushes under the same brand name for years. The company is looking at launching toothpaste in early 2011 at aggressive price points 3. What do they bring? P&G has bought its customer understanding capabilities, market intelligence and leveraged the strength of its R&D to grow its business in international markets. The company focuses on adding more and more consumers. In FY2010, the company reached an additional 200 million consumers, bringing the total customers served to 4.2 billion. It plans to reach 5 billion consumers by FY2015. In order to achieve its goal in the highly competitive FMCG industry, P&G is pursuing a clearly drafted strategy with focus on enhancing its customer base No company in the world has invested as much as P&G in consumer and market research. The company interacts with more than five million consumers each year in nearly 60 countries around the world The company has designed a Consumer and Market Knowledge (CMK) division. CMKs responsibility is to be the voice of the consumer and be on the forefront of market trends. CMK’s core work is the integration of consumer, shopper and market understanding to catalyze business growth at the corporate, business unit, category, brand and initiative levels The company conducts over 15,000 research studies every year to understand its customer needs. The company invests more than USD 350 million a year in developing a better consumer understanding according to the changing market conditions Further, the company focuses highly on customers who are more price conscious by offering its lower-priced products with superior performance in comparison to other mid-tier and value-tier alternatives available in the market 4. How do they internationalise? Procter & Gamble started with mini-P&Gs that tried to fit into local markets, but it has evolved differently. The company’s global business units now sell through market development organizations that are aggregated up to the regional level. P&G remains willing to adapt to important markets, it ultimately aims to beat competitors country centered multinationals as well as local companies – through aggregation of its business units, production site to make standardized products. P&G also focuses on arbitration strategy, which includes the deployment of supply chain activities for maximum profit (mostly through outsourcing) P&G has also expanded its international presence through M&A and Partnerships: P&G has adopted a play-to-win strategy which involved the acquisition of its domestic and foreign competitors. P&G acquired a number of other companies that not only increased profits significantly but also helped the company diversify its product line In July 2010, P&G completed the acquisition of Ambi Pur, a leading air care brand, from SaraLee. Henceforth, P&G is aggressively working to merge the product innovation and geographic expansion plans of Ambi Pur with the Febreze franchise. With the acquisition, P&G’s air care business now spans across 84 countries. In May 2010, P&G acquired Natura Pet Products Inc., a privately-held pet food business based in Davis, California. The acquisition enables P&G to expand into the attractive "holistic and naturals" segment of the pet food category, complementing P&Gs current Lams and Eukanuba brands In June 2009, P&G acquired another prestige male-grooming brand: Zirh In June 2009, P&G purchased The Art of Shaving brand. The acquisition gave P&G a foothold in the retail industry with The Art of Shavings 36 US stores Partnerships & Agreements P&G is dedicated to finding and building partnerships. The company searches for partnerships in various fields which encompasses everything from product innovation to R&D services, trademarks to packaging, marketing models to engineering, and business services to design. Together with its partners, P&G aims to bring new products to patients as quickly as possible In Sep 2010, P&G and the Agency for Science, Technology and Research (A*STAR) entered into a strategic partnership to jumpstart P&Gs innovation expansion in Singapore and strengthen the company’s R&D presence in Singapore In Aug 2010, P&G and Somaxon entered into a co-promotion agreement for Silenor® (doxepin), a newly-approved treatment for insomnia characterized by difficulty with sleep maintenance In June 2010, P&G signed up eye-tracking technology firm, Tobii, as its partner for packaging design and shelf visibility testing projects In May 2010, P&G signed a license agreement with BIOLASE Technology, Inc., the worlds leading dental laser company, to enable the later to launch light-based oral care devices to dental professionals In Apr 2010, P&G entered into an agreement with University System of Ohio. The agreement simplifies the legal process related to the negotiation of research projects between the company and Ohio universities, allowing innovative ideas to come to fruition faster In May 2009, P&G Professional has selected Rieke Dispensing’s versatile RS30 pump dispenser for 5 litre containers of the company’s market-leading Fairy Expert washing up liquid Porter’s 5 Forces Model – P&G Buyer Power. P&G face weak buyer power because customers are fragmented and have little influence on price or product. But if we consider the buyers of P&G to be retailers rather than individuals, then it faces very strong buyer power. Verdict: Strong buyer power from retailers. Supplier Power. More than likely, P&G faces some amount of supplier power simply because of the costs they incur when switching suppliers. Verdict: Limited supplier power. Threat of New Entrants. Given the amount of capital investment needed to enter certain segments in household consumer products, such as manufacturing deodorants, the threat of new entrants is fairly low in the industry. In some segments within the household consumer-products industry, this may not be the case since a small manufacturer could develop a superior product, such as a detergent, and compete with Procter & Gamble. The test is whether the small manufacturer can get its products on the shelves of the same retailers as its much larger rivals. Verdict: Low threat of new entrants. Threat of Substitutes. Within the consumer-products industry, brands succeed in helping to build a competitive advantage, but even the pricing power of brands can be eroded with substitutes such as store-branded private-label offerings. In fact, some of these same store-brand private-label products are manufactured by the large consumer-products firms. The firms believe that if they can manufacture and package a lower-price alternative themselves, they would rather accept the marginal revenue from their lower-priced items than risk completely losing the sale to a private-label competitor. Verdict: High threat of substitutes. Degree of Rivalry. Consumers in this category enjoy a multitude of choices for everything from cleaning products to bath washes. While many consumers prefer certain brands, switching costs in this industry are quite low. It does not cost anything for a consumer to buy one brand of shampoo instead of another. This, along with a variety of other factors, including the forces weve already examined, makes the industry quite competitive. Verdict: High degree of rivalry Major Strengths/Competencies and Weaknesses of P&G Strengths Significant R&D, Product Development and marketing investments Being a consumer products company, P&G relies heavily on innovation and continued marketing investments in order to establish a significant competitive advantage. As a result, the company has made significant investments in R&D and marketing. Over the last decade, P&G has invested nearly $2 billion in consumer and market research (nearly twice that of its closest competitor, Unilever, whose average R&D expense rounds up around $1 billion-$1.2 billion). Virtually, all the organic sales growth delivered by P&G in the past ten years has come from new brands and new or improved product innovation. As part of its R&D efforts, the company interacts with more than five million consumers each year in nearly 60 countries around the world. Leading market position garnered on a strong brand portfolio With revenues of $78,938 million, P&G is the worlds largest consumer products manufacturer, with its products reaching 4.2 billion people worldwide. P&G was the 22nd largest company in terms of sales and the 4th largest company in profits among the Fortune 500 list of 2009. The companys market capitalization of roughly $175.2 billion as of March 2011 far exceeds the $46 billion book value of the company’s tangible assets, which reflects the higher value placed on the company’s brands, the earnings and cash flow. Weaknesses Increasing instances of product recalls P&G has been registering increasing instance of product recalls recently. For instance, in November 2009, the company voluntarily recalled three lots of its Vicks Sinex nasal spray in the US, Germany and the UK. The recall was a precautionary step after finding the bacteria B. cepacia in a small amount of product made at its plant in Gross Gerau, Germany. In the following month, P&G voluntarily recalled its Vicks DayQuil Cold & Flu 24-Count LiquiCaps Bonus Pack in the US. The product was recalled as it did not contain a child-resistant backing for the blister packs in the box, despite label statements that the product is in child-resistant packaging. Later in March 2010, P&G voluntarily recalled its Pringles Restaurant Cravers Cheeseburger potato crisps and Pringles Family Faves Taco Night potato crisps in response to a recommendation from the Food & Drug Administration (FDA) to the food industry to protect consumers from potential Salmonella exposure. Critical Analysis of Report on International Strategy Key Summary Points 1. Companies are finding huge opportunities to expand their scale of operations beyond their home markets 2. May follow any of the three strategies(AAA strategies) to expand globally: Adoption: May adopt and address local market requirements, by creating local units in the markets with good potential to operate supply chain activities Aggregation: May expand global operations through aggregation of production processes Arbitrage: May carry out supply chain processes in the regions where they fit the best with minimum cost 3. It depends upon nature of the business which strategy a company deploy. For eg, a company with extensive R&D activities may deploy aggregation strategy, a labour intensive company may deploy arbitrage strategy and so on 4. However, the principal tension in the implementation of global strategy is between economies of scale and local responsiveness. 5. Companies, while focusing on enhancing scale economies are unable to address local requirements effectively. 6. Firms in the same industry may differ in implementing their global strategy Application of ‘AA’ Strategy: Examples 1. Cognizant experimented changes in staffing, delivery, and marketing in its pursuit of a strategy that emphasizes both adaptation and arbitrage. Its staffing Includes: More MBAs and consultants, More non-Indians, Training programs in India for acculturation. Its marketing includes: Joint Indian –U.S. positioning, Use of U.S. nationals in key marketing positions, Focus on selling to a small number of large customers 2. Another example is of GE Healthcare: GEH has higher total R&D spending than SMS or PMS, greater total sales, and a larger service force (constituting half of GEH’s total employee head count) – but its R&D-to-sales ratio is lower, its other expense ratios are comparable, and it has fewer major production sites. Expanded through its Acquisition capabilities. Through experience, GEH has become more efficient at acquiring. It made nearly 100 acquisitions under Jeffrey Immelt (before he became GE’s CEO); since then, it has continued to do a lot of acquiring, including the $9.5 billion Amersham deal in 2004, which moved the company beyond metal boxes and into medicine. In terms of adaptation, GEH has invested heavily in country focused marketing organizations, coupling such investments relatively loosely with the integrated development and- manufacturing back end, with objectives that one executive characterizes as being “more German than the Germans.” AAA Strategy: A company might use all the three ‘A’ strategies to put together a globally competitive strategy. For example: Philips Medical Systems, a diagnostic imaging firm, historically emphasized adaptation but has recently placed some focus on aggregation. Siemens Medical Solutions emphasizes aggregation and uses some arbitrage. The most successful of the three, GE Healthcare, beats each of its rivals on two out of the three A’s. Lessons: 1. Focus on one or two of the A’s. While it is possible to make progress on all three A’s –especially for a firm that is coming from behind – companies (or, often more to the point, businesses or divisions) usually have to focus on one or at most two A’s in trying to build competitive advantage 2. Make sure the new elements of a strategy are a good fit organizationally. While this isn’t a fixed rule, if your strategy does embody nontrivially new elements, you should pay particular attention to how well they work with other things the organization is doing. IBM has grown its staff in India much faster than other international competitors (such as Accenture) that have begun to emphasize India-based arbitrage. But quickly molding this workforce into an efficient organization with high delivery standards and a sense of connection to the parent company is a critical challenge: Failure in this regard might even be fatal to the arbitrage initiative. 3. Employ multiple integration mechanisms. Pursuit of more than one of the A’s requires creativity and breadth in thinking about integration mechanisms. Given the stakes, these factors can’t be left to chance. In addition to IBM’s algorithm for matching people to opportunities, the company has demonstrated creativity in devising “deal hubs” to aggregate across its hardware, software, and services businesses 4. Think about externalizing integration. Not all the integration that is required to add value across borders needs to occur within a single organization. IBM and other firms illustrate that some externalization is a key part of most ambitious global strategies. It takes a diversity of forms: joint ventures in advanced semiconductor research, development, and manufacturing; links to and support of Linux and other efforts at open innovation; (some) outsourcing of hardware to contract manufacturers and services to business partners; IBM’s relationship with Lenovo in personal computers; customer relationships governed by memoranda of understanding rather than detailed contracts. 5. Know when not to integrate. Some integration is always a good idea, but that is not to say that more integration is always better. First of all, very tightly coupled systems are not particularly flexible. Second, domain selection – in other words, knowing what not to do as well as what to do–is usually considered an essential part of strategy. Third, even when many diverse activities are housed within one organization, keeping them apart may be a better overall approach than forcing them together in, say, the bear hug of a matrix structure. Analysis of ‘International Strategy’ article including positive aspects, negative aspects, compatibility of AAA model with other theories Companies focusing on internationalization aims to expand their scale economies. They can achieve this by adopting any of the strategies of globalization including adoption, aggregation or arbitration, or even the combination of any of them. While adapting to these strategies they face the problem of addressing local needs effectively. Also, companies may face several business challenges for implementing their international strategy which can range from cost pressures, managing customer demand, supply chain operations, business unit aggregation, implementing relevant IT systems to improve operations etc. To address these challenges effectively, companies may select specific global expansion strategy for itself which may be based on the combination of three A’s. For example, IBM has adapted arbitration policy as it has able to exploit the low cost labour advantage of India by increasing its employee strength significantly in the country It may also happen that the companies in the same industry may choose different combination of three A’s to pursue their expansion plans. For eg: TCS, a leading IT company in India follows arbitration strategy, however, Cognizant, another leading IT company in India, followed both adoption and arbitration policy to expand its geographic footprint. Positive and negative aspects of each of 3A’s strategy: Through adoption strategy, though the company may be able to address the local market needs more effectively by tailoring its products/services specifically to suit their interests and requirements, however, it requires huge capital expenditure from the company point of view. It may result in affecting the profit margins of the company For aggregation strategy, though the company is consolidating its production in the areas to support supply chain activities and bring standardization to its products/services, however, the company may not be able to address the local market needs effectively, as a result, it may happen that new product launches from the company receive different response from different markets. It may lead to success of product in one market and its failure in other market For arbitration strategy, the company may take the advantage of different regions to carry out its supply chain/business activities, a service may costs less in one region compared to another, developing manufacturing plants may be easier in one region and difficult in other region AAA framework is coming in line with other theories in this area, such as Porter’s 5 forces model. A company going for AAA strategy may address its limited buying power, supplier’s power, threat of new entrants, substitutes, degree of rivalry. Through adoption, a company may improve buying power of customers, its suppliers power as it has expanded its global footprint by establishing units in local markets. Through aggregation the company underpins its cost structure by leveraging supply chain efficiencies of a particular market, thus providing it competitive advantage and makes it more capable to address threats of new entrants. Through arbitration, the company may collaborate across its business activities across several markets, to bring quick innovation, product launches etc thus, reducing the threat of substitutes and degree of rivalry. Conclusion: Selecting global expansion strategy is highly dependent on the nature of company’s business and its strategic goals. For eg: a company with high R&D may follow arbitration strategy, FMCG companies may focus more on adoption strategy etc. Also, utmost care needs to be taken while implementing combination of these strategies, as they may become contradictory at certain point of time. For eg: Adapting both Adoption and aggregation strategy may be contradictory as one is talking about providing market tailored solutions by developing local units, and other is talking about making standardized products and leverage ease of supply chain operations of a particular market References: 1. P&G Annual Report 2010: http://www.pg.com/en_US/investors/financial_reporting/index.shtml 2. P&G Company Website: www.pg.com 3. P&G Investor Presentations and Webcasts 4. P&G Company Strategies: http://www.pg.com/en_US/investors/company_strategy.shtml 5. P&G Datamonitor Report available at www.ovumkc.com 6. Dow Jones Factiva: global.factiva.com 7. Harvard Business Review report on ‘Managing Challenges: The Central Challenge of Global Strategy’ 8. P&G at Wikipedia Read More