Procter and Gamble: Organisation 2005 strategic business analysis review
Category : Max Factor Case Studies, Procter & Gamble
AN ANALYSIS OF PROCTER AND GAMBLE’S STRATEGY IN THE NEW MILLENNIUM
Procter and Gamble (P&G) is one of the most recognisable and even the most powerful companies in the world. However, the environment which they operate in is slowly catching up to their competitive advantage. This spell danger for the market domination as well as the market share of the brands operating under the roster of P&G. This call fro development gave birth to Organization 2005, a strategy that started under the leadership of and eventually continued by the current CEO and President . The discussions below are an examination of P&G and the changes made by the company in its implementation of the strategy.
Organisational success may well be something that every organisation intends to achieve. However, how could one measure success of their organisation? Would it suffice to say that an organisation is successful based on increase in revenues or profit? Traditionally, that may be the case. However, recent accounts of modern companies tend to manifest an increase in regard of overall growth and development as an essential determinant of organisational success. One such organisation is Procter & Gamble (P&G) which engaged in developments and changes in its strategies to achieve this characterisation of organisational success. The following study will be providing an examination of the business strategy of P&G based on the case study provided by (2003). Specifically, the analysis will be focused on the P&G initiative called Organisation 2005. The study will be divided into three parts. Basically, an analysis of the macroenvironment and the microenvironment will be initially provided and subsequently followed by an examination of the changes held in the strategy of P&G from 1999-2004. In the end of this paper, a summary and analysis of the conditions held by the case study and the initial claims of this paper will be given. In the same manner, recommendations regarding the case will also be given.
The following discussion is essentially a SWOT analysis. To some extent, the analysis covered by this tool tackles both the internal and external factors affecting the organisation. (2006) As a result, it is usually used as an instrument to address issues relating to strategy and strategy formulation. In any case, the focus of this analysis is to uncover the strength and weakness of the organisation in relation to their resources along with the opportunities and threats external of the organisation. The following SWOT analysis of P&G is to be based on the case study provided by (2003).
The strength of the resource of the company is based on several elements as indicated in the case study of (2003). An apparent strength of the company is the presence of a wide range of business segments in consumer good industry. Procter & Gamble divided its operations in the consumer goods industry into five segments which includes fabric and home care; baby, feminine, and family care; beauty care; health care; and food and beverage. In looking at this attribute of P&G, it is apparent that this diversification of the consumer good market has made their performance and productivity improve throughout the years. ( 1995) In the same account, the use of business segments also allows a firm to take on a more consolidated system of operations fit for dealing with the international market. (2006) This attribute is similarly noted in the case study of (2003) as P&G has international recognition and worldwide distribution of products. Specifically, the products of the company reached major market areas like the United States, Latin America, Europe, Middle East, Africa, and Asia.
One other strength of the company is seen in the history of P&G, specifically in its account of high quality consumer products and reputation built on this accepted knowledge from the consumers. With its humble beginnings in 1837 in the United States, the company was on its way on achieving commercial success and become one of the top multinational corporations in the world. The success of this company has been attributable to the top of the line leaders that have graced the company. In the study of (1999) they noted that the direction that the company will take is generally dependent on the leadership of the company. Recent known president and CEOs includes and , both of which have handled Organization 2005 in their reign in the headship of P&G. (2003) On the two said leaders, was the one who initiated the creation of the Organization 2005 initiative. Based on the major intentions of the strategy, it appears that P&G is bound for a rather appealing future.
Procter & Gamble, like any other organisation, have limitations and shortcomings in their operations. (2003) noted several of these weaknesses. One of these is the mediocre performance in the context of innovation on the new brand. () This is rather a huge blow for the company given that continuous brand and product innovation tend to influence the consumption patterns of the individual market on which any company like P&G operates. (2002) Studies have indicated that having such a slow pattern of innovation on the part of the company indicates that some barriers to innovation do exist in the company. For the most part, studies have indicated that the presence of such barriers similarly indicate that the company has the propensity to be rigid and engage in “bureaucratic inertia.” (2006)
Though it could also be seen as strength, one attribute of the company could also be seen as a drawback connected to the barriers of innovation in the company. Basically, (2003) indicated that the established brands of the company is comparatively mature. Normally, this indicates that the knowledge of a particular product by the public is already at extremely high levels. (1995) This shows that the consumers know that the brand and the products of the company exist. However, it also indicates that the mature brands are bound to decline eventually if the company fails to provide some differentiation initiatives that could improve the performance of the product or brand. (1996) Thus, the demand for the company to constantly differentiate their mature products is marred by the barriers to innovation established in the case study. This weakness is exacerbated by the inconsistent performance on the entire product brands of the company. (2003) Apparently, the different segments of P&G do not have the overall control of the consumer product industry.
The company have great opportunities in the global market, particularly in opening new markets and taking advantage of the recent trade liberalisation of formerly protectionist countries. In doing so, the distribution of the global product lines of the company would be the first ones to feel the improvements. This triggered the creation of the global business units (GBU). These were the initial step in seizing the opportunities in the global market. (2003)
Along with the opportunities present for the company in the context of globalisation, there is also the opportunity to cut costs by installing manufacturing houses and warehouses in major markets overseas. This means that with the rising expenditures incurred by the company, significant cuts in the costs of the company. In this regard, P&G will also have a closer consideration of the market by being immersed to the actual market culture and buying behaviour of the specific market on which it distributes its goods. Subtle adjustments could be addressed by the possibly similar localisation of the operations of P&G. This means that despite the constant demand for internationalisation and globalisation, companies are required to regard the localisation of the operations of multinational firms. Companies like P&G thus have to find ways to complement the demands of the local market by individually analysing the conditions distinct in every state.
(2003) further indicated that opportunities to lessen the costs of operations is also within the sights of the company. The case study noted that the company is considering expanding the network of their operations in the other countries by installing directly investing on plants and other factories. The lower costs of labour in other nations provide the opportunity to cut the operational costs and allow the company to disburse it to other areas like marketing or market analysis. It is in this possible reduction of operational costs that the possibility of developing the existing top brands of company in major markets all over the world becomes accessible to the company. () Since it has been established early on that the brands of P&G in every segment has been considerably mature, then the company could take advantage of this before it declines eventually.
A further opportunity for the company is inherent in the infusion of IT in their operations and marketing strategies. Once technology comes into the fray, this could improve the chances of P&G to make the organisational objectives a reality. Companies, regardless of size, have already made it a point to infuse IT with their operations. From the reduction lead time to the creation of further opportunities, the combination of IT and business principles are closely becoming a universal recipe for success.
The market environment is among the most important elements to be considered in the context of strategy formulation. In the study of (2002) he indicated that the compatibility of the market environment and the strategy of the company is imperative for the proper operations and performance of the firm. With the initially mentioned weakness of slow innovation on the part of the part of P&G, the technology on which the competitors and other players in the consumer product industry have been catching up with the level of competitive advantage of P&G through the use of the current technologies.
In the same regard, a rather incontrovertible threat is the incessant presence of intense competition from the company’s tightest rivals, Unilever. As seen in the study of (2005) Unilever and P&G has been at it for the past decades and have been battling for brand supremacy using different marketing techniques and strategies to gain better position in the market. To some extent, the case study could lead people to believing that Unilever has overtaken P&G in the industry as the latter have incurred certain drawbacks including a decrease in sales and in cash flow within the company.
The discussion above has provided the picture of the environment, both internal and external, of Procter & Gamble. Basically, it presented certain elements on which the company could use as reference once it intends to develop its existing strategies. The discussions above have presented the assets on which the company could use to its advantage in their global operations. It also presented the areas on which the company could improve later on. The opportunities as well as the threats indicate the demand for the company to be flexible in its operations. In the same manner, it also presents the need for a competent strategy to keep the performance of the company in a top-notch shape.
Organization 2005 is the brainchild of the P&G as it came to realize that the other players in the consumer product industry is starting to gain a lot of competitive advantage that could match and even take over their market share. This necessity spawned the Organization 2005 initiative on the part of P&G which essentially attempts to trigger organisational development. Basically, the discussion on the changes in strategy is to be based on the leadership changes that took place when Organization 2005 is being implemented.
Building an organization with the competences, capabilities, and resource strengths to execute strategy successfully
To ensure that the execution of a particular strategy would effectively provide the desired outcomes for the organisation, (2000) indicated the need to establish a capable organisation and ensure that the core competencies of the company are recognised. Along with this is the creation of a competent framework that will provide structure on the work effort of the company. In the case of P&G the structure of this framework is seen in the creation of Organization 2005 initiative.
Staffing the Organisation
In the initial stages of the strategy, P&G has to deal with the “outgrowth” of the restructuring process. (2003) This means that the staffing of the company would be the first to feel the effects of development. Primarily, this means labour cuts. In the case study, (2003) indicated that the compensation of those given separation in 2002 alone amounted to three hundred ninety-three million dollars. This is over a fifty million increase from the previous year with $341 million dollars. Overall, fifteen thousand jobs were affected by the Organization 2005 initiative during the implementation from 1998-2001. Among those affected the most are those employed by the company in Europe, Middle East and Africa with over six thousand employees separated or reassigned.
In any case, Jager, the then CEO and President of P&G, emphasised that the Organisation 2005 initiative is not about job reductions. The implications of the initiative on the employment structure of P&G are all a part of a greater plan to make the company more competitive in the market. However, it has been established in organisational literature that the security of the employment of the workforce is directly related to the level of motivation present in the organisation. (2000) Thus in the case of P&G, the possible troubles encountered eventually by Jager may also be attributed to the low morale of the workforce regardless on how sure he is that it wont affect the actual implementation of the strategy. In the long run, having a workforce that constantly thinks that they will sooner or later lose their jobs could compromise the efficiency of any professed “fool-proof” plan. This is further proven when Jager was forced to resign after the mediocre performance of P&G in 2002.
Building Core Competencies and Competitive Capabilities
Based on the case study of (2003), P&G has a considerable number of core competencies, on top of which are the mature brands under its roster. And a recent addition to these brands is Gillette after P&G has acquired it in 2005. Initial intentions of the Organization 2005 initiative was to create new opportunities through equally new initiatives made by P&G. (2003) However, the performance fiasco of in 2001-2002 led the company to shift its focus to make the most of the exiting competencies of the company, in this case, the brands of the company. Furthermore, the Lafley mentioned that the P&G is going to improve more on its market share by taking on diversification and acquisition of other brands in the market.
Based on the existing literature, a company is able to take advantage of its brand leadership in specific markets if it is able to align its strategies to maintaining and even improving this competency. (2000) This has been the clear objective of the future endeavors of P&G as they acquire brands that will be able to help their innovative nature and align the value chains of their diversified companies.
Structuring the Organisation and the Work Effort
In the structure under the Lafley leadership of P&G, the focus on placing efficiency on the top of the priority list has have placed the IT initiative in action. (2003) Studies have indicated in their findings that infusing the IT in their operational frameworks practicable to operational development. (2002) This indicates that along with the improvement in the logistics, distribution, and communication among the major brands under the roster of P&G, the infusion of IT in the company permits the possibility of added learning and possibly added competitive advantage in their international operations. (1999) For P&G, being an inherently innovative company could only mean that it is bound for far greater outcomes based on the intention of Lafley to infuse IT. The possibility of business-to-consumer opportunities is seen as e-commerce is introduced in the processes of the company.
More importantly, the leadership ability of Lafley should similarly be taken into notice as a huge responsibility is placed on his shoulders upon replacing Jager in implementing this revolutionary strategy in the form of Organization 2005. In a similar account, the possibility of organisational success will only be practicable once Lafley wins the trust and cooperation of the entire workforce of P&G. Unlike his predecessor, he must be able to take on the challenge of being firm without compromising the level of motivation of the workforce.
Following the shift of leadership and shift in the focus of the strategy of P&G, the top brands of the company was given the top priority along with the top markets in the industry. As indicated in the case study of (2003) the focus was the European market. The best selling brands are said to be placed in that market in addition to the allocation of the manpower, resources, and financial support. Basically, those brands which give P&G over a billion dollars annually are given that support in the European markets.
In the context of manpower, Lafley continued the labour cuts initiated by . However, Lafley focused more on cutting the non-manufacturing part of the workforce. This means that those that were directly affected by the Lafley interpretation of Organization 2005 initiative are primarily in areas like sales. Thus, the morale of those that are still deemed essential by the company, particularly those in the manufacturing lines, is kept intact.
Moreover, it has been noted that company is inherently an innovative one. With this culture as one of their major assets of P&G, growth is seen with Lafley’s introduction of new products coming from the specific high performing brands of P&G. For instance, feminine product brands like Tampax have given a go ahead by P&G to expand their product lines starting 2002. This also took place in brands like Olay which created a new line of products for men called Ohm.
The concept of strategy nowadays requires not only effectiveness of operations but also calls for further sustainability of the competitive advantages of the company. (2000) pointed out several procedures and policies that could ensure that the company will be successful in its undertaking with particular stress on its strategy execution. The first activity that a company require is to establish what the strategy-critical value chain activities of the company. In the recent study made by (2007, 215), they indicated that such strategy-critical value chain activities particularly in cases of multinational companies includes “sourcing, manufacturing, and distribution activities.” In establishing the specific elements of these value chain activities, the company is able to manage its performance properly and within the level of risk controllable by the organisation. In the case of P&G, they have pinpointed under Organisation 2005 that they will focus on manufacturing and distribution activities globally though sourcing in the local markets of the individual states which they chose to operate.
Another course of action noted is to choose what activity is to be performed internally and what to outsource. ( 2000) This means that the element of outsourcing has become one of the indispensable factors in operations of the company. In the study of (2005) they noted that P&G outsourced their HR functions in order to focus more in the needs of the customers. This gives the company opportunity to take initiatives to be more sensitive to the changes in the market which also allows the company to be more flexible and adaptable to these changes.
Upon establishing the elements that should be outsourced and those that should be performed internally, the company should realise that the activities that are said to be carried out internally are to become the building blocks of the organisational structure. (2000) In the case of P&G, Lafley may have realised this as the shift of focus to bigger markets and bigger brands also entailed a shift on the operations in favour of the European market which Lafley deemed a rather less exploited goldmine. (2003) Resources, financial backing and a major part of the workforce, in short the structure and framework of the organisation, is changed to complement the intentions of to dominate the rest of the European market with the most potent brands under the roster of P&G.
For multinational companies like that of P&G, the delegation of authority is similarly important. For instance, the decision whether to place a centralised or decentralised decision making process is always an issue. In the case of P&G the decision-making structure is in line with Organization 2005 as the “Euro Brand teams in which the ideas were leveraged across countries and motivation was enhanced by choosing a subsidiary general manager who was most enthusiastic about the brand in question.” (1999) This means that for foreign operations, P&G tends to place a significant amount of authority on the subsidiary brand managers with some level of consultation with the CEO and president Lafley when it comes to issues of far greater implications on the organisation.
Looking at the previous paragraph, Lanfley has apparently taken the advice of (2000) as they noted that, often, the best policy is empowering the workforce. In the case of P&G, the empowerment is given in the management with particular reference to the free reign Lafley has endowed these subsidiary managers in covering the local operations of the individual P&G distribution in their areas of responsibility. Though it is not an openly apparent policy, it takes care of the decision making efficiency in the company despite the diversified structure of P&G. At any rate, the leadership of has considerably taken a great step in realising the objectives of Organization 2005 as policies that sought order and control on both the internal and external environments of P&G.
Adopting best practices and striving for continuous improvement in how value chain activities are performed
The concept of “best practices” is rooted in the proper management of knowledge in the organisation. The case study of (2003) indicated that Lafley has recognised the need for continuous improvement on the knowledge management of the company and relate it to the value chain activities of the firm. This is shown in the apparent endeavour of the CEO to intensify its IT capabilities. indicated that once a stable IT initiative is installed in P&G, Organization 2005 comes one step closer to its realisation of its goals. A key indication that is indeed serious about this IT enabling initiative is the allocation of a considerable number of funding in this endeavour. In 2002 alone, P&G spent over a billion dollars of funds to establish such IT capabilities.
In doing so, the company is able to “capture, store, process, and disseminate business knowledge.” (Hunton 2002, 55) Organisational literature has noted the capability of managing these activities into allowing the company to use this firm-specific and industry-specific knowledge to their advantage. Particularly, this initiative towards IT enables the company to create clear lines of communications to its suppliers and possible partners in the industry. In the same manner, the company could thus monitor their operations in a more efficient manner with particular reference to the management of inventory, manufacturing and even the distribution of their products. It similarly opens new opportunities for P&G as they could now sell their goods directly to the consumers, which means they may well do away with some of the minor players in the retail industry as they could initiate B2C methods through the use of e-commerce. The study of (2001) manifested the importance of such IT capabilities and e-commerce potentials to companies like P&G. Specifically, the study focused its attention to the marketing possibilities of using IT to gain competitive advantage in the context of location-based marketing. This means that this increase in the capability of P&G in terms of IT tends to contribute largely on the market dominance of each subsidiary operating overseas.
In line with the improvements in the IT capabilities of P&G, the company could also monitor their improvements in the operations through benchmarking for the best practices in the industry. For instance, the issue of infusing IT, knowledge management, and marketing has been the focus of another company in the top of its game, Ducati Motor Holdings (DMH). ( 2005) P&G could take some of the innovations taken by DMH on its operations and infuse it in the consumer product industry. Specifically, the company could implement some of the marketing initiatives of DMH in the operations of P&G.
Installing information and operating systems that enable company personnel to carry out their strategic roles proficiently
Based on the case study given by (2000), IT has become one of the major improvements by P&G wit over a billion dollars allocated to its development. As mentioned in the previous parts, this is a great step on the part of Lafley and his crew as the development of this part of the operations also entails an improvement in the support systems present in the company. Thought the case study fails to mention the actual support systems installed in P&G, (2000) have indicated that a “innovative, state-of-the-art support system” is a good starting point for building competitive advantage as long as the company’s core competencies complement such systems.
(2000) mentioned possible support systems that could be helpful in the operations of P&G. These include e-commerce systems, internet and intranet for the company. With the installation of these, the employees of P&G are able to communicate through email and even access online data systems that could be helpful in making market analyses and other examination tools measuring the complex and diversified environment on which the company operates.
In any case, installing support systems are all but a part of the knowledge management of the organisation. This means it adds up to the core competencies of the organisations with particular focus on the efficient sharing of information from one individual employee to another. (2000) As indicated in numerous KM studies, the observation of (2000) slowly establishes P&G as something close to a learning organisation. Being innovative and considerably one of the players that dictate the pace and the trends in the consumer product industry, P&G should implement continuous improvements and developments to add to their competitive advantage in the market. (2000) indicated that there are certain areas on which companies like P&G should consider in their regard of their information systems. Elements like customer data, operations data, employee data, supplier/partner/collaborative ally data, and financial performance data. Basically, these set of information basically describe the current status of the organisation. Furthermore, this claim merely highlights the need to have a record of such aspects of the operations in order to detect the changes in the environment of the organisation, no matter how understated these changes may become.
Tying rewards and incentives directly to the achievement of strategic and financial targets and to good strategy execution
The case study of (2000) noted that despite the massive job cuts in the initial stages of Organization 2005, the company have given those that have been retained with both monetary and non-monetary incentives to continue working to realise the goals of the initiative. Monetary Incentives includes those connected to augmentation in salary, bonuses for performance, stock options, retirement packages, promotions, and other perks. (2003) On the other hand, non-monetary incentives include those that deal with job security and employee morale particularly as a result of praise, constructive criticism, recognitions and trust from the company. ( 2003) In the case of P&G, the incentives were seen predominantly in terms of the separation packages that they offered to their employees during the jobs cuts. This took place in the time of where those retained felt unsecured of the jobs that they posses along with the vaguely offensive leadership style practiced by the then CEO.
These all changed when took over the headship of the company. In this period, there are still job cuts but it is overshadowed by the appealing incentives for those who have been retained, especially those holding from the management positions. A balance between monetary and non-monetary incentives has been apparent with a rewards system that is based on performance and considerably result-oriented. Compensation was given at competitive rates with the existence of constant training to “revitalize long-term competitiveness” of P&G.
The basic premise of the Organization 2005 initiative establishes the need to streamline the operations of the company. ( 2000) This is the main reason why the company conducted job cuts all over the world. One sure way of streamlining the operations of the company and in the same time reduce the cost of operations is by mass lay-offs. Another consequence of these job cuts could be mass reduction on the morale of the remaining employees. However, this rather negative effect of the strategy could also work in favour of P&G. (2003) The company have to use their influence effectively so as to instil an culture of competition among those retained. Essentially, the uncertain job security could be counteracted by establishing a performance-based incentive or a results-oriented appraisal system such that every person retained by P&G will give the best that they can offer professionally. This change in culture could be derived from what and (2003) indicated as those that originate from arrival of new leaders, policies and strategies compounded by the organisational politics inherent in P&G. In such conditions, the culture of P&G will incontrovertibly evolve into something far different from the original. This is manifested in the change in leadership as Lafley took over the seat of power from Jager. The change from confrontational leadership shown by Jager to the transformational style of Lafley made leaps and bounds of improvements on P&G. In any case, the change in culture in P&G made the execution of Organization 2005 acquire a better mode of execution.
Exerting the internal leadership needed to drive implementation forward and keep improving on how the strategy is being executed
In the Organization 2005 initiative, leadership has changed in P&G in the middle of its implementation. At some point, the company may have considerably gained immensely from this change in the leadership. Apparently, the leadership style of tends to conflict with the strategy in general. As (2000) characterised it, the style he used was highly confrontational and bordering to authoritative. This left a bad aftertaste on the operations of the company.
The change of leadership is rooted from the demand of the major stakeholders of the company; from the shareholders, management, and even the retained rank and file employees. When Lafley took on the point, he recognised the flaws of the style and took on a different route. However, it must be pointed out that still cleave on the strategy started by Jager. Based on the case study of (2000), apparently empowered his managers and other top officials in the company by giving them freedom to exercise their decision-making practices. Nonetheless, in the Lafley version of the Organization 2005 initiative, the mission was still the same but the objectives were much clearer. This clear set of objectives and policies helped the managers handle their jobs and executive functions as they are now currently aware of what courses of action to take when they encounter come bumps in their operations. And apparently, all they have to do is emulate what Lafley did and continue to cleave on to the principles of the strategy.
As noted by numerous market analysts and academics, the recent acquisition of P&G of Gillette was bold to say the very least. With fifty-seven billion dollars in tow, Gillette handed over the control of their twenty-one brands to Procter and Gamble along with the core consumers of the company that has been loyal to its products throughout the years. The following discussions will examine and analyse the acquisition of P&G of the said company. Particularly, the discussions will be covering the possible implications of the acquisition based on the concepts of strategic fit, value chain, and the diversification endeavours of P&G.
By far, the P&G acquisition of Gillette created the largest company in the consumer product market. The two companies are possibly the owners of the most mature brands in the United States. With stable brands and loyal customers, the merger is expected to generate immense returns for P&G. This monolith of a company is expected to acquire over sixty million dollar group sales annually subsequent to the acquisition.
One notable attribute of the merger is that both Gillette and P&G markets brands focused on grooming for male and female consumers respectively. In doing so, the market of P&G has considerably diversified and at some level acquired a whole new market to take advantage. One major drawback on this grand union of consumer brands is the possibility of employment cuts especially on the part of Gillette. On the part of P&G, they have no choice but to go through with such cutbacks so as to reduce the operational costs and labour expenses of the company. In fact, coming from the economies of scale and internal restructuring, P&G foresees to save costs of over fourteen million dollars and sixteen million dollars respectively. In any case, the acquisition of Gillette has made P&G among those in the top echelon of the consumer goods industry making its close competitor, Unilever, in second place. Other players in the consumer brand industry have been scrambling to restructure and establish a stable position in the market to address the implications of this union of brand juggernauts from the United States.
There are some issues as to whether the acquisition of Gillette was actually a good idea on the part of P&G. For some reason, an acquisition this grand may not even be fit to satisfy a level considered as a “good idea.” The sheer amount of finances disbursed by P&G requires this acquisition to be commensurate with the amount they spent. The following discussions will be analysing whether the acquisition of Gillette complements the strategies held by P&G, particularly with reference to Organisation 2005.
This part will be discussing the theoretical foundations to be used in the analysis of the Gillette acquisition. Basically, the following will discuss the sensibility of acquiring another company for a diversified company such as P&G. Studies have noted that a particular course of action taken by an organisation should essentially be aligned in “a strategy with its environment results in superior firm performance.” ( 2002) This implies that companies should constantly be vigilant in determining as to whether the benefits of a decision, like an acquisition of a direct competitor like Gillette, would outweigh the possible drawbacks on the organisation. and (2002, 657) called this as strategic fit. In the case of a diversified company like P&G, the concept of strategic fit encompasses the angles as indicated by (2000) as “whether one or more businesses have valuable strategic fits with other businesses in portfolio” and “whether each business meshes well with firm’s long-term strategic direction.”
Related and Unrelated Diversification
For any multinational company, the drive to diversity is inevitably a part of the development and expansion processes needed to acquire a competitive advantage over the other competitors in the industry. In the context of P&G, the acquisition of Gillette is their account on that noted step towards development. Diversification opportunities come in different forms and sometimes, firm often disregard as to whether these opportunities may be helpful or not on their operations. (2000) indicated that these opportunities tend to be divided into related and unrelated diversification. According to and (1995) these two concept is separated by the “the relative distance between the knowledge needed to operate in the new domain and the degree of knowledge available in the current domain.” Specifically, for a diversified company, a related diversification opportunity shows the possibility of a fit on the other businesses held by the firm in terms of the value chains and the resource capabilities of the businesses it controls. On the other hand, in an unrelated diversification opportunity, the firm seeking to diversify regards only the financial appeal of the business, the industry on which the business opportunity exist factors minimally in this diversification process.
The concept of a value chain has been utilised in organisational and business studies for many decades already. This is essentially an approach that allows a company to acquire competitive advantage over the other players in the industry. (1985;1992) Specifically, the value chain is a process that starts from the acquisition of the raw materials to the actual physical products peddled by the company. In the context of a diversified business, the context of the value chain and the individual activities involved in the process is imperative in determining cross-business strategic fits. ( 2000) These activities include inbound logistics, technology, operations, sales and marketing, distribution, and service. In this category, strategic fits and value chain relates to cross-business points to the ability to share and combine the functions of the company. In any case, the possibility of aligning value chain activities across firms could indicate a strategic fit for the diversified organisation.
The following is a discussion of the benefits of the acquisition of Gillette. In the said process, strategic fit and resource fit analyses will be carried out. Based on these analyses, a discussion on its implications in the industry will also be derived. Moreover, an evaluation on the actual diversity of P&G as they acquired Gillette will be presented in this part of the paper.
The acquisition of Gillette has been noted by most of recent articles as nothing short of brilliance on the part of P&G. The following analyses will provide the said justifications.
Strategic Fit Analysis
In looking at the strategic fit of the P&G acquisition of Gillette, one must also take into consideration the earlier discussions on Organisation 2005 indicated in the SWOT analysis and analysis of the changes in strategy above. As indicated above, the case study of (2003) indicated that Organisation 2005 intends P&G to shift its focus from geography to the global product lines. Basically, that is the core objective of the said strategy. Generally speaking, the acquisition of Gillette does fit to that objective. In essence, P&G and Gillette are the top consumer product brands all over the world. There are similar observations that both companies cater to extreme types of consumers, P&G on women and Gillette on men. The marriage of the two organisations creates a whole new opportunity and conditions in the consumer product market. For instance, the areas of beauty care and health care has been revolutionised by the Gillette acquisition. With P&G’s existing brands like Olay, Max Factor, and Crest complements the exiting product line of Gillette in the beauty care and health care category. Such products like those includes in the blade and razor series, dental merchandise from their Oral B segment and other items related to grooming complements the existing brands and products of P&G. Moreover, the case study of (2003) stated that under the reign of as CEO and president of P&G, Organization 2005 is going to focus more on advancing the market share of big brands as opposed to opening up new initiatives for the company. In the acquisition of Gillette, P&G is exactly doing what it is expected to do as indicated by the principles of Organization 2005.
Resource Fit Analysis
The previous part presents the compatibility of the acquisition of Gillette on the strategy of the company. This part of the paper will be focusing on the compatibility in terms of resource. It is an accepted fact that companies merge because of the intention to make the most of the opportunities that they possess as separate entities, particularly in commercial terms like market dominance, increased market share and increased sales. Seeing this claim, P&G’s decision to acquire Gillette improves the economies of scale of the company. For instance, P&G has limited access to the market share of the male grooming industry. The acquisition of Gillette changes all that as over a half of the existing market share in the said area is held by Gillette. ( 2004) Basically, Gillette owns a considerable number of brands in the said market as compared to P&G’s Head and Shoulders.
In other studies, the individual description of P&G as well as with Gillette indicates that they are a perfect match in terms of the nature of their operations. (1999, 239) indicated that P&G is inherently an organisation geared towards innovation. As indicated in the case study of (2003), the era under Jager established a commendable research and development programme in the company. On the other hand, Gillette was deemed as essentially an engineering company. (1999) With top of the line products from their multiple razor blades to their battery products from Duracell, Gillette has been performing considerably well in this regard and in the same time provides the public with high quality consumer products. In this regard, Lafley was right in deciding that the company should acquire Gillette as their nature complements each other and thus creates value on their products.
Discussion: Evaluation of the Diversity of P&G
In analysing the acquisition of Gillette more closely, one has to see as to whether P&G do have a diverse company that could cater more top brands with the ranks similar to Gillette in the future. The following analysis is based on the (2000) account of identifying a strategy of a diversified company.
The corporate strategy is based on the Organization 2005 initiative that Lafley have inherited from former president and CEO . The strategy is initially to create initiatives that could open new opportunities for the company through its global product lines. Eventually, this changed when Lafley focused on acquiring a greater market share through established brands. The acquisition of Gillette is the realisation of that objective.
At this point, would this endeavour be classified as a diversification initiative that is narrow or would it be classified as broad? The acquisition of Gillette, based on the resource fit analysis indicates that it is a broad diversification on the part of the P&G. On the other hand, the strategic fit places .this as a related diversification initiative. This means that most of the value chain activities related to the products of P&G tends to be handy on the operations and manufacture of products under the brands held initially by Gillette.
In the context of geographic location, both companies have their base on the United States. However, both are internationally mature brands and operate in different continents of the world. The effort to add Gillette on the list of P&G names created the biggest consumer product company in the world. This places them in a position where they could have bargaining power with the retailers and other players involved with distribution of these goods. Given their influence and relatively huge share of the market, the loyal consumers of P&G and Gillette may find a hard time locating substitutes from products coming from the other players in the consumer product industry.
The discussions above have presented the conditions surrounding the acquisition of P&G on Gillette. Based on the analysis above, the companies do complement each other in terms of strategy and resource. Apparently, the diversification opportunity that P&G had with Gillette was highly related as a majority of the product lines as well as the value chain processes are aligned to a certain extent. This means that some of the businesses could take advantage of the value of the other in the market. In the same regard, the companies have considerably rocked the industry as they created a monolith in the consumer product industry. One could only imagine the reaction of other players in the industry like Unilever, Kimberly-Clark and Colgate-Palmolive in this bold move on the part of Lafley. In the context of Organization 2005, the Gillette acquisition was one step in realising P&G’s goals. At this point, one should recognise this as an indication that P&G intends to hold on to the top spot of the consumer product industry. With a diversified company, domination of the market, effective strategies, and a considerably strong market share, P&G is slowly but surely becoming one of the world’s top companies in existence.
Strategy formulation and implementation has become a staple in any organisation. In order to acquire market domination and competitive advantage, strategy formulation has to be close to flawless along with its consequent implementation. This is seen in the case of Procter and Gamble as it implements Organization 2005, their strategy to sustain their lead on the consumer product market. The discussions above have provided an in-depth examination of the company and the changes in its changes as Organization 2005 was implemented under the leadership of Jager and Lafley. In the first part of the study, it has been established that the company is indeed a powerful one with both resource strengths and market opportunities are more than suffice to ensure the survival of the firm. In a similar regard, the examination presented that like any other diversified companies, P&G has some flaws in its structure compounded by the threats in the environment particularly coming from the competitors and from the consumers themselves. These threats and weaknesses are actually the factors that spawned the Organization 2005 initiative. The second part of the discussions has provided a detailed discussion of the changes that took place in the company as Organization 2005. It indicates that the company is indeed on its way to success as the market is beginning to turn to their favour. From the improvement of the value chain to the infusion of IT operations in the company, the implementation of Organization 2005 initiative has been doing wonders for P&G. A clear indication of the effectiveness of the Organization 2005 initiative is the bold move of acquiring the Gillette brand. Though it does seem rather audacious on the part of P&G to engage in such risky endeavour, the said action is a perfect fit for the structure, value chain, and the overall strategy of P&G. To some extent, that area may have been the key element of the apparent success of P&G’s Organization 2005 as it complements the diversified structure, value chain, multinational operations and distribution, and overall framework of the firm.
Moreover, the study has also emphasised that the capability of the organisation to decipher the subtle changes in the environment, both internal and external, allowed it to minimise its losses and lessen the risk in its operations. In any case, it must also be noted that the decisions made by the leadership of P&G may have led the company into greener pastures using its own resources and capabilities and in the same time dodging the odds that goes against them. Lafley learned from the missteps made by Jager and eventually tapped the goldmine that is the consumer product industry. And at the rate that they are going, it is not surprising that they will be keeping the legacy of the company as the number one provider of consumer products and possibly the best the ever existed in known history.