Procter and Gamble
Background & History:
Procter & Gamble Company (P&G) is a leading manufacturer and marketer of branded consumer packaged goods across the world. P&G manufactures, markets and distributes its products in five segments – Beauty, Grooming, Health Care, Fabric & Home Care, Baby Feminine & Family Care.
In 1837 William Procter had established himself as a candle maker, while James Gamble apprenticed himself to a soap maker. The two might never have met had they not married sisters, Olivia and Elizabeth Norris, whose father convinced his new sons-in-law to become business partners. As a result of Alexander Norris’ suggestion, a bold new enterprise was born – Procter & Gamble. (www.pg.com).
Today, P&G’s products are sold in over 180 countries and territories, with over 300 brands worldwide. Some of the leading brands include Head & Shoulders, Tide, Ariel, Olay, Pantene, Pampers, Iams, Gillette, Braun, Fusion, Duracell, Bounty, Vicks and Oral-B. P&G’s customers include mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons distributors, e-commerce and stores. Headquartered in Cincinnati Ohio, P&G was incorporated in 1905 within the household goods industry.
As one of the world’s largest consumer packaged goods companies, with over 170 years of experience, P&G has scalable advantages across it’s 300 plus brands, businesses, operations and people. P&G has about 135,000 employees and annual sales of about $79 Billion. This allows P&G to share knowledge, transfer technologies, optimize spending and flow resources to better serve consumers and continually improve efficiency and productivity.
Organizational Structure & Behavior:
To make a positive impact on consumers, P&G believes they have to excel in six core strengths- Consumer Understanding, Innovation, Branding, Go-to-Market Capabilities, and finally Scale and Productivity. “Our company, our structure and our people are focused on winning through brands and products that create value for consumers, touching and improving lives every day… all over the world.” (www.pg.com).
P&G is recognized as one of the industry’s most prolific global innovators. They collaborate with industry partners. More than half of their product innovations have at least one major component from an external partner. Such contributions have helped P&G to earn consistent recognition from the IRI New Product Pacesetters Report – an annual list of the biggest innovations in the industry. To maximize total shareholder return, P&G is looking to grow both profits and cash flow. To meet this value creation priority, P&G plans to grow sales, improve margin, and utilize assets efficiently. P&G has strategies and capabilities in place to transform the company into a faster-growing, more profitable and far simpler company. The company’s approach is to create a more focused business portfolio; a more innovative and productive; and a more strengthened business unit strategies. There are numerous opportunities for the company to do that, but it will not be easy. The company would also like to minimize costs and generate revenues, while been a leading innovator in the HouseHold Goods Industry.
From it’s early years in the industry, P&G has evolved from a simple informal owner administered production in 1937 to a professional managed line and staff structure and after 1954, a multidivisional organization in the United States. Prior to that, in 1948, the company opened its first international sales division. In the U.S there was the homogeneous market developed into nationwide brand and product division organization. In Western Europe there was the heterogeneous market which adopted a decentralized hub-and-spoke organization along three dimensions – country, function, and brand. As P&G grew more complex, it decided to change its structure to accommodate the growing market.
In 1987 the company introduced the matrix organization in the U.S to better balance the product and the functional influence in the management decision process. With this introduction came 39 U.S product-category business units, run by general managers to whom brand and dedicated functional managers reported. Functional leaders reported directly to their business leaders and also in a dotted line reporting to their functional leadership. By 1995 the matrix structure was extended to the rest of the company around the world with four regional presidents (Asia, North America, Latin America, and Europe – Middle East & Africa) reporting directly to the CEO. After experiencing bottlenecks with the structure P&G embarked on organizational restructuring named, “Organization 2005″. It involved trimming the old matrix structure to a newer version known as the front-back hybrid matrix structure (Galbraith 2009). The first part focusing on the customer-markets, designated the front end, while the second part, focusing on products, designated the back end. The objective was to simultaneously achieve global scale economies and also customer focus and responsiveness. Spear-headed by the then CEO, Durk Jager, this structure saw sales growth of 40% ($57 Billion), with doubling profits and an almost doubling stock price in 2005. In 2006 the financial statements stated: ” The foundation for consistent sustainable growth was clear strategies, focus on core strengths, and a unique organizational structure that leveraged P&G strengths” (Degen 2009).
The main drive for the company in choosing the matrix structure was the need to pursue a multiple-priority strategy – customers and market focus, product focus and functional efficiency – besides the sharing of expensive resources.(Degen 2009). Today P&G runs with it’s Global Business Unit model.
In developing its supply chain system, the company partnered with heavy suppliers such as Wal Mart and Walgreens. With about $83 billion in annual sales, P&G has 22 billion-dollar brands, and operates 130 plants staffed by 70,000 people. The company deals with more than 70,000 suppliers all over the world (Gunn 2015). P&G’s goal is to replenish 80% of its orders in less than 24 hours, and has redesigned its distribution network to help achieve this in the U.S. It has improved visibility throughout the supply chain, and partners closely with its suppliers – even going so far as to bring suppliers in-house and locating its own staff at supplier sites – in order to increase synergy throughout the production cycle (Gunn 2015). P&G’s robust supply chain system is fueled by three strategies – Collaborative Planning Forecasting and Replenishment (CPFR), Consumer Driven Supply Network (CDSN), and the Control Tower Program. These initiatives allows P&G to have oversight and control over its supply chain activities. For its accomplishments, company received a CHEP award in 2011 for Supply Chain Excellence. CHEP is the worlds leading pallet and container pooling company.
As a symmetric company, P&G has many subunits, as such it stacks itself very high on horizontal differentiation. The company also has many levels due to its matrix structure and as such stands high on vertical integration. Work at P&G is broken down into many task specialties as well as many vertical reporting levels. Everything is broken down into smaller tasks such that work is done simultaneously in the subunits. Parallel processing of work and the ability of each global business unit to deal with the marketplace, and the opportunity to work independently. The matrix configuration reflects the complex environment in which P&G operates – a combination of a functional and divisional form with a dual focus on firm and hierarchy.
Industry & Competitiveness:
Procter and Gamble (P&G) has a turbulent environment and when it comes to their ability to adapt and survive in that environment, I believe they have adapted well and surviving. I say this because P&G has operated on the global stage for decades and has seen its share of challenges, failures and successes along the way. The company operates in over 180 countries and copes with government regulations, taxation, competition (local & global), currency exchange rate risk, interest rate risk etc. P&G definitely maneuvers murky waters every year to maximize shareholder value. For instance, the company has created a groundbreaking business intelligent system called Business Sphere which allows it to respond rapidly to changes in the marketplace and uncover new opportunities. It is a visually immersive data environment that transforms decision-making at P&G by harnessing real-time business information from around the globe. The outcome with the introduction of this system is that it eliminates the delay of manually collecting and aggregating data, improves productivity and collaboration, simplifies work processes, reduces the decision-making cycle time, and enables the company to better focus on innovation for the consumer.
P&G also introduced an open innovation approach called Connect and Develop. At the time of its inception, less than 10% of the company’s technologies were being used in products. With the increasing pace of knowledge sharing and innovations being carried out in small entrepreneurial firms, P&G realized that it was challenging to complete everything alone while at the same time creating satisfactory operating results for its shareholders. The company introduced its new innovative business model (Connect & Develop) to cope with both the desire for external ideas coming in and its own ideas going out, instead of using its traditional in-house research and development model.
The Connect and Develop idea was to bring together external research institutions, customers, suppliers, individuals and even competitors to develop the market for new products. The company established a web site (www.pgconnectdevelop.com) to communicate with the resources outside. The mechanism works like this: they simply put all their needs on this website in classified categories, and then anyone who is interested or has the solution could propose their ideas and get assessed by a specialized team. Payments can range anywhere from $10,000 to $100,000 for creative innovations. P&G has increased its innovative ideas to over 50%, resulting in the company achieving a greater than 6% organic growth in an industry which is growing at 2-3 %.
P&G embraces the genius philosophy of computer scientist, Alan Perlis, when it comes to innovation as noted in his quote: “Fools ignore complexity. Pragmatists suffer it. Some can avoid it. Geniuses remove it.” (Alan Perlis).
Competitors:
The company’s major competitors are Unilever, Avon Products, Inc., Colgate-Palmolive Company, Henkel KGaA, Kimberly-Clark Corporation, Reckitt Benckiser PLC, Energizer Holdings, L’Oreal S.A. P&G operates in a highly competitive market for it products. The company competes against similar products of many large and small companies, including well-known global competitors. In many of the markets and industry segments in which they sell, P&G competes against other branded products as well as retailers’ private-label brands. The company is well positioned in the industry segments and markets in which it operates, often holding a leadership or significant market share position. The company supports its products with advertising, promotions and other vehicles to build brand awareness in conjunction with an extensive sales force. P&G believes this combination provides the most efficient method of marketing for the types of products it sells. Product quality, performance, value and packaging are all important competitive factors for P&G.
Industry Size: Personal and Household Industry, market cap at $426 Billion; Revenues at $140 Billion; Net Income at $12 Billion.
Competitiveness:
Comparing the results to its competitors, P&G reported Total Revenue decrease in the 4 quarter 2015 year on year by -16.1%, despite revenue increase by most of its competitors of 0.17 %, recorded in the same quarter. With net margin of 19.08% P&G achieved higher profitability than its competitors.
The following are segments highlighting P&G’s performance compared to its competitors:
Baby & Family Care: P&G increased its market share in this segment despite slow revenues
Beauty Care: P&G increases its market share in this segment despite slow revenues
Fabric & Home Care: P&G lost market share of about 29.11% to its competitors while revenues fell by -19.68%
Health Care: P&G lost market share of about 13.55% to its competitors while revenues fell by -10.69%
Related Industries:
Other personal and household goods repair and maintenance with a North American Industry Classification System (NAICS) number of 811490. This related industry comprises establishments primarily engaged in repairing and servicing personal or household-type goods without retailing new personal or household-type goods (except home and garden equipment, appliances, furniture, and footwear and leather goods). Establishments in this industry repair items, such as garments; watches; jewelry; musical instruments; bicycles and motorcycles; and motorboats, canoes, sailboats, and other recreational boats.
Raw Materials:
Suppliers for the company include International Flavors & Fragrance Inc. (IFF), National Presto Industries Inc., Ferro Corporation, E.I. Du Pont de Nemours and Co., and Brady Company.
Real Estate: The company has its corporate headquarters in Cincinnati Ohio with numerous properties around the globe. In the U.S., P&G owns and operates 29 manufacturing sites located in 21 different states or territories. In addition, it owns and operates 100 manufacturing sites in 38 other countries. Many of the domestic and international sites manufacture products for multiple businesses.
Services: P&G has numerous services for its most valued assets, which are its customers and employees.
Human Resources:
P&G employs over a 135,000 people globally from a ripped labor market. The company prefers to hire fresh graduates traditionally and groom them from promotion within, but it broke that mold and went for middle managers from outside as part of its innovative strategy to get outside input to grow the company.
Financial Resources:
P&G is trading on the New York Stock Exchange with ticker sign PG, price at $82.12 as of close of trade on Friday May 6th, 2016. (Yahoo! Finance). Below is a quick recap of its performance:
Market Capitalization (Millions $) 235,757
Shares Outstanding (Millions) 2,865
Employees 110,000
Revenues (TTM) (Millions $) 68,768
Net Income (TTM) (Millions $) 8,589
Cash Flow (TTM) (Millions $) 1,208
Capital Exp. (TTM) (Millions $) 3,317
Market:
Customers include Berkshire Hathaway Inc., Dillard’s Inc., Dollar General Corporation, Family Dollar Stores Inc.
Technology:
P&G has advance technologies to include its Business Sphere intelligent system to collect real-time data for decision making and also uses e-commerce with all stakeholders to include suppliers and customers. In Lima, Ohio P&G installed a 1.15 million square feet facility equal the size of 19 football fields and ranks among the world’s largest automated distribution centers. The ACTIV system as it is called, operates 24 hours per day and can stage over 160 orders, presented in exact loading sequence, at any given time. It also receives product at the shipping dock, and transfers shortages directly from the manufacturing area to the dock. With this new system in place P&G only uses 45 additional employees to facilitate the process of managing 109,000 pallet positions in one massive warehouse.
Economic Conditions:
P&G coordinates all relevant economic conditions via its Cincinnati Headquarters and responds accordingly to emerging issues from around the world. The company monitors global risks in all markets within which it operates. Uncertain global economic conditions, including disruptions in credit markets or changes to P&G’s credit rating may have adverse impact on demand for its products. The ripple effect could cause its customers and other business partners to suffer financial hardships or reduce access to credit, all of which could adversely impact P&G’s operations. Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as greater political unrest in the Middle East and Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets and economic slowdowns in Japan and China, could reduce P&G’s sales or erode its operating margin, in either case reducing earnings.
Government:
P&G’s net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. P&G is currently managing its debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Argentina, China, Egypt, Greece, India, Nigeria, Ukraine and Venezuela. Changes in government policies in these areas might cause an increase or decrease in P&G sales, operating margin and net earnings. During fiscal 2015, P&G de-consolidated its Venezuelan subsidiaries due to evolving conditions that have resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and have restricted P&G’s ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars. P&G has representation in over 180 countries and constantly has to adjust its business strategy based on what government regulations impacts its operations at the time.
Sociocultural:
P&G has zero tolerance for discrimination and welcomes talent from all backgrounds. P&G assimilates into different cultures from around the world and its employees are one of the most diverse in the world. P&G’s organizational culture consists of shared values and beliefs that allow employees to understand their roles and values of the company. By having a diverse work forces P&G sets itself up for success because the employees bring in knowledge about different cultures, allowing them to connect with consumers across the globe. The company has a green initiative program to help reduce its carbon footprint around the world. P&G has joined with Walmart in a $100 million Closed Loop Fund to help US cities boost recycling programs. The company said that by 2018 it will cut water content in laundry detergent by 25 percent, saving 45 million gallons of water annually. The company has also responded to Greenpeace protests by vowing to begin policing its entire palm oil supply. Over the last few years P&G brought 50 plants worldwide to “zero-waste-to-landfill” status, saving space in local landfills—and saving the company $1 billion a year—by harnessing electricity from incinerating trimmings from Pampers product, for instance, and converting paper refuse into ceiling tiles in Mexico.
International:
P&G operates in over 180 countries and faces stiff competition from other global firms such are L’Oreal and Este Lauder. The company also faces competition from small local companies who fight to gain a piece of the household goods market share. Entry into any country is challenging, especially in this industry because of the affinity locals already have with their own personal and household products. P&G is subject to a wide variety of laws and regulations across all of the countries in which they do business, including those laws and regulations involving intellectual property, product liability, marketing, antitrust, privacy, environmental, employment, anti-bribery or anti-corruption (such as the U.S. Foreign Corrupt Practices Act).
P&G is very much a global competitor in the personal and household products industry. With operations spanning seven continents, the company competes with the likes of Johnson & Johnson, Kimberly Clark, UniLever, and L’Oreal. P&G boasts dozens of billion-dollar brands for home, hair, and health. As the world’s largest maker of consumer packaged goods, P&G divides its business into five global segments. The company also makes pet food, water filters, and over-the-counter acid-reflux medication. About two dozen of P&G’s brands are billion-dollar sellers, including Always, Braun, Crest, Fusion, Gillette, Head & Shoulders, Mach3, Olay, Oral-B, Pantene, and Wella in the beauty and grooming segment, as well as Bounty, Charmin, Dawn, Downy, Duracell, Gain, Pampers, and Tide in the household care segment. P&G’s products are well known in the Western Hemisphere, but there are still opportunities to further branch out into emerging markets such as South America and SouthEast Asia. (P&G Annual Report 2015).
P&G exists in a complex type 4 environment based on the information discussed so far.
Complexity: measured as the number of factors in an org’s environment and their interdependency (Reliant on each other (e.g., supplier/buyer or strategic alliance). Environmental complexity increases as the number of factors increases and/or the interdependency increases. Ex/ If a firm has two major competitors it faces low complexity; numerous conditions – competitors, prices, labor pool, new products- high complexity.
Unpredictability: lack of understanding or ignorance of the environment in terms of the nature of the factors and their variance; greater variance means less predictability. The higher the environmental unpredictability, the less accurate the forecasts are and the more uncertain management can be about the future. Ex/ Recent financial crisis in the US has made the US market less predictable.
Challenges/Problems:
The company faces numerous challenges across the globe. The “arrogance” of P&G, says Mr. Dibadj (The Economist), had caused it to underestimate the competition in emerging markets, not just from traditional rivals like Unilever but from local firms, some of which are fast becoming as professional as any multinational company from a rich country. As a result, P&G underestimated the cost of building its presence in these countries. In its efforts to find cash to finance its emerging-market expansion, the company raised its prices in rich countries to levels that consumers were not ready to accept. Overheads are higher as a proportion of revenues than at most of its rivals, and have not fallen as sales have grown, suggesting that management has done a lousy job of achieving economies of scale. Big acquisitions, such as that of Gillette in 2005, have added products and complexity but not, it seems, efficiency. (Economist 2012).
P&G’s biggest challenges rests in its size and playing field – global enterprise. The four drivers that professor Martha Maznevski describes in her article fits P&G perfectly. These drivers interact to produce complexity in organization’s like P&G.
Diversity: From diversity in business models, management systems, and employees to diversity in customers, suppliers, and socio-political systems, leaders must respond to an ever-increasing variety of often-conflicting demands from multiple stakeholders.
Interdependence: Globalization’s deep web of connections has resulted in “small world” effects, shortening the standard six degrees of separation to one or two – local events can easily have global effects through “long-hops.” The intertwining of organizations’ value chains, corporate governance, and financial flows results in exposure to shocks at the periphery that can move to the centre of an organization in rapid succession.
Ambiguity: An overload of information, often with numerous, conflicting data points, makes it hard for business executives to glean insights that can be applied to decision-making judiciously. Coupled with increasing uncertainties and unknowns, causal relationships are difficult to pin down, making it even more problematic to assess the validity of a course of action.
Flux: The unrelenting pace of change that envelops companies, industries, and nations only adds fuel to the fire of complexity. Circumstances that are taken for granted today may become irrelevant tomorrow, often with no advance warning. (Financial Times 2007).
Recommendations:
P&G should consider trimming down and shedding its low performing brands to focus on the $1 Million plus high performing brands, because traditionally it has done very well.
P&G should also stand its ground with aggressive marketing following the launching of it’s brand name products.
P&G’s should stay with its new strategy of freeing up funds by taking an axe to its bloated cost structure.
P&G should consider its strategic approach to entering emerging markets through joint ventures.
Managerial Implications & Conclusion:
With its current momentum, P&G has what it takes to be an industry leader. However there are healthy challenges it has to overcome before attaining that leadership role in the personal household goods industry. P&G has to be ambidextrous—the ability to both explore new avenues and exploit existing ones. Companies need ambidexterity when operating in diverse environments that require different styles of strategy simultaneously, or in dynamic environments that require them to transition between styles over time. Companies need to be ambidextrous when operating in both emerging and developed markets, when bringing new products and technologies to market while exploiting existing ones, when integrating startups into their existing business, and in a range of other circumstances. The path to sustainable growth appears straight, but it is flooded with hurdles that when addressed properly become viable opportunities. Strategic managing of P&G will require leaders who can evolve and adapt with the times.
Coping with the complexity of today’s business environment is not about predicting the future or reducing risk. It’s about building the capacity, in yourself, your people, and the organization to adapt continuously and learn speedily, in order to maximize the chances of seizing fleeting opportunities.
References:
Degen, R. (2009). Designing Matrix Organizations That Work: Lessons from the P&G Case. Retrieved from https://www.academia.edu/5216053/
Galbraith, J. (2009). Designing matrix organizations that actually work: How IBM, Procter & Gamble, and others for success, Jossey-Bass, San Francisco, p. 7, 10
Gunn, M. (2015). How Supply Chain Transformation Saved P&G $1.2 Billion. Retrieved from
http://www.gtnexus.com/resources/blog-posts/how-supply-chain-transformation-saved-pg-12-billion
Procter and Gamble. (2011). Procter & Gamble Awarded Top Award for Supply Chain Collaboration by CHEP. Retrieved from http://www.pg.com/en_AP/news_views/pressreleases/award-for-supply-chain.shtml
The Economist. 2012. Fighting for the next billion shoppers. Retrieved from http://www.economist.com/node/21557815
Reeves, M., Haanæs, K., Hollingsworth, J., and Pasini, F. (2013). Ambidexterity: The Art of Thriving in Complex Environments. Retrieved from https://www.bcgperspectives.com/content/articles/business_unit_strategy_growth_ambidexterity_art_of_thriving_in_complex_environments/
Seijts, G., Billou, N., and Crossan, M. (2010). Ivey Business Journal. Coping with complexity. Retrieved from http://iveybusinessjournal.com/publication/coping-with-complexity/
Lafley, A.G. (2008). P&G’s Innovation Culture: How we built a world-class organic growth engine by investing in people. Strategy + Business Retrieved from http://www.strategy-business.com/article/08304?gko=b5105
Company Strategy. (2016). Retrieved from http://www.pginvestor.com/Company-Strategy/Index?KeyGenPage=208821
CSI Market. Procter and Gamble Company Data. (2016). Retrieved from http://csimarket.com/stocks/at_glance.php?code=PG
Parraguez-Ruiz, P. (2009). Open Innovate: Procter & Gamble’s Connect and Develop. Retrieved from http://www.openinnovate.co.uk/pgs-connect-and-develop/
Maznevski, M. (2007). Leading People Globally. Retrieved from http://video.ft.com/62063400001/IMD-Leading-people-globally/Management
Yahoo! Finance. (2016). The Procter and Gamble Company – Stock Price. Retrieved from http://finance.yahoo.com/q?s=PG
P&G Organizational Chart
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