The Strategic Development of Procter and Gamble into a Global Giant
Procter and Gamble (henceforth P & G) is one of the largest manufacturers and distributors of consumer products in the world with a global reach for it 300+ brands of 180 countries. During the 1990’s the company made some significant alterations to its corporate strategy; it aimed to reduce its cost structure and develop its differentiated business-level strategy, in an attempt to increase revenues and profits. The rapid development of international markets and globalisation demanded a corporate “shake up”. Moreover, the reduction of trade barriers and tariffs indicated that to retain a competitive advantage globally the company had to develop an effective International strategy, whilst benefitting from economies of scale. Cross-functional integration and speed of innovation increasingly became imperative to corporate strategy. In this article I will look at the key development that took place in thus process and turned P&G into such a powerhouse.
The cohesion between the strategy and the structure of the company is crucial. The structure will align the company with the strategy it wishes to pursue; and, along with the company’s culture and control systems, will utilise the value-chain competencies and capabilities, and facilitate increased competitiveness, profitability and superior return on Investment.
Procter and Gamble identified the increasing globalisation of business and resultantly altered their business strategy and structure in order to maximise exposure in more countries in order to: remain competitive internationally, benefit from economies of scale; and to maximise revenues, profits, share price and return on invested capital. To facilitate the implementation of their global strategy CEO, Lafley, changed the structure from a “Global Product Structure”, which is often associated with a standardisation strategy and implemented a “Transnational” global strategy, and implemented a hybrid organisational structure that considered the geographical dispersion of multiple marketplaces, respective specialisation for particular brands and specialisations and economies of scale in particular value creating functions. Ronald Jean Degen has termed this a ‘Front-Back Hybrid Matrix organisation’ structure.
This strategy allowed P&G to simultaneously amalgamate cost reductions in the firm and retain efficient customer responsiveness; adapting to local tastes and expectations as they vary across nations. The nature of this strategy dictates that some functions are centralised and some are decentralised. This has been chosen as it supports the empowerment of the various levels of management in the company’s Global Business Units (GBU’s). Lafley has suggested that this provides the ability to make faster, more locally responsive and efficient decisions, whilst autonomy was given to key functions that required local customisation. R&D and innovation were very much the spearhead of P&G’s corporate strategy, so the R & D function remained centralised, so that control could be exerted over it.
The global-matrix structure that Lafley adopted to support the transnational strategy is a complex structure that requires significant cohesion from all members of the workforce and complex controls. Lafley, realised the significance of worker’s morale, contrary to his predecessor, and implemented a culture that would support the structure. Lafley is noted to have implemented pay-incentives that tied employees to the performance of the company. Lafley’s strategic leadership ensured that cross-functional co-ordination created a significant advantage over competitors; as distribution channels, logistics, supply chain, and manufacturing were all co-ordinated across nations; thus, P&G was able to lower costs. The complementation of the culture and the global-matrix structure advanced the changing nature of the corporate strategy and developed their international competitive advantage. However, crucial to these elements were sophisticated systems for co-ordination which Lafley recognised would be essential and championed the use of IT systems, even setting up a deal with Cisco systems to take full advantage of their complex systems, systems support; in order to reduce IT costs through economies of scale –spreading their system globally.
Lafley reported significant financial progress in 2000; “We’ve had three major acquisitions including Clairol, Wella and Gillette; and, we have tripled the pace of our business initiatives over this same period.” Lafley, therefore, decided to further restructure the business units to accommodate these strategic acquisitions and increase competitiveness thusly. The global business units were reduced from five to three: ‘global beauty care; global health, baby, and family care; and global household care’. This complimented the transnational global strategy well as providing sharper focus of the respective target consumers; whilst complimented by a decentralised empowerment of regional, subsidiary and functional managers, which was supported by the effectiveness of cross functional co-ordination and interlinking of complex IT systems.
The use of integrating mechanisms in general, and use of knowledge management in particular, to gain a competitive advantage.
A transnational global strategy requires close co-ordination with key areas of the business for increased efficiency and competitiveness. Cross functional co-ordination at P&G allows them to organise and utilise their resources to optimal effect. The calculation of demand should accurately match supply, and so the supply chain, logistics and distribution channels can be effectively co-ordinated to manage increased/decreases in demand; hence, a Just-in-Time inventory control system can be implemented to reduce costs. Moreover, these integrating mechanisms support the transnational global strategy employed by the firm as local managers can quickly relay changes in tastes in their particular regions and the products can be updated/altered, or inventory levels can be corrected accordingly, more efficiently and effectively.
Moreover, as Lafley has identified that Research and Development and Product Innovation is key to pioneering the competitiveness of the corporate strategy; integration mechanisms allow fast communication between marketing and R&D. Additionally, inter-business function (marketing, RnD, Logistics, Finance etc) communication facilitates value creating propensity between manufacturing and marketing. Furthermore, inter function co-ordination is crucial as line, functional, business, divisional, and corporate level managers within the same functions must be able to quickly communicate between one another, in order to mitigate against “information distortion”, especially when spread across many nations.
P&G facilitates the effective implementation of integration mechanisms through “direct contact” with one another. This is a simple, cost effective way to communicate problems and ensures that opinions and concerns are voiced. Moreover, it is essential to have direct contact between different functions, especially those that must co-operate considerably. Conversing directly between one another ensures cohesion of the products and the market, with the overall strategy. This reduces “handoff” and “transfer” problems. However, this can increase bureaucratic costs and it may not always be viable to converse with different employees face to face all over the globe, although such technological advances, such as video Tele-conferencing may help.
“Liaison roles” are a good way of handling handoff and transfer problems when structures become complex and will help co-ordinate divisions and functions. Meeting at a regular time intervals ensure regularity. Additionally, liaison roles ease tensions between functions and can ferry information from one to another.
“Teams” are used when two/more functions share common problems and these can help relieve tensions or aid in finding a solution. P&G could use teams when they have problem co-ordinating particular functions in a large region, for example Asia. Teams may provide insightful solutions to problems i.e. efficient logistics. Referenced from MIT Sloan Management Review P&G accredit considerable success to the cohesion of their function team co-ordination, ‘what made the teams work was the mutual interdependency that grew’. Thus, demonstrating how integrating mechanism are vital for communication across a global business in order for P&G’s transnational strategy and FB- global matrix structure work effectively.
Furthermore, the importance of IT must be accredited to the effectiveness of this co-ordination; as many of the systems and integrating mechanisms rely heavily this interwoven web of technology. Lafley was correct to have championed it as he did.