CHAPTER CASE6
P&G’s Strategic Position Weakens
WITH REVENUES OF$85 billion and business in over 180 countries, Procter & Gamble (P&G) is a global leader in consumer goods. Some of its category- defining brands include Ivory soap, Tide detergent, Crest toothpaste, Iams pet food, and Pampers dia-pers. Among its many offerings, P&G has 22 con-sumer brands in its lineup that each achieve over $1 billion in annual sales. P&G’s iconic brands are a result of a clearly formulated and effectively imple-mented business strategy. The company pursues a differentiation strategy and attempts to create higher perceived value for its customers than its competitors by delivering products with unique features and attri-butes. Creating higher perceived value generally goes along with higher product costs due to greater R&D and promotion expenses, among other things. Suc-cessful differentiators, however, are able to command a premium price for their products.
In the summer of 2009, after 30 years with P&G, Robert McDonald was appointed CEO. Since then, P&G’s strategic position has weakened consider-ably, and profit has declined for three straight years. P&G also lost market share in key “product-country combinations,” including beauty in the U.S. and oral care in China. So what happened?
Some of today’s problems are the result of P&G’s $57 billion acquisition of Gillette in 2005, engineered by then-CEO A. G. Lafley. Although Gillette holds t wo-thirds market share of the $15 billion shaving industry, future incremental revenue growth for the entire company is now harder to achieve given P&G’s larger base. Per-haps even more troubling is that Mr. Lafley focused P&G mainly on the U.S. market. Rather than inventing new product categories, P&G added more features to its existing brands such as Olay’s extra-moisturizing creams and ultra-soft and sensitive Charmin toilet paper. The strategic decision to focus on the domestic market and to incrementally add more features to its existing prod-ucts created two serious problems for P&G.
First, with the deep recession of 2008–2009,
U.S. consumers moved away from higher-priced
brands, such as those offered by P&G, to lower-cost private-label alternatives. Moreover, P&G’s direct rivals in branded goods, such as Colgate-Palmolive, Kimberly-Clark, and Unilever, were faster in cut-ting costs and prices in response to more frugal customers. P&G also fumbled recent launches of reformulated products such as Tide Pods (deter-gent sealed in single-use pouches) and the Pantene line of shampoos and conditioners. The decline in U.S. demand hit P&G especially hard because the domestic market delivers about one-third of sales, but almost two-thirds of profits. Second, by focus-ing on the U.S. market, P&G not only missed out on the booming growth years that the emerging econo-mies experienced, but it also left these markets to its rivals. As a consequence, C olgate-Palmolive, Kimberly-Clark, and Unilever all outperformed P&G in recent years.
To strengthen its competitive position, Mr. McDon-ald launched two strategic initiatives. First, P&G began to refocus its portfolio on the company’s 40 most lucrative product-market combinations, which are responsible for about half of P&G’s revenues but almost 70 percent of its profits. Part of this initiative was to expand P&G’s presence in large emerging economies. Recently, P&G launched Tide in India and Pantene shampoos in Brazil. Moreover, P&G began to leverage its Crest brand globally, to take on Colgate-Palmolive’s global dominance in toothpaste. Second, P&G implemented strict cost- cutting measures through eliminating all spend-ing not directly related to selling. It also planned to shed 4,000 jobs, among other cost-reduction moves. Taken together, it hopes to cut costs by $10 billion by 2016.
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THE P&G CHAPTERCASEraises a number of issues that we will address in this chapter. P&G differentiates itself from competitors by offering branded consumer product goods with distinct features and attributes. This business strategy implies that P&G focuses on increasing the perceived value created for customers, which allows it to charge a premium price. This approach proved successful, especially in rich countries such as the United States. Over time, though, in response to changes in the external environment, the strategy needed to be fine-tuned. P&G took a fresh look at reinvigorating its business-level strategy in order to strengthen its competitive position. Future growth seems to lie with more cost-conscious consumers, both in the U.S. and global markets. Moreover, P&G needs to focus on consumers in large emerging economies, which it has traditionally neglected.
The two strategic initiatives launched were intended to strengthen P&G’s competitive position. The first strategic initiative—refocusing P&G’s brand portfolio on the company’s 40 most lucrative product-market combinations—aimed at further enhancing its differen-tiated appeal. P&G’s value proposition needs to be more compelling for its consumers. Top-line growth should also come from expanding into large emerging markets such as China, India, and Brazil with products especially reformulated and promoted to meet local preferences. To reduce pressures on profit margins, however, P&G must also control its cost structure, which is higher than that of its competitors. To address this problem, the company implemented strict cost-reduction measures.
The goal of the two strategic initiatives is to increase the perceived value of P&G’s brands in the minds of the consumer, while lowering production costs. The combined effort should— if successful—increase P&G’s economic value creation (V 2 C;also called the value gap). The expectation is that P&G’s revised business strategy featured in the C hapterC asewould strengthen its strategic position and help it regain its competitive advantage.
This chapter, the first in Part 2 on strategy formulation,takes a close look at business-level strategy. It deals with howto compete for advantage. Based on the analysis of the external and internal environments (presented in Part 1), the second step in the AFI Strat-egy Framework(see the strategy framework on page 161) is to formulate a business strat-egy that enhances the firm’s chances of achieving a competitive advantage.
W e begin our discussion of strategy formulation by defining business-level strat-egy, strategic position,and generic business strategies.We then take a close look at two key generic business strategies, introduced briefly in Chapter 1: differentiationand cost leadership.We pay special attention to value and cost drivers that managers can use to carve out a clear strategic profile. Next, we relate the two business-level strategies to the five forces in order to highlight their respective benefits and risks. We then introduce the notion of integration strategy— combining a differentiation and cost-leadership strategic position—and explain why trade-offs make this difficult to implement effectively. We look at changes in competitive positioning over time before concluding with practical Implica-tions for the Strategist.
The hope was that these two initiatives would strengthen P&G’s strategic position by improving its differentiated appeal to command premium prices, while lowering its cost structure. By spring 2013, how-ever, P&G’s performance had further deteriorated. The company’s board of directors brought back A. G. Lafley as CEO to replace Mr. McDonald. It remains to
be seen if Mr. Lafley can turn around P&G, because some of the strategic decisions that led to a weaken-ing of P&G’s strategic position were made under his watch.