CONTENT

1. Introduction 1

2. Brief History and Strategic Challenges 1

3. PESTLE Analysis 3

4. Five Forces Analysis 4

5. SWOT Analysis 6

6. Generic Strategy 8

7. Recommendations 9

8. Conclusion 10

9. Bibliography 11
 1. Introduction

For the fiscal year of 2010, Procter & Gamble witnessed an increase on net
sales by 3% to $78.9 billion and a 4% increase in unit volume (Deloitte,
2010). Under the unfavourable environment of global recession, P&G has
successfully retained positive increases since the Financial Crisis and kept
the position of worlds largest consumer products manufacturer. In
Fortunes list of most admired companies for the year of 2010, P&G is
ranked as 6th among the worlds corporations (Fortune, 2010). Products of
P&G serve 4.2 billion of the 6.5 billion people in the world from everyday
morning (P&G, 2010c). The aim of this report is to undertake a detailed in-
depth research centred on the company of Procter & Gamble with a
number of theoretical frameworks. In the beginning of the report, a brief
history of P&G will be presented and point out some strategic challenges
facing the firm. Secondly, there will be a PESTLE analysis of the current
external environmental conditions for the firm. Then, the companys
effectiveness and sustainability of current strategies will be examined,
followed by recommendations for P&Gs strategies, accompanied by
appropriate explanation and justification.

The concentration industry of this report will be the SIC code 2844
Perfumes, Cosmetics and Other Toilet Preparations (OSHA, 2010). It will be
defined as Personal Products Industry throughout this report. The world
personal market will be regarded as a whole and the market can be
categorized into six segments, encompassing hair care, make-up,
skincare, personal hygiene, oral hygiene, and fragrances (Graul et al,
2006).

2. Brief History and Strategic Challenges

P&G was founded by Willian Procter (a candle maker) and James Gamble
(a soup maker) in 1837 in Cincinnati, Ohio, the US. The company was
responsible for supplying soap and candle to the Union Army in the

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American Civil War and enjoyed the companys growth based on military
contracts in that period. In 1911, the company started to open factories in
other places in the US due to rising demand for its products and its
products began to diversify. In 1920s and 1930s, the company sponsored
many radio programs that were later known as soap operas. P&G began
its international operation in 1930 by acquisition of a UKs company called
Thomas Hadley Co. Thereafter, through its own products diversification
and numerous acquisitions, the company gained capabilities to offer
consumers with a wider range of consumer products and its size kept
growing as its expansion to different nations. By 1980, the company had
operated in 27 countries besides America and sales in these countries
made up a quarter of the companys $11 billion total sales (Bartlett et al,
2008). In 2005, P&G acquired the UKs prestigious razor producer, Gillette,
replacing Unilever as the worlds largest consumer products brand.
Nowadays, P&G has become a company operating in America, Europe and
Asia, with 135,000 employees, more than 300 brands covering cosmetic,
home, baby, toiletries, and fragrance industries (Datamonitor, 2010). The
annual sale of the company equals to the GDP for some small countries
and hence it is even called P&G Empire.

Facing enormous benefits from its extremely large size and profits, P&G
has to deal with strategic challenges inevitably at the same time. First of
all, the most outstanding issue exactly results from its size, i.e. issues of
too big. With its dominance in various industries and hundreds of
brands, issues on its industry and brand management are prominent for
the company to deal with. For instance, a particular strategy designed for
one product to increase its sales might somehow cannibalize the
companys another products sales as a result. On the other hand,
operations in a number of countries pose significant challenges to
maintain its worldwide operation efficiency. P&G has a matrix
organizational structure (Galbraith, 2009). The company deployed
numerous country subsidiaries in those regions it operated and global
business units (GBU) are charged with particular products and brands
operation. P&G categorized its global business into three GBU, consisting

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of beauty & grooming, health and well-being, and household care. The
matrix structure did help the companys multinational management and
boost its worldwide expansion by 1990s. However, since competing in
more than 75 countries by the mid-1990s, the overseas expansion
opportunities left rather limited for the company. The company
consistently treated innovation as its core strength and pressures from
distinctive markets local responsiveness also required the company to
develop its research capability. Nevertheless, incremental coordination
was needed to innovative new products, leading to reductions in
organizational flexibility and efficiency. Therefore, the matrix structure
revealed its shortcomings for P&G which threat the companys sustainable
development in the global market.

3. PESTLE Analysis

The PESTLE analysis will be conducted to examine the current external

environment for P&G in the world market.

Political With operations in more than a hundred countries of different

continents, P&G has to deal with distinctive political patterns influencing
its business operations.

On one hand, the company has to deal with and adapt to political
pressures in different nations. On the other hand, with regard to the
corporations size, it plays integral roles to cooperate with and affect local
government.

Economic The world economy is presenting a pattern of rejuvenation

from the recession and world demand is forecasted to grow in the next
years. Hence, the company can have a relatively positive expectation on
its sales performance. However, the development in different market may
vary because unbalanced development situation in different regions.

Social The company has to pay attention different social norms during
overseas operations due to distinguished cultural background in different

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markets. For personal products, social need is evolving with time. For
instance, the demand for mens grooming is rising recent years.

Technological As the market size of personal products is very large,

major players in this industry invest significantly to gain technological
advantage in order to maintain and expand market positions. As a result,
technology applied in this industry develops relatively fast.

Legal P&G has to comply with different national legislations on personal

products, process of production, and business operations.

Ethical Because personal products are essential for peoples daily life, the
quality of productsare extremely important for brands. Any scandals about
product can lead to significant damage on the brand image.

4. Five Forces Analysis

Prior to analyzing P&Gs current strategies, it will conduct an industry

analysis for personal products using Porters five forces framework. The
five forces analysis will focus on personal products in the UKs market.

Buyer Power Buyer industry in the UK has been growing these years and
presenting an optimistic trend in the future. As figure 1 shows, since 2005,
the total market for cosmetics (make-up) and fragrances has witnessed
increased by 5.1% (2006), 6.5% (2007), 7.2% (2008), and 6.5% (2009)
than their previous years (Baxter, 2010a). By the year of 2009, the total
value of cosmetics and fragrances market has reached 2.18 billion (ibid).

Figure 1: The Total UK Market for Cosmetics and Fragrances by

Sector by Value

at Current Prices (m at rsp), 2005-2009

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Similarly, the UK market for toiletries (including hair care, skincare, oral
care, personal wash and bathroom toiletries, and shaving and razor) has
manifested stable growing pattern, with YOY growth rate of 4.2% (2006),
2.3% (2007), 2.5% (2008), and 2.1% (2009) (Baxter, 2010b).

Buyers in personal products industry can be individual consumers as well

as large retailers and distributors such as Wal-Mart and Carrefour.
Individual consumers have little buying power as they are fragmented and
they can affect price and product to a limited extent but they nearly face
no switching cost. However, as far as large retailers are concerned, their
bargain power on price is considerable based upon their significantly large
buying quantities.

Supplier Power Each product line of personal products has its own
unique requirement and preferences. On the other hand, various
ingredients, raw material, and components are needed and there are
subsequent procedures throughout the production process. Hence, P&G is
coping with significantly differentiated suppliers while face relatively

5
limited bargain power from its suppliers. However, the company still faces
switching costs primarily due to its quality need to build its brand image.

Threat of New Entrants In the personal products industry, leading

companies including P&G are already enjoying economies of scale and
economies of scope in terms of their size, multiple brands, and diversity of
product lines. Furthermore, major companies in this industry have
accumulated considerable experience in terms of product development,
distribution, and supply chain. For instance, P&G has established and
operated for more than 170 years and possesses 80 years of international
market experience. Therefore, leading incumbents in this industry has
occupied the favourable place on learning curve, which along with
advantages of economies of scale erects barriers for potential entrants.
Moreover, a big amount of investment is essential in this industry to
implement production, distribution, R&D, and marketing. Thus, threats of
new entrants are relatively limited for this industry. However, it is not
possible for major players in this industry to cover every corner, which still
leave opportunities for small entrants to service customers particular
needs. This also can result from the markets emerging demand which
observed and grasped by small players or they have specific innovations
to develop certain products.

Threat of Substitutes Even major players like P&G and Unilever has
been dedicating to build and reinforce their brand recognition and loyalty,
this advantage still might be eroded by pricing power of substitutions. For
instance, retailers such as Tesco and Wilkinson in the UK market, they
offer their private label products with lower prices than strong brand ones,
posing significant challenges for leading companies. Despite sufficient
availability of substitutions, customers only face slight uncertainty and
switching costs in this industry. All in all, high threats of substitutes exist
in personal products industry.

Degree of Rivalry The total global revenue of personal products market

was $361.1 billion in 2008 and the global market value is estimated to

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reach $424.1 billion by the end of 2013 (Datamonitor, 2009). Facing such
a large market value, the completion within the market is extremely
fierce. There are a number of comparable rivals for P&G in terms of
company size, brands, capital, and research capability. Major rivals such
as Unilever, Avon, Estee Lauder, LOreal, all possess their own leading
brands and products, and considerable R&D capability and market
competence in global operations. Taking low switching cost for consumers
into consideration, the completion within this industry tends to remain at
high degree in the long run.

5. SWOT analysis

In order to examine whether P&G is positioned effectively to exploit the

companys strengths and defend weaknesses, a SWOT analysis will be
conducted first, followed by further analysis of its current strategy under
the framework of Michael Porters Three Generic Strategies.

Strength According to Datamonitor (2010), main strengths of P & G are

attributed to market leading place based on strong brand portfolio,
significant cash productivity and enormous marketing and R&D
investment. As the largest consumer products producer in the world, P&G
is holding more than 50 leadership brands covering quite a wide range of
industries which categorized by the company into three global business
units, i.e. beauty and grooming, health and well-being, and household
care (P&G, 2010b). With respect to a complex brand portfolio, the
company has been showing its strong management capability and
thoroughly taking advantage of its powerful brand portfolio to sustain its
competitive advantage in the global market. Datamonitors 2010 report
revealed the companys leading position in various markets such as baby
care (33%), fabric care (33%), feminine hygiene and protection (37%),
blades and razors (70%). Among the company's portfolio, 23 brands have
been generating more than one billion dollars annually and another 20
brands generating 500 million or more annually for P&G (Datamonitor,

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2010; P&G, 2010b). With a number of leading brands, the company
obtained significant competitive advantage over its rivals in the market
and contributed to its robust cash productivity and financial growth.
Moreover, diversifications in industries and products helped P&G achieve
economies of scale in production and distribution, and hold favourable
bargain power against suppliers and retailers.

P&G has been consistently retaining strong cash productivity via

enhancing productivity, working capital management and cost
management. The company devoted much endeavour to enhance
productivity within the company. From 2000 to 2009, sales per employee
increased from $363,000 to $585,000 and profit per employee from
$32,000 to $84,000 (Datamonitor, 2010). Furthermore, the company
conquered remarkable working capital and cost management
performances than its competitors. For example, in terms of supplier
management, the company is acting as a leader to harness e-solution in
inventory management. Besides its effective application of spread sheet
model, the company has a research group named IT Global Analytics
working on supplier relationship management, inventory management,
and material forecasting, which contributed to $294.8 million savings from
supplier management in two and a half years since September 2003
(Concordia et al, 2006; Farasyn, 2008). Strong cash productivity ensured
the company stable capabilities to pay dividends, retain healthy credit
record, and invest in the companys future business growth.

As a consumer products supplier, P&G continuously invested

overwhelming amount in market research and R&D over its rivals to
pursue sustainable competitive advantage in the market. As the former
chairman and chief executive of P&G, A.G. Lafley (Robert McDonald just
took the reins from Lafley in July, 2010) put it, consumer understanding-
deep consumer understanding-is a critical core strength for Procter &
Gamble (Wartzman, 2009:14). It is reported that P&G has aggregately
invested more than $ 2 billion in market and consumer research in the last
decade, which is approximately double amount of Unilever or the total of

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other competitors including Avon, Clorox Company, Colgate-Palmolive
Company, Energizer Holdings, Henkel, Kimberly-Clark, LOreal, and Reckitt
Benckiser (Datamonitor, 2010). Every year, P&G spends $350 million on
consumer understanding programs, implements more than 15,000 market
researches, and communicates over five million consumers in about 60
countries all over the world (ibid). Innovation is strategically regarded as
core strength of the company. The fiscal year of 2010 was the companys
continuously fourth year with almost $2 billion in R&D (P&G, 2010a). In
the last 15 years, P&G had 125 innovations appeared on the Top 25
Pacesetter list (ibid). In addition to its own investment in R&D, the
company also involved with other research partners to develop its
research capability.

Weakness It seems that P&G depends too much on the Wal-Mart in terms
of sales revenue and distribution channel. Since 2006, around 15% of
P&Gs revenue derived from Wal-Mart and its affiliates (Datamonitor,
2010). Hence, any declines of Wal-Marts revenue or market share will
inevitable trigger loss for P&G. Furthermore, over dependence could lead
to loss of bargain power against the Wal-Mart. Peng (2009) doubt that the
purpose of acquisition of Gillette by P&G in 2005 was enhancing its size to
gain bargain power over the Wal-Mart.

Another weakness of P&G in 2010 is its increasing instances of product

recalls. For example, the company recalled a number of its Vicks Sinex
nasal spray in the US, Germany and the UK due to bacteria B. cepacia
finding in some products. Similar recalls occurred several times in this
year among different markets.

P&G is generally good at exploiting its strengths to defend against its

weaknesses. With strong brand portfolio, the company is able to gain
bargain power against large retailers such as Wal-Mart, pursuing reduction
of over-dependence on Wal-Mart ultimately. Strong cash productivity
enables the company with sufficient resources to invest in innovation,
consumer interaction, and promotion. In this way, negative effects of

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product recalls can be alleviate to a significant extent and customer base
and loyalty can be retained as well.

6. Generic Strategy

It appears that P&G adopts transnational strategy as its multinational

strategy in response to both pressures for local responsiveness and cost
reductions. In terms of Porters generic strategies, P&G generally adopted
differentiation strategy ever since its early overseas expansion. The
companys first vice president of international operations, Walter Lingle
said we must tailor our products to meet consumer demands in each
nation (Bartlett et al, 2008: 481). This principle was inherited until today
and the company tend to provide consumers with superior personal
products to cultivate customer base and their loyalty. The differentiation
strategy is reflected thoroughly in the companys large investment in
consumer understanding and innovation. The company has sufficient
global market knowledge through sufficient market researches and
consumer understanding is principle of the companys marketing strategy.
Then, overwhelming innovation investment enabled the company to
launch or update products that meet local consumers needs in regular
intervals. In this way, the company was able to retain its financial growth,
customer loyalty, and brand recognition. In addition to product
differentiation, P&G maintain transnational characteristics among its
foreign subsidiaries in other parts of operation as well. For instance,
products sold in Chinese market are completely from its manufacturing
centres in China and the companys Chinese branch absorbed Chinese
local human resource as well as international personnel to manage
business there (Holt and Wigginton, 2002).

7. Recommendations

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For P&Gs global operations, the issue of too big is the most import and
prominent challenge that should be dealt with cautiously. Within the
organization, managers of P&G should pursue more efficient operations
under matrix structure. Sufficient cross market coordination work is
essential for the company to share market and consumer knowledge,
facilitate research development, and implement cooperation between
different divisions. After years of acquisition and merger, it might be the
time for the company to have a rest and take a careful look inside. With
more than 300 brands, an effective and efficient management and
coordination on its brand portfolio will be necessary for the company to
sustain its competitive advantage.

As the worlds largest personal products producer, P&G is involving in

several parts throughout the value chain including procurement,
production and distribution. The company has already noticed and chase
efficiency in some parts of value chain such as e-management on
suppliers. However, the company still has to endeavour more to align its
resources to optimize all value chain components. Although the company
invests a great number in R&D, roll-out of new products is not running
smoothly for company, or it took long time to launch in the market. Other
worse examples are some news about product recalls from the global
market. In addition to capital investment, the company might be better-off
to coordination other resources to facilitated the process. As mentioned
before, more efficient organizational structure might help. On the other
hand, the company would be better to balance the growth from
incremental innovation and descriptive innovation in order to achieve a
sustainable growth for the company.

Every year, the company also spends quite much on promotion and
advertising. A research based on P&G conducted by Ailawadi et al (2001)
revealed a positive relationship between investment in advertising and
promotion. Nonetheless, it pointed out that distinctive mix of advertising
and promotion results in different implications on consumers brand
recognition and brand loyalty that companies should be aware of. Thus, it

11
will be better for P&G to implement an organic integration of promotion
mix in order to optimize its effects.

On the other hand, P&G should pay enough attention to cope with
external environment. The company devoted outstanding investment and
effort to obtain consumer understanding. This is also one of the
companys core strengths. It already performed much better than
competitors but continuous searching for more efficient and appropriate
consumer interaction methods should be stock to as well. Facing the new
development pattern in the world market, the BCGs growth matrix might
be helpful for P&G to manage products and regional markets. For instance,
the company should identify cash cow markets (might be Europe and
the US) to support further development in rising star (might be China and
India). Similarly, in terms of products, dog brands should be abandoned
while cash cow brands supporting rising star brands.

8. Conclusion

In conclusion, P&G is relatively successful leader in the global personal

products market through analysis in this report. It has long history of
business operation beginning from the foundation of Cincinnati and plenty
of overseas experience since 1930s. Through PESTLE analysis, it can be
seen that the company has to deal with complicated and different
conditions in the world market. The company should not only adapt to the
external environment, but also take advantage of different situations
across countries for its sustainable development. Then, five forces
analysis presents main elements in personal product industry and their
influences on P&G. The company is facing limited buying power from
individual consumers while the relationships with large retailers require
precautious management. In the meantime, the company faces relatively
weak supplier power and low threat from new entrants. However, strong
threat of substitutions and high degree of rivalry force the company to
strive to retain its competitive advantage and make it sustainable.

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According to SWOT analysis, P&G performed well to defend its
weaknesses by its strengths of strong brand portfolio, robust cash
productivity, and outstanding investment in consumer understanding and
innovation capability. Under the framework of Porters generic strategies,
P&G has been consistently undertaking differentiation strategy in terms of
products, brands, innovation, and organizational management. Several
recommendations are given with respect to issues of P&G. First of all, it is
necessary to achieve and maintain efficient operation within the
organization. Then, P&G should optimize the value chain by aligning its
resources. The effectiveness of its investments is worthy noticing as well.
Finally, taking advantage of changing external environment is another
stimulus for the companys sustainable development.

With its size, brands, and influences in the global market, Procter &
Gamble is a good example for studies on global expansion strategies of
multinational organizations, brand management, and international
marketing strategies.

9. Bibliography

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Marketing Mix: Learning from Procter & Gambles Value Pricing Strategy. Journal of Marketing.
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Bartlett, C., Beamish, P. and Choshal, S. (2008) Transnational Management: Text, Cases, and
Readings in Cross-Border Management (5th ed). New York. McGraw-Hill/Irwin.

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Concordia, M., Levine, D., Martyn P, and Sandholm, T. (2006) Changing the Game in Strategic
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Fortune (2010) Worlds Most Admired Companies. Available at

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Graul, L., Henricks, S., Olp, S. and Strohecker, C. (2006) Procter & Gamble, Unilever and the
Personal Products Industry. University of Maryland, University College.

Holt, D. and Wigginton (2002) International Management (2nd ed). US: Thomson South-Western.

OSHA (Occupational Safty & Health Administration) Industry Group 284: Soap, Detergents, And
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<http://www.pg.com/en_US/company/purpose_people/index.shtml> [9 December
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