Reference no: EM132268790

Founded in 1837, Cincinnati-based Procter & Gamble (P&G) has long been one of the world’s most international companies. Today, P&G is a global colossus in the consumer products business with annual sales in excess of $80 billion, some 54% of which are generated outside of the United States. P&G sells more than 300 brands—including Ivory soap, Tide, Pampers, IAMS pet food, Crisco, and Folgers to consumers in 180 countries. Historically, the strategy at P&G was well established. The company developed new products in Cincinnati and then relied on semiauton- omous foreign subsidiaries to manufacture, market, and distribute those products in different nations. In many cases, foreign subsidiaries had their own pro- duction facilities and tailored the packaging, brand name, and marketing message to local tastes and preferences. For years, this strategy delivered a steady stream of new products and reliable growth in sales and profits. By the 1990s, however, profit growth at P&G was slowing.The essence of the problem was simple: P&G’s costs were too high because of extensive duplication of manufacturing, marketing, and administrative fa- cilities in different national subsidiaries. The duplication of assets made sense in the world of the 1960s,when national markets were segmented by barriers to cross-border trade. Products produced in Great Britain, for example, could not be sold economically in Germany due to high tariff duties levied on im- ports into Germany. By the 1980s, however, barriers to cross-border trade were falling rapidly worldwide, and fragmented national markets were merging into larger regional or global markets. Also, the retailers through which P&G distributed its products were growing larger and more globalized. Wal-Mart, Tesco (from the United Kingdom), and Carrefour (from France) were demanding price discounts from P&G.In the 1990s, P&G embarked on a major reorga- nization in an attempt to control its cost structure and recognize the new reality of emerging global markets. The company shut down some 30 manufac- turing plants around the globe, laid off 13,000 em- ployees, and concentrated production in fewer plants that could better realize economies of scale and serve regional markets. It wasn’t enough. Profit growth remained sluggish, so in 1999, P&G launched its second reorganization of the decade, “Organization 2005,” with the goal of transforming P&G into a truly global company. P&G replaced its old organization, which was based on countries and regions, with one based on seven self-contained, global business units, ranging from baby care to food products. Each busi- ness unit was given complete responsibility for gener- ating profits from its products and for manufacturing, marketing, and product development. Each business unit was told to rationalize production, concentrat- ing it in a few large facilities; to try to build global brands wherever possible, thereby eliminating mar- keting differences among countries; and to accelerate the development and launch of new products. P&G announced that, as a result of this initiative, it would close another 10 factories and lay off 15,000 employ- ees, mostly in Europe where there was still extensive duplication of assets. The annual cost savings were estimated to be about $800 million. P&G planned to use the savings to cut prices and increase marketing spending in an effort to gain market share, and thus further lower costs through the attainment of scale economies. This time, the strategy seemed to work. For most of the 2000s, P&G reported strong growth in both sales and profits. Significantly, P&G’s global competitors such as Unilever, Kimberly-Clark, and Colgate-Palmolive were struggling during the same time period.

How did global expansion by P&G create economic value for the company and its shareholders?

What multinational strategy was P&G pursuing when it first expanded overseas?

What were the problems with this strategy? Why do you think these problems didn’t become evident until the 1990s?

What were the goals of the reorganization that P&G embarked upon in the late 1990s? What multinational strategy is the company now pursuing? How should this benefit the company? Can you see any drawbacks?