By Ana Best, Tim Clarke, Mandukhai Hansen, Matt Richards, Aleksey Vlasov
The Procter & Gamble Company (P&G) embarked on an ambitious growth strategy in recent years to reach “More Consumers in More Parts of the World, More Completely.”1 The goal is to reach and acquire a billion more consumers by penetrating the emerging markets with the most populous and developing countries of India and China. This “purpose-inspired growth” strategy that would be key to its profitable future, growth and sustainable development seems to be working well so far. In the most recent quarterly earnings statement published August 5th, P&G’s net sales grew 10 percent to $20.9 billion for the fourth quarter and five percent to $82.6 billion for fiscal 2011.2 Organic sales, which exclude the impact of acquisitions, divestitures and foreign exchange, grew five percent for the quarter and four percent for the fiscal year2.
As one of the world’s largest consumer products company with the largest lineup of leading brands, P&G has been experiencing stagnant growth in most of its leading markets in developed countries. Rising commodity prices, low single digit growth due to market contractions and market saturation have challenged P&G’s long term growth strategy. Investments in emerging markets present P&G with unparalleled opportunities for acquiring new market share, expanding its existing operations in more places with more growth and revenues. However, the challenges of emerging markets in most of the developing nations, also present significant issues P&G must identify and solve, sometimes even at the expense of margins.
Procter & Gamble- for Everyone
Combination of challenges present in emerging developing markets requires P&G to modify its long established strategy of providing top brand, multiple selection, and superior quality products in developing markets to shifting towards providing affordable, quality products for everyday use to more consumers in more markets. The essence strategy of companies is usually based on the choices the company selects to pursue to maximize the company’s profits and market share, while selectively identifying paths they choose not to pursue. After careful analysis of market studies of consumer preferences, P&G has made some of the select choices that would fit and would not fit within its course of new strategy.
During 2008, while many of the consumer goods companies were in a craze over ecologically friendly “Green” product offerings, P&G chose not to compete in the same path its competitors such as Clorox, SC Johnson were rushing in.6 The ingredients and solutions used in such “green” products usually produced sub-par quality household items with lower results. Higher costs of production often demanded higher costs for the consumers. In a recent article in NY Times, Len Sauers, vice president for global sustainability of P&G, said “the company considered such a move five or six years ago. But in conducting market research about green products, what the company found was that “not many people bought them.”6
Instead, the company focused on its core new strategy, of reaching more consumers, more completely, by offering alternative consumer wallet friendly products, such as Tide Coldwater detergents for consumer who utilize washing machines and Tide Naturals for consumers that utilize hand washing for their fabric laundry care. P&G also chose to offer only essential categories of brand products in developing markets in limited offerings, such as 16 product categories in China compared to 36 categories in the United States.12
Proving Grounds in Emerging Markets- Above and Beyond
Over the past several years P&G has worked to rapidly expand its market share in emerging markets such as Russia, China, and India, driven significantly by three basic demographic factors: population growth, household formation, and household income growth.4 These developing markets present large expansion opportunities and strong growth potential. A recent quote by P&G CEO Robert McDonald, who had an exceptional career as a US Army Paratrooper, states that P&G is focusing on these developing nations to create a profitable future, and reach its goal of servicing 1 billion new customers by 2014.14In order to reach such ambitious goal, he’s been steering P&G through the turbulent waters of worldwide economic downturns and increased competition.
In order to reach these low income, large volume consumers, P&G needed to significantly alter some of its leading name brand products. However, the purchasing power of consumers, and their demand and preference for certain categories of products have proved challenging to embark on such an ambitious strategy. Economies of scale largely enjoyed in developed markets, such as in the US that demand convenient, bigger size packaging are simply not going to work in these markets. Although demand for name brand consumer goods are there, purchasing power of most consumers in the emerging markets is low. P&G research studies showed consumers in China currently spend average of $3 per year for P&G Products and India at $1 per year, compared to a whopping $93 a year spending by US consumers.14 Even at such low margins, the expected growth in these emerging markets estimated to be much higher at 12% in China, 22% in India compared to stagnant 0.5% in US.5
By differentiating itself from many sub-par quality competitor products and curtailing their products for the local consumer preferences and needs, P&G made significant inroads in developing markets, such as by reducing packaging sizes to affordable smaller sizes with various dimensions and eliminated expensive non essential ingredients.14 In order to keep its superior quality, P&Gs fabric care detergents such as Tide and Ariel were modified to include easy soluble ingredients for lesser temperature water that are also much more gentler for hand washing1. As a result, P&G now enjoys large market share in consumer household and personal care lines in Russia, and it has been hitting double digit growth in sales in China reaching 60% of Chinese consumers. This month’s company announcement notes that quarterly profits rose by 15% as sales grew in emerging markets. 11
Social Networking for Social Responsibility = Social Gain
After the deadly tsunami hit south-east Asia in early 2000, P&G donated 13million packets of PUR water purifiers to Sri Lanka, Indonesia and Maldives.9 In order to get approval for company to support such effort, Senior P&G Executive Greg Allgood, took the matter to social network. After the PUR brand gained 50,000 Facebook fans in one day and was the ’second-most popular trending topic on Twitter’9, the company achieved internal buy in. Similar techniques now used by P&G as part of their corporate social responsibility duty, and even resulted in launch of several programs such as “Tide Loads of Hope” and “Duracell Power Relief” that aid communities affected by natural disasters. Repurposing a brand and building value through non-financial metrics gained strong internal support from within P&G and also helped them leverage the brand through a non-profit model to increase company value in emerging markets and create opportunities.
Overcoming Roadblocks – Literally!
Similar to many multinational companies operating in emerging markets, P&G faces logistics nightmares in transportation, storage and distribution of its products. Some markets are improving significantly to aid in such problems, such as China’s state mandated massive infrastructure campaign recently finished building over 25,000 miles of expressway roads. In comparison, India was only able to improve little over 3,700 miles of roadways during the same time period.15 Overcrowded ports, poor transportation and storage systems at docks and airports, and highly congested roadways can significantly affect company’s operations.
To alleviate some part of the issue, P&G plans to establish strategically positioned 20 manufacturing centers within these developing countries, improving its access to wider distribution areas and keep some control over its product distribution channel activities.3 Being locally present in these locations hopefully will help P&G also combat another issue of roadblock in such emerging markets, fighting and limiting the spread of the counterfeit consumer household brand products.
Affordable Products- At More Costs?
It’s no secret that P&G is the world’s biggest spender. In a recent Forbes article, it was quoted to have spent $9.3 billion on marketing last year, the second straight year it has set a company record, while also investing $2 billion in Research and Development (R&D). 11 WikiInvest.com also notes that in 2009, R&D expenditure of P&G was $1 billion more than its closest competitor, Unilever.13
R&D and technology is certainly are very important aspects of P&G operational strategy. Data gathered on customers’ preferences and buying habits serves as one of the main competitive advantages of P&G, allowing the company to provide the markets with the specialized and customized products. As the leader in innovative supply chain inventory optimization use, in 2009, utilization of combined multi-echelon inventory optimization tools10 software to minimize inventory costs across the end-to-end supply chain in its more complex supply chain systems, added $1.5 billion in cash savings.8 P&G is additionally saving over $770 million by outsourcing its IT infrastructure to HP and IBM.16
Although efforts in cost savings is significant, with increasing prices in main commodities, such as oils, risen and other raw materials of P&G products11 , require more disciplined spending in order to sell more cheaper, affordable products to these emerging market consumers. As it stands, P&G needs to sell more diapers and detergents to reach McDonald’s ambitious goal.
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2Procter and Gamble. “P&G Announces Results for the Fourth Quarter and 2011 Fiscal Year” PG.com Web. Accessed 5 August, 2011.
3Birchall, Jonathan, “P&G to shift ‘centre of gravity’ with growth in emerging markets.” Financial Times. Web 12 December, 2008. Accessed 15 August, 2011. http://www.ft.com.ezproxy.t-bird.edu/cms/s/0/3fcb6e30-c7eb-11dd-b611-000077b07658.html#ixzz1VdSP3SJL .
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7Martin, Andrew and Clifford, Stephanie. “For a Few, Focus on Green Products Pays Off.” NY Times, Web. Accessed 21 April, 2011
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9 Seagle, Carol and Christensen, Lisa. Case study:” Procter & Gamble’s Pur.”Financial Times. 2 March 2011. http://www.ft.com/cms/s/0/1415f250-44fe-11e0-80e7-00144feab49a.html#ixzz1VbKhec00. Accessed 18 Aug., 2011.
10Sean P. Willems, et al. “Inventory Optimization at Procter & Gamble: Achieving Real Benefits Through User Adoption of Inventory Tools.” Interfaces 41.1 (2011): 66-78. Business Source Complete. EBSCO. Web. 23 July 2011.
11Sewell, Dan. “Procter and Gamble’s 4th quarter net income jumps 15%” USA Today. Web. 5 August, 2011. http://www.usatoday.com/money/industries/retail/2011-08-05-procter-amp-gamble-earnings_n.htm
12Team, Trefis. “P&Gs Market Share Play a Winning Strategy.” Forbes.Web.14 January, 2011 http://www.forbes.com/sites/greatspeculations/2011/01/14/pgs-market-share-play-a-winning-strategy/
13Wikinvest. “Procter and Gamble Company.” Wikinvest.com Web. 20 July, 2011.
14Wayne, Leslie. “P.& G. Sees the World as Its Client.” NY Times. Web. 11 December, 2009. http://www.nytimes.com/2009/12/12/business/global/12procter.html
15“The Trouble with India” BusinessWeek. March 19, 2007. Accessed 5, August 2011 www.businessweek.com/magazine/content/07_12/b4026001.htm
16 Sarah, Cliff. “Procter & Gamble adds to HP outsourcing deal.” Computer Weekly (2004):10. Business Source Complete. EBSCO. Web. 15 Aug 2011.