Procter and Gamble is an extremely large firm that has dominated the consumer goods market for many years. The company has established many strengths and VRIO resources, but has also contrived several weaknesses that need to be addressed internally. Based on our research, we have developed two recommendations. First, P&G should capitalize on their broad economies of scope and VRIO resources, particularly their substantial amounts of capital and favorable reputation. Second, we recommend that P&G focus on overcoming weaknesses by improving market awareness and alleviating the company’s struggles with innovation.
Procter and Gamble possesses a wide range of brands in many different product categories, resulting in economies of scope as a competitive advantage against smaller companies. P&G has been in business since 1837, and over that time, the firm has learned how to coordinate and manage diverse production of many products. They are likely to remain immune from direct duplication, since smaller competing firms will find that it is costly to realize these same economies of scope.
In order to continue dominating against smaller firms and remain competitive against other larger firms, P&G should grow in size through acquisitions and new brands to continue to maximize their advantage from economies of scope. When considering Porter’s Five Forces, the only strong forces are bargaining power of buyers and rivalry among existing competitors. Both of these threats would be reduced by owning additional brands. Reaching a larger market share from smaller, less profitable brands in any category will strengthen P&G’s overall market share without diminishing overall profit. However, retailers such as Kroger’s stores, Walmart, and Target are relied upon heavily, and thus possess a strong bargaining power of buyers. Owning more brands will reduce retailers’ power over P&G because the firm will have more overall consumers, and a proportionate amount of loyal consumers. Rivalry among existing competitors is also a very strong force against P&G. P&G’s competition includes small companies that compete with only a few of its brands, large companies such as Estee Lauder that compete with entire brand categories, and other massive firms that compete across many categories, such as Johnson & Johnson and Unilever. P&G is a massive firm, even when shrunken down to the current sixty-five brands. The firm should take advantage of their knowledge on how to manage many brands and grow by capitalizing on their substantial economies of scope rather than shrinking. Doing so would result in both of the aforementioned Porter’s forces becoming weaker.
P&G has extensive financial resources, which allow them to be “the biggest advertiser in the world” (Vranica, Suzanna; The Wall Street Journal). At the end of fiscal year 2017, they had over $5.5 billion in cash and cash equivalents, and over $96 billion in retained earnings. Their net income for fiscal year 2017 was more than double their nearest competitor’s net income (Yahoo Finance). This is a huge competitive advantage for P&G, because it is very difficult for any other company to compete on the same scale.
P&G also has many physical resources, including manufacturing facilities, machines and different technologies used in the production process, as well as R&D labs. Applying the VRIO framework, P&G can exploit external opportunities and neutralize external threats with their large pool of resources and capabilities (Barney, Jay; Hesterly, William). We recommend that P&G use these extensive financial resources to acquire companies and brands that either pose a threat, or that can add value to P&G. Few competing firms control the same amount of resources as P&G does, and firms that do not have these resources face a barrier. It would prove to be very costly for other firms to obtain the same amount of resources that P&G possesses.
Because reputation is a quality that is so difficult to replicate, P&G’s positive reputation is a major strength that helps the company continue to exploit the resources they possess, while adding value to the firm. It also helps Proctor and Gamble widen the gap between themselves and potential competitors that are also vying for market share in the industry. The company was recently ranked #63 by Forbes on the list of the “World’s Most Reputable Companies” (P&G). P&G was also ranked #11 by Glassdoor on the list of “Employee Choice Awards for Best Place to Work 2015” (P&G). This allows them to attract top talent. We recommend that P&G continue to bolster their reputation to sustain their competitive advantage.
Though P&G has many strengths, they also face many challenges that arise from weaknesses within the company. These include a lack of current market awareness and a recent decline in innovation, due to a rigid company culture.
One of the most prominent weaknesses that continues to limit P&G’s potential is the company’s lack of innovation. Despite priding themselves on being a prominent innovator, Proctor and Gamble has struggled to come up with ideas that break the mold and represent advances in the progression of the consumer goods industry. With the aforementioned resources and R&D budget that Proctor and Gamble currently has, there is no excuse for the recent decline in the innovation of new brands, ideas, and household solutions. It should be noted that the most recent breakthrough of P&G occurred almost twenty years ago in 1999 with the release of Swiffer (Colvin and Tully). For a company that spends more than its 8 closest competitors combined on research and development, this is unacceptable. Though there have been slight improvements through brand extensions, such as the recent release of Tide Pods, we recommend that R&D funds be allocated in such a way to inspire the creation of valuable new brands that push the limits of what is possible in the industry.
Having been established in 1837, Proctor and Gamble’s company culture runs deep. Upon initial inspection, this could be considered an admirable strength. However, because P&G’s culture is so rigid, growth and needed change within the organization has not been able to take place (Colvin and Tully). This can be one reason why P&G has struggled to innovate and create new ideas. Recent internal conflict has surfaced between current management and newly appointed board member, Nelson Peltz. Peltz’s views on what is best for the company differ widely from the views of current CEO, David Taylor. Nelson Peltz is also very keen on cutting costs and reevaluating R&D procedures. This shift in opinions represents opportunities for P&G to break an age-old company culture and make the necessary changes to innovate. We recommend that there be a reevaluation of the company’s corporate culture. This includes management being more open to new methods of accomplishing work. In order to facilitate greater flexibility and increase innovation, we propose that P&G also reach out to employees and consumers for suggestions on new brands, products, and ideas. Following these recommendations will prove to be a wise decision because they will allow Proctor and Gamble to create greater value for consumers and build stronger connections with the market they hold such a significant presence in. P&G’s recent struggle with market awareness will likely prove to be a detriment to the firm’s success and this renewed focus on innovation provides part of the solution to the problem.
Another weakness that P&G has struggled with is their ability to understand and adapt to the current market. Every new generation brings about change in spending habits, wanted products, and culture in general. Like any successful company that has lasted many decades, P&G has adapted to these changes in the past. However, the age of the internet has brought rapid changes to culture in the world that P&G is not adapting to quickly enough. This includes developing products that appeal to Millennials, and more aggressively expanding their online presence. This will allow P&G to increase profits and market share in categories they currently may be struggling in. Millennials are an increasingly important customer segment in all industries and have become and represent more than a quarter of the United States population (US Census). Procter and Gamble needs to adapt to the quickly changing cultures, particularly the online culture. Increasing their presence online in the age of the internet is one of the many ways that P&G will be better able to build bridges with the Millennial population. Many Millennials are seeking out companies and products that are purpose-driven and have a distinct social impact platform. Being able to build connections with the companies they are purchasing products from is important to many consumers. Because Proctor and Gamble is so large and established, the younger generations of consumers often find it difficult to relate to or trust the firm (Danzinger, Pamela). In light of these current weaknesses, we propose that P&G focus more of their efforts into brands that Millennials can relate with. This includes placing a greater emphasis on social impact, and helping consumers feel like they are making a difference through the purchases they are making. We also recommend that P&G devote more resources to marketing via social media platforms and connecting to their customer base via those channels.
In order to remain an industry leader and enhance its ability to perform, Proctor and Gamble must more effectively use the wide swath of VRIO resources that it possesses. P&G’s large amounts of capital, expansive economies of scope, and the successful maintenance of its company reputation must remain key sources of competitive advantage for the company. We also recommend that Proctor and Gamble use the resources they possess to overcome prominent struggles that the company faces. These include better understanding of the current market, as well as improving innovation abilities to bring new brands, ideas, and products to the table. Execution of the recommendations provided will ensure that Proctor and Gamble remain a strong competitor and avoid pitfalls that could potentially present problems for the company.