Mini Case 3
When Will P&G Play to Win Again?
WITH REVENUES OF some $80 billion and business in more than 180 countries, Procter &
Gamble (P&G) is the world’s largest consumer products company. Some of its category-defining
brands include Ivory soap, Tide detergent, Crest toothpaste, and Pampers diapers. Among its
many offerings, P&G has more than 20 consumer 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
implemented 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 attributes. Creating higher perceived value generally goes along with higher
product costs due to greater R&D and promotion expenses, among other things. Successful
differentiators are able to command a premium price for their products, but they must also
control their costs.
Detailing how P&G created many market-winning brands, P&G’s long-term CEO A.G. Lafley
published (with strategy consultant Roger Martin) the bestselling book Playing to Win: How
Strategy Really Works (in 2013). In recent years, however, P&G’s strategic position has
weakened considerably, and P&G seems to be losing rather than winning. P&G lost market share
in key “product-country combinations,” including beauty in the United States and oral care in
China, amid an overall lackluster performance in many emerging economies. As a consequence,
profits have declined. P&G posted a sustained competitive advantage in recent years; its stock
market valuation has fallen by some $50 billion, while its competitors Unilever, Colgate-
Palmolive, and Kimberly-Clark posted strong gains. Many wonder when P&G will play to win
again?
Some of P&G’s problems today are the result of attempting to achieve growth via an aggressive
acquisition strategy in the 2000s. Given the resulting larger P&G revenue base, future
incremental revenue growth for the entire company was harder to achieve. A case in point is
P&G’s $57 billion acquisition of Gillette in 2005, engineered by then-CEO A.G. Lafley. The
value of this acquisition is now being called into question. Although Gillette dominates the retail
space of the $3 billion wet shaving industry, P&G was caught off-guard by how quickly razor
sales moved online. Turned off by the high prices and the inconvenience of shopping for razors
in locked display cases in retail stores, consumers flocked to online options in droves. The online
market for razorblades has grown from basically zero just a few years ago to $300 million.
Although this is currently only 10 percent of the overall market, the online market continues to
grow rapidly. Disruptive startups such as Dollar Shave Club offer low-cost solutions via its
monthly subscription plans online.1
Perhaps even more troubling is that P&G focused mainly on the U.S. market. Rather than
inventing new category-defining products, P&G added more features to its existing brands, such
as Olay’s extramoisturizing
creams and ultra-soft and sensitive Charmin toilet paper, while raising prices. Reflecting higher
value creation based on its differentiation strategy, P&G generally charges a 20 to 40 percent
premium for its products in comparison to retailers’ private-label and other brands. The strategic
decision to focus on the domestic market combined with incrementally adding minor features to
its existing products created two serious problems for P&G.
First, following 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 alternatives. Moreover, P&G’s direct
rivals in branded goods, including Colgate-Palmolive, Kimberly-Clark, and Unilever, were faster
in cutting costs and prices in response to more frugal customers. P&G also fumbled recent
launches of reformulated products such as Tide Pods (detergent 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 focusing on the U.S. market, P&G not only missed out on the
booming growth years that the emerging economies experienced during the 2000s, but it also left
these markets to its rivals. As a consequence, Colgate-Palmolive, Kimberly-Clark, and Unilever
all outperformed P&G in recent years.
As a result of its sustained competitive advantage, P&G also had a revolving door in its
executive suites. Within a three-year period (from 2013 to 2015), P&G went through three
CEOs. After 30 years with P&G, the former Army Ranger Robert McDonald was appointed
CEO in 2009, but was replaced in the spring of 2013 in the face of P&G’s deteriorating
performance. The company’s board of directors brought back A.G. Lafley. This was an
interesting choice because Lafley had previously served as P&G’s CEO from 2000 to 2009, and
some of the strategic decisions that led to a weakening of P&G’s strategic position were made
under his watch. Lafley served a second term as CEO from 2013 to 2015. In late 2015, P&G
named David Taylor as new CEO, again promoting from within, while Lafley will continue to
serve as executive chairman.
To strengthen its competitive position, P&G launched two strategic initiatives. First, P&G began
to refocus its portfolio on the company’s 70 to 80 most lucrative product-market combinations,
which are responsible for 90 percent of P&G’s revenues and almost all of its profits. Some argue
that P&G had become too big and spread out to compete effectively in today’s dynamic
marketplace. To refocus on core products such as Tide, Pampers, and Olay (with these three
brands alone accounting for more than 50 percent of the company’s revenues), P&G already sold
or plans to divest almost 100 brands in its far-flung product portfolio, including well-known
brands such Iams pet food, Duracell batteries, Wella shampoos, Clairol hair dye, and CoverGirl
makeup, but mainly a slew of lesser known brands.
Part of this strategic initiative is also to expand P&G’s presence in large emerging economies. As
an example, 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. Yet, the strong dollar in recent years is hurting P&G’s international results. Second,
P&G implemented strict cost-cutting measures through eliminating all spending not directly
related to selling. As part of its cost-cutting initiative, P&G also eliminated thousands of jobs.
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 – C). The hope is that P&G’s revised
business strategy would strengthen its strategic position and help it regain its competitive
advantage. It remains to be seen if this will be the case.
DISCUSSION QUESTIONS
1. 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 quite successful in the past, especially in rich
countries such as the United States and many European countries. What went wrong in
the recent past? Detail P&G’s internal weaknesses and external challenges. Derive
recommendations on how to improve P&G’s strategic position going forward. Be
specific.
2. Given the discussion in the Mini Case about P&G slashing its R&D spending and cutting
costs and jobs more generally, does the firm risk being “stuck in the middle”? Why or
why not? If yes, why would being “stuck in the middle” be a bad strategic position?
3. Which strategic position should P&G pursue? Which value and/or cost drivers would you
focus on to improve P&G’s strategic profile? How would you go about implementing
your recommended changes? What results would you expect, and why?
4. Given the high turnover of CEOs in recent years as a result of the company’s inferior
performance and P&G’s continued practice to promote company veterans, some argue
that P&G’s leadership model is broken. Rather than promoting from within, they argue
that an outsider might be better positioned to make the necessary changes. Which
arguments can be mustered to support sticking with P&G’s model to continue promoting
from within? Which arguments would support the notion that appointing an outsider as
CEO might be advantageous given that P&G has been in a turnaround situation for a
number of years now? Where do you come down in this argument?
Endnote
1 Dollar Shave Club’s promotional video was a viral hit on YouTube with over 20 million views, see
www.youtube.com/watch?v=ZUG9qYTJMsI. Sources: This Mini Case is based on: “Razor sales move online, away
from Gillette,” The Wall Street Journal, June 23, 2015; “P&G names David Taylor as CEO,” The Wall Street
Journal, July 29, 2015; “P&G to shed more than half its brands,” The Wall Street Journal, August 1, 2014; “Strong
dollar squeezes U.S. firms,” The Wall Street Journal, January 27, 2014; “Embattled P&G chief replaced by old
boss,” The Wall Street Journal, May 23, 2013; Lafley, A.G., and R.L. Martin (2013), Playing to Win: How Strategy
Really Works (Boston, MA: Harvard Business Review Press); “A David and Gillette story,” The Wall Street
Journal, April 12, 2012; “P&G’s stumbles put CEO on hot seat for turnaround,” The Wall Street Journal, September
27, 2012; “At Procter & Gamble, the innovation well runs dry,” Bloomberg Businessweek, September 6, 2012; and
“P&G’s Billion-Dollar Brands: Trusted, Valued, Recognized,” Fact Sheet, www.pg.com.
