Global issues: topics 6 and 7

P&G

Proctor & Gamble entered foreign markets early in its existence, and relied on semi-autonomous foreign subsidiaries to manufacture market and distribute products that were developed in the United States. This tactic relied on P&G owning the subsidiary, but giving the subsidiary considerable operational leeway, so that the arrangement almost worked more like a licensing deal. This strategy persisted for P&G through the 1980s.

In the 1990s, this strategy became less viable, at least relative to the alternatives. The strategy had arisen and persisted in an era where barriers to trade between nations were high, and by the 1980s these barriers were beginning to fall -- it was the beginning of the modern era of globalization. National markets were becoming regional markets -- for example with the common market in Europe and the Canada-U.S. Free Trade Agreement. In addition, P&G's retail partners were becoming global in scale, something that demanded P&G adopt a more globalized approach to production and even to distribution. Thus, it was changes both in the legal environment of international trade and in the competitive environment of its major customers that drove the internal change at P&G.

3) P&G has in the past several years been working towards becoming a global company, rather than a multinational one. A global company is one that operates predominantly on a global scale, with little change to accommodate regional conditions. Such a strategy assumes that the product can be marketed in roughly the same way around the world. To implement this strategy, P&G has been dismantling its regional subsidiaries and has been reorganizing the company more in line with a global company, focusing on product-based divisions rather than geographical ones.

There are some benefits to adopting a global strategy. The first is evident from the impetus for this change -- the company's products are more attractive to global customers. Major retail clients like Wal-Mart and Carrefour prefer to purchase globally, and therefore they must work with companies that can produce and deliver on that scale. P&G will be able to win greater economies of scale using such an approach as well, which will make its products more competitive not only on the distribution front but on the price front as well. This strategy might also facilitate increased market entry for P&G, as the company will no longer require setting up an entire national subsidiary to facilitate market entry. This is especially valuable in smaller countries where the cost of setting up national infrastructure had constrained market entry in the past. In addition, such a strategy reflects the reality of a globalized world, where cultures can blend into each other.

There are, however, some risks associated with this strategy. One is that the company becomes a cost leader by default. It earns economies of scale, but purchasers like Wal-Mart and Carrefour operate specifically on high-volume, low-margin strategies. P&G will need to be comfortable with such a strategy if it wants to work with these retail partners. Another risk with this strategy is that P&G becomes less nimble in local markets. Where it might gain access to major retailers, it also loses the ability to market to local tastes, and at local price points. This could hurt it in markets that are less receptive to a global message, and markets where such hypermarkets have low penetration -- the loss of agility in such circumstances might not be offset by gains from the hypermarket retail channel.

2.a) The benefits of outsourcing so much work to foreign suppliers is that Boeing can lower the cost of production, and it can improve the quality, by tendering globally instead of just in the U.S. There are significant risks, however, in terms of supplier reliability, in terms of increased transportation costs, and in terms of managing the global supply chain. Often, the benefits do outweigh the risk, especially in this case where the suppliers come from major industrial countries.