Procter and Gamble, a leading global company, specializes in consumer goods. Its global business services unit, established in July 1999, was aimed to move the company from “operating by regions to operating by-products” (Delong et al 4).
Economic changes and strategic plans of P&G demand restructuring of this unit and new approaches to doing business on the global scale. Three alternatives involve: spin-off GBS as a separate independent entity, outsource all of GBS to one business and outsource GBS divisions separately. Critics admit that it is a mistake to consider the outsourcing and restructuring alternative in a vacuum. It is important to take into account the nature of business and the modern economic environment. To achieve the basic objective of making the company larger, more successful, and more profitable, many possible alternatives should be taken into account.
The first approach is the most attractive for P&G but it is not a priority of the company. The separation will impact the service level and costs, delivery system, and logistics. Continuous value enhancement in a single product area is certainly laudable, but prudence dictates that other stakeholders’ needs (shareholders, employees, creditors, and suppliers, for instance) also be taken into consideration.
Diversification is an important strategy in assuring that the needs of a variety of stakeholders are given careful enough attention to merit their strong approval. Moreover, expanding the product and market scope of the firm widens its spectrum of customers, providing even more opportunities for delivering value in completely novel ways. The separation of the unit will create additional problems for the company and its customers including increased competition and lower customer service. It is possible to say that the unit has the expertise to compete but it will require additional financing and support of the main units. The leader of the unit, Miek Power, has found that by reevaluating activities, improved efficiencies can be gained by outsourcing essential services (Campbell 54).
The benefits of integrating resources through supply chain management help to produce total efficiency which translates to the creation of customer value. Properly planned and implemented, this type of approach can produce desirable results without losing competitive capabilities (Greaver 22).
The second option is more advantageous for the company but less desirable for employees. Thus, this alternative is limited to broadening the product line, however, is erroneous. Many other business goals can be fulfilled by outsourcing. These include strengthening the company’s financial position, procuring the services of one or more key personnel or new executive talent, obtaining land, buildings, and equipment for expansion, stabilizing cyclical or seasonal types of business, avoiding concentration in a government-regulated area of industry, acquiring the technical skills of highly trained scientists, and many other critical elements in business which determine growth and success (Greaver 29).
The process of outsoaring by a single company, then, is one that ought to be considered by the management of any enterprise as its plans for growth are executed. The acquisition is one way to be considered in achieving the complete set of defined objectives. And many companies have found it a very satisfactory way (Campbell 54).
The main limitation of this option is the inability to find a company able to meet the requirements and expectations of P&G. The company will have to ’employ’ 5,700 employees from the unit and proposes them equal positions to those they obtain in GBS. If P&G chooses this option, it will have to manage the transition process. The support activities will include work design and schedule, compensation schemes, and fair treatment of culturally diverse employees. Like all approaches to the solution of management problems, outsourcing may for any particular company provide a profitable and satisfactory alternative to other ways of expanding company activities.
Outsourcing per se does not automatically solve all problems for all companies. It is shortsighted for management to refuse to consider any acquisition, and it is foolish for management to operate on the assumption that acquisition will guarantee sound growth and increased profits (Greaver 87). The outsourcing of other companies or parts of companies is just one of many possible ways of achieving an organization’s goals. When outsourcing is contemplated as one method for corporate growth, it must be remembered that it includes a large bundle of problems quite different from those involved in the day-to-day operations of a business. Failure to recognize these differences has led many managements into unfortunate and unprofitable outsourcing experiences.
In some situations executives, having learned of unfortunate experiences in other companies as a result of outsourcing intuitively refused to consider it as an element of their companies’ growth programs. Such decisions are unfortunate for they deny their organizations the potential benefits of many opportunities. On the other hand, there were many executives who were pursuing active outsourcing programs because it seemed to be the fad, much as having an executive development program was in 1990. But top management attitudes toward product diversification through acquisition vary widely. Some executives enthusiastically endorse the idea of moving into new product areas.
They know well the sharp and difficult competitive conditions in their own industries, a point of view which seems to be characteristic of all industries, and look admiringly across the business street at what appears to be greener competitive pastures. Lack of knowledge about life in other product fields gives them a spirit of optimism and they eagerly seek opportunities to venture into different product areas.
In other organizations, top executives are most reluctant to enter fields in which they have not had experience, and when discussing growth opportunities, they make very clear their exclusive interest in confining product growth to areas identical with or closely similar to their current lines. To support this point of view, they quote the inauspicious and abortive expeditions of some companies into new and unknown product areas through acquisitions (Greaver 76).
The third solution is unlikely for both P&G and its employees. If P&G outsources its division separately, it will cause dissatisfaction of employees and a lack of control for the company. When these conditions exist in the management of the outsourcer, ventures into unknown fields generally seem to be successful. The willingness of executives to consider new and different fields of activity is also related to the profitability of their existing business.
When current operations are going smoothly, top management is less willing to consider expanding into other fields. The third option will help P&G achieve corporate objectives, but it will be difficult to achieve them. P&G can find companies specialized in all areas (finance, logistics, management) but will be difficult to control and coordinate their activities. In this case, it will be necessary to create a new unit in order to manage diverse departments and companies (Greaver 123).
The fourth solution is to keep GBS in-house. An effective business strategy consists of being aware of all the variables so as to get the optimum interplay. This requires not only a clear definition of the variables but also a careful analysis of them. The completion of such an analysis then can lead to a decision on whether acquisition seems to be the best answer. Too often managements think primarily of acquisitions as a method of adding products to the existing product line. It is often said that there are only two ways to grow: through the internal development of products and through the acquisition of enterprises with similar or different products.
The corporate manager who is being restructured out of a job will argue that they force management to load up their company with non-productive high-risk debt to stave off raiders. The raider will claim that it is inevitable and that he is simply helping to redeploy assets to more profitable uses. Likewise, the shareholder, who realizes a capital windfall on a takeover, benefits at the expense of the bondholder, whose securities become nearly worthless when the company takes on huge amounts of debt to finance the buyout (Robbins 77). The high values that Wall Street is assigning these takeover targets are generally thought to be attributable to the belief that restructuring will increase profitability to the same levels as the asking price.
The analysis shows that the fourth solution is the best one for P&G and GBS. This option will require additional resources but it will help P&G save employees and improve its productivity. Enough income must be created by a firm’s business activities to validate its existence.
As a minimum, the cost of goods sold must be covered, as well as the wages necessary to produce and manage the product. A firm operating under such a breakeven strategy is not destined to last very long in the competitive and global marketplace that we are facing today. Also, technological advances guarantee that any product that enjoys a competitive advantage today may become obsolete tomorrow due to some emerging technology or improved manufacturing process. Now, more than ever, to remain competitive in today’s global marketplace, P&G must pursue circular growth strategies (Robbins 54).
The fourth strategy will help P&G to win the customer by proposing exceptional service and high quality. This strategy means that the profits that are generated today are pumped back into the company later to pursue long-term growth and to ensure the future generation of profits. In many instances, the main motivation behind outsourcing activity is to improve a firm’s profitability, markets, customer base, manufacturing efficiencies, assets, and R&D facilities, or by simply eliminating some of the competition.
The hope is that the combination of the firms will improve the operating efficiency and profitability of the companies involved. The net effect of all this restructuring is that corporate managers are devoting increased amounts of time toward protecting their own interests in the short term, rather than focusing on long-term growth.
Outsourcing, with its expertise in understanding customer, and competition, and market environments, is in a strong position to accept leadership at least in ensuring a customer orientation. GBS must develop partnerships with other functional managers in developing and implementing strategies with a customer-driven focus. the plan implementation will take 6-7- months and will involve training of employees and restructuring of the unit. The main criteria are the customer-driven structure of the unit and business itself, and communication aimed to support all activities of P&G and its strategic goals.
Works Cited
- Campbell, D.J. Organizations and the Business Environment. Oxford: Butterworth-Heinemann, 1997.
- Delong, E. J. et al. Procter and Gambler: Global Business Services. Harvard Business School. 2004. pp. 1-15.
- Greaver, M. F. Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives. AMACOM, 1999.
- Robbins, S. Organizational Behavior. Pearson Higher, 2002.