The study examines the evolution of Procter & Gamble's (P&G) strategies from 1930s to the start of the present century. It discusses in detail the company's effort to constantly evolve its brand management model in response to the changes in the external environment and customer needs and preferences. The study also examines P&G's major brand management systems, such as concept of brand manager, the category management model, the 'global' branding strategy and finally the cohort management strategy. It also explains the rationale for a major restructuring exercise initiated by the company, called 'Organisation 2005', a six year long program and the distribution of brand portfolio associated with it. The study analyses the brand management system of P&G –the rationale for its changes with time, the evolution of new system and the strategies connected thereof and collates the learnings that can be applied to other companies.
Brand management started in Procter & Gamble (P&G) on May 13, 1931, with an internal letter from Neil McElroy (1904-1972), a fresh recruit who had come to P&G in 1925 after his graduation from Harvard College.1 McElroy had to compete not only with soaps from Lever and Palmolive, but also with Ivory, P&G's own flagship product which made him feel frustrated. In a now-famous memo, he opined that more attention should be paid to Camay, and by extension to other P&G brands as well and the infighting between the different brands of P&G has to be stopped in order to meet the competition in a determined way. In his opinion, there should be a person in charge of a brand and to help him in the discharge of his duties, he should be assisted by a substantial team of people devoted to thinking about every aspect of marketing it. This dedicated group should attend to one brand only. The new unit should include a brand assistant, several "check-up people," and others with very specific tasks.
The primary motivation of these managers would be the development of that particular brand, which would be marketed as if it were a separate strategic business unit. In this way the qualities of every brand would be distinguished from those of every other. A different market segment would be derived for each of these brands. The targeting and the positioning of the brands would be different from one another. Even in ad campaigns, Camay and Ivory would be targeted to different consumer markets, and therefore would become less competitive with each other. Over the years, not only product differentiation but differentiation across each element of marketing would be developed separately for each of these brands.
The modern system of brand management system thus came into existence. It was widely benchmarked, and was practiced in one form or the other even in the early twenty-first century by many consumer-products companies throughout the world. Typically, brand managers were energetic young executives who were slated for bright futures within the company. In case of P&G all CEOs after Deupree2 had brand-management experience. This group included Neil McElroy himself, who headed the company after Deupree retired in 1948, and who in 1957 became Secretary of Defense under President Eisenhower.
Just as the Multidivisional Organisation of Dupont heralded a new era in corporate America so also Brand management as a business technique was one of the greatest achievements in American marketing during the twentieth century. It epitomized the persistent theme of balancing centralized oversight with decentralized decision making based on who in the company had the best information about the decision at hand.
Neil McElroy's formula for P&G's success was: "Find out what the consumers want and give it to them” (Dyer, Dalzell & Olegario, 2004). P&G went to extreme lengths to do both. The Company contracted hundreds of women to use their products in their own homes, and then report the results. This kind of market research was initiated by P&G and it became the guiding stone of the company's approach to the development of new products to improve existing ones. However, McElroy soon found out that such a system was bringing in complacency in the system. Thus in the late 1940s, he introduced new brands to compete with the existing brands of P&G. For instance, the launch of Tide and Cheer affected P&G already established “Oxydol” brand.
In order to obtain consumer feedback for brand development, the company devised an innovative concept. It recruited women who would visit consumers in their homes for interviewers. This group consisted mostly of young women who had graduated from college. A woman selected would be attractive but not inordinately so. The company wanted members of this force to project a wholesome and non-threatening image, so as to inspire confidence and elicit candid answers.
However, by 1960s, the company began to phase out this group. The availability of cheap long distance telephone rates made it possible to conduct mass surveys more cost efficiently. This process was so encouraged that by 1970s, P&G was conducting about a million and a half telephone or mail-in interviews each year. With the coming of the television, the company became a heavy television advertiser. It initiated the "DAR" (Day after Recall) method for measuring the impact and memorability of TV commercials. The company also recruited advertising agencies, which used focus groups and many other kinds of opinion-sampling techniques in order to help the company to adapt its products to changing needs and tastes of the consumers.
A lot of emphasis was placed on the brand names. The names were typically one or two syllables long, easy to pronounce, distinct and easy to remember. For example, the name Tide conveyed power and heavy duty. P&G tried to maintain consistency with respect to its brands and was very unlikely to change anything about the brands that the consumers had become acquainted with. As the company grew, a number of product lines were introduced. Several brands were launched within each product lines resulting in several competing brands within the same product line. This led to a gradual transformation of the brand management system, and the adoption of a new concept called the category management model.
Category management is a distributor/supplier process of managing categories as Strategic Business Units (SBUs), producing enhanced business results by focusing on delivering customer value. Under this model, the brand mangers did not compete with each other with similar products but brands within the same category, say detergents, cooperated with each other. Category management includes six inter-related components, of which two – strategy and business process- are the most essential and called the core of the category management. Strategy is a process by which firms combine the internal analysis of phenomena within the company with the external analysis of the industry and the competitive environment (Collis & Montgomery, 1995). In other words, firms should scan the prevalent external environment, Viz., political, social, economic and then build up business processes in sync with the external environment. The external environment can be understood with the help of Porter Five Forces Analysis, which include rivalry among firm, power among suppliers, power of buyers, threat of new entrants and threat of substitutes. Strategy should not be confused with operational effectiveness. Operational effectiveness means performing similar activities better than rivals whereas strategy means performing different activities better than rivals of performing similar activities in a different way (Porter, 1996).
Besides the above two, Category management also includes three other enabling components - organisational capabilities, information technology and collaborative relationship between trading partners. A capability is a set of business processes strategically understood (Stalk, Evans & Schulman, 1992). A company delivers value to its customers through a business process. A capability is defined as those key business processes, investing in which will have along term payoff. For example, consider the cross docking capability of Wal-Mart. Cross docking is not the cheapest or the easiest way to run a warehouse but it provides a competitive advantage to the company whereby it is able to change stocks twice a week as compared to the industry average of once in two weeks. Information technology cannot be the chief reason for the company to shift to category management but should act as an enabler to the whole system. Collaborative relationship explains the manner in which the company deals with its external relationships, viz, with its suppliers, with its dealers etc. A large part of Honda's original success was due its better 'dealer relationship'. It managed its dealers to ensure that they would become successful business people. It trained all its dealers and their staff in new management systems and supported them with computerized dealer management information systems.
The introduction of category management system at P&G gave rise to further problems. John G Smale & John E Pepper who had become the President and Vice President of the P&G in 1986, took a hard look on the portfolio of brands and the organizational structure and management systems that supported it. The problems were evident. In some categories, such as laundry and cleaning products, the company had too many brands that competed with one another. Second internal competition among brands had many virtues but there were also disadvantages that became increasingly evident in the face of tough external competition in 1980s. The company was missing opportunities to collaborate and share information and learning. Third, P&G lacked a coordinated strategy in each of its major categories, because it was no-one business to identify segments and opportunities that might be served with line extensions or even new brands. Finally, the success of an experimental cross branding team of Whisper & Always demonstrated the advantage of cross functional collaboration.
To address these problems, Smale and Pepper in October 1986 announced a major reorganization of US operations –'the most significant reorganization of the company in 30 years' (Dyer, Dalzell & Olegario, 2004), Category Business Units (CBUs) were established in the space between the product divisions and brand mangers. A CBU aggregated “all brand and products in a particular business category, such as disposable diapers or oral care products….. organizationally in the same unit” (Dyer, Dalzell & Olegario, 2004). The general mangers of these CBUs had reporting to them not only the brand mangers in their portfolio but also representatives from sales, finance and product development. The new structure included 39 CBUs in US, led by 26 CBU managers; some of them were responsible for more than one category. This change affected not only brands managers but also the divisional general managers, who became in effect the group vice presidents. At the same time, a new Profit Improvement Program (PIP) triggered significant changes as manager shifted their focus from selling more cases to generating more profits.
Companies do not necessarily believe in the power of individual brands but rather in terms of needs of individuals groups of customers (Murray, 2002). This line of thinking leads to a more sophisticated approach strategy that has come to be called “Cohort Management”. Robert Rubin of Forrester Research3 can be credited with coining the phrase 'cohort management’. The idea is that companies should group brands around customers by using demographics or other related variables. This strategy would help firms to develop better consumer relationship by using behavioral data about consumers gathered from traditional and online retailers. This strategy also led to the emergence of cohort managers whose primary responsibility was to identify and segment customers into groups of individual who possessed similar needs, preferences, attitudes and the ability to purchase. The cohort managers were required to possess strong analytical abilities in order to capitalize on the information gathered on consumer behaviour.4
According to analysts, P&G is one of the forerunners in the introduction of cohort management in consumer goods market.5 The company had introduced 16 of its key products to market them jointly through mail, email and other media that provide offers and information about these products, rather than marketing each one on an isolated basis. The plan, which has dubbed 'Golden Household', was launched to find out the value of each customer and build relationship-marketing programs around these brands. Positioning brands around 'cohort' consumers makes a lot of sense for the consumers and it is also cost effective.
The cohort management strategy enabled P&G to market complementary products together. It increased the marketing efficiency of P&G by reducing the number of consumers the company targeted and maximizing the time it had with each consumer. But ironically, P&G endeavour to implement 'cohort management' had its biggest problem in its strength in its past. P&G was always very strong in building individual brands; it had more than hundred brands in its current portfolio. The key problem of P&G would be bundle bunches of different brands around consumer groups. However one solution that P&G can avail of, according to Prof Taylor David of Schulich School of Business (2004), is to prune its brand portfolio and move to corporate branded products just as Kellogg or Heinz has done.
"The days of reaching large audiences with generic messages and promotions will give way to a new era in which individuals will be targeted and measured based on their behavior," said Robert Rubin of Forrester Research.6 In order to manage competition firms will have to focus on a group of homogeneous customer, who buy a number of products rather than focusing on products per se. In other words, firms have to concentrate on 'cohorts' of consumers rather than their own brands. Most often than not brand managers continue to emphasize demographics in placing online media, the offline purchase data proves that past purchases are better indicators of future intentions than are demographics. In the next few years, access and use of consumer purchase history from traditional and online retailers will be the catalyst that drives CPG manufacturers to shift from brand management to cohort management.
Behavior-based marketing will increase the marketing efficiency of CPG manufacturers by reducing the number of consumers they need to reach and maximizing the time they have with each consumer. Marketers will target individuals with acquisition or retention ads and promotions that will generate the highest possible return rates. A new breed of marketing professional will emerge as CPG manufacturers begin to identify and segment consumers into cohorts - groups of individuals that share similar needs, abilities to purchase, and attitudes. Cohort managers will possess the analytical capabilities and skills to master behavior-based marketing. Cohort managers operating across brands will decide which ads and promotions to present to consumers based on continuous consumer information. Brand managers will focus on detailed operational issues like inventory and product formulation. The same technological capabilities that will enable cohort managers to market to consumers based on their past behavior will also enable them to measure consumer Return On Investment (ROI) - measuring the value of marketing dollars invested and the money each consumer spends as a result (Knapp, 2003).
The strength of a brand will emerge once the managers are able to identify and measure their most profitable consumers across brands. In other to calculate the life time value of a brand, the impact of specific marketing activities, like advertising, promotion, research has to be linked to the utility derived by an individual customers or a group of 'cohorts' of consumer and the value that he pays for it rather than the sales volume that brand generates (Aaker, 2004).
CPG manufacturers that decide to wait until the technological capabilities have arrived before changing their approach to marketing will find themselves gobbled up by those who are more adept. The move toward cohort management will evolve over the next five years, and the outcome will be a better understanding of consumer behavior and the development of in-house skills and tools needed to act on this knowledge.
As companies move into cohort management, Customer Relationship Management (CRM) will rein supreme. CPG manufacturers are initiating the process of building cohorts teams to establish direct relationship with those consumers whose behaviour is best suited to their product mix. The impetus for this increase in CRM came from a study by Reichheld (1996) who demonstrated dramatic increase in profits from small increase in customers' retention rates. His studies showed that as a little 5% increase in retention rates had as high value of 95% on the net present value delivered by customers. Other studies done by McKinsey have shown that repeat customers generate twice as much gross income as new customers. The considerable in technology, specially internet, have made it easier foe companies to deliver on the promise of greater profitability from 'cohorts' of customers. The flexibility of web based interaction permits firms to choose to whom they to offer services and what quality level. Moreover, the net can also be used a range of activities stating from tracking future moves of consumers to sending then direct e-mail communications.
1 P&G Online Strategy Challenges by Maratha Stewart, www.adage.com April 8,2002
2 Following the passing of William C. Procter, one of the founders of P &G, Richard R. Deupree became the new CEO.
3 Forrester Research is a technology and market research company headquartered in US that provides pragmatic advice to global leaders in business and technology. The Internet will Force Brand Management to Evolve to Cohort Management by 2005 www.forrester.com September, 7,2000.
4 Neff Jack, The Surprising Power of 'Cohort' Web Sites, www.adage.com, April 8, 2002.
5 Bernadette Johnson “Packaged Goods Marketers Test Solutions Based Approach” www.strategymag.com Feb 25, 2002.
6 Anfuso Dawn, Interview: Forrester Research's Robert Rubin, www.imediaconnection.com June 10, 2002.