Vertical Disintegration

During 2014, A.G Lafley left the retirement life to try and calm down the upset shareholders of Proctor and Gamble (P&G). Lafley left P&G after working there for thirty years, and shortly after the company’s profits began to decline. The board went wild, and demanded the former CEO return. Coming back has already been shown successful, with P&G seeing an increase in profits by 3% (Ng).
                Lafley declares the issues with decreasing profits are a result of not enough specialization and too much vertical integration. An article in Wall Street Journal talks about Lafley’s changes says only a few of its brands produce 90 percent of its profits (Ng). P&G’s move now is to sell off or shut down the less profitable and lesser known brands and reap the benefits of specialization. The goal is that when consumers are making a purchase P&G’s products are the preferred choice, and P&G will rake in profits assisted by specialization.
                Chapter six in the textbook warns us of the costs of vertical integration, and P&G is evidence of these costs to the bottom line. With P&G’s loss of profitability so quickly, there is suspicion if vertical integration is not only the issue. While Mr. Lafley has reversed the decline, his forerunner and successor (Bob McDonald) as CEO may have been experiencing some principle-agent issues that plague today’s management decisions.


Ng, Serena (August 1, 2014). P&G to Shed More Than Half Its Brands. Retrieved from: http://www.wsj.com/articles/procter-gamble-posts-higher-profit-on-cost-cutting-1406892304


Dr. Tufte said...

Jake Eliason: 100/100

I'm dubious about this explanation. I agree that vertical integration can be a source of inefficiency. But Proctor and Gamble has always been a multi-brand company (so that's horizontal integration) with a lot of supply chain support (that's the vertical integration). Why is the latter a problem all of a sudden?

Jake also describes it as "not enough specialization". I think something like "diseconomies of scope" might be more accurate.

I also don't know that the source articles focus on P&G getting most of their profits from only some of its product lines is that much of a problem. It sounds to me like they are operating with some mark-up power in some markets, and little mark-up power in others. Those may not be great businesses, but if they break even in a competitive market, I'm not sure what the problem is.

So I could be totally clueless on this one ... but to me it just doesn't add up.

SpencerM said...
This comment has been removed by the author.
SpencerM said...

I can see Dr. Tufte's point that P&G has always been a very horizontally integrated company. I think the key to their success is delivering a high quality product with great branding. It is definitely a different model compared to companies such as Apple, which is very adamant about having their logo on every product that they create.

A pro for P&G's strategy is that their customers won't have to deal with the headache of brands changing. People go to the store and look for Tide or Bounty because they know they are high quality products. If P&G rebranded them to say P&G it may cause some customers to be very upset. A con however, is that many people don't know all of the different brands of P&G and therefore they can't give credit to them and build their brand.

It will be interesting to see with P&G dropping nearly 100 of their different brands if their success will increase. Even if their brands were just breaking even, it would still build market share and P&G's name to keep them around.

Dr. Tufte said...

SpencerM: 50/50

Not much to add to this one.

Were they actually talking about rebranding stuff as P&G? That doesn't seem bright.

Last paragraph: here we go again with market share. Go look it up in your text's index. Market share is barely covered in most ManEc books because it really isn't useful for assessing much about a business.