Proctor & Gamble vs the great unbundling

Economies of scale no longer guarantee success. How has P&G fought back against its nimbler, niche rivals?

by Hemant Taneja
Last Updated: 06 Jul 2018

In Unscaled: How AI and a New Generation of Upstarts are creating the Economy of the Future, venture capitalist Hemant Taneja argues that big is no longer automatically beautiful. Economies of scale used to give larger companies a formidable advantage against smaller rivals but, he argues, this has now changed as barriers to entry have shrunk and technology makes it easier to target and exploit niches.

In this edited extract from Unscaled, Taneja uses the example of consumer goods giant Proctor & Gamble to illustrate how big businesses can survive and thrive in this new age of unscale.

Proctor & Gamble’s breakthrough came in 1878. According to lore, one of the company’s chemists accidentally left a soap mixer on during lunch, stirring more air than usual into P&G’s white soap. The company marketed it floating soap Ivory nationwide, and began to scale up.  

By 1890 P&G was selling 30 different kinds of soap. In 1911 it introduced Crisco food shortening. After World War II, it brought out Tide detergent, the first mass-market soap specifically for cleaning clothes in an automatic washing machine. By the end of the century P&G was one of the world’s corporate superpowers, offering more than 300 brands and raking in yearly revenue of $37bn.

In 2016 analyst firm CB Insights published a graphic showing how unscaled companies were attacking P&G. It looks like a swarm of bees taking down a bear. P&G is no longer a monolithic company with powerful defences against upstarts; instead, it is depicted as a series of individual products, each vulnerable to small, unscaled, agile, AI-driven, product-focused start-ups.

P&G’s Gillette razors were being successfully challenged by Dollar Shave Club and Harry’s subscription models; Pampers’ customers were getting peeled off by The Honest Company’s environmentally friendly diapers; Thinx 'period panties' were going after Tampax tampons in a new, uncharted way; and eSalon 'custom' hair colouring was challenging the mass appeal of P&G’s Clairol.

CBI called it the 'unbundling of P&G'. It illustrates what big corporations face in an era that favours economies of unscale over economies of scale. Small companies can challenge every piece of a big company, often beating mass-appeal offerings with products or services more perfectly targeted to a particular buyer. If unscaled competitors can lure enough customers, economies of scale will work against incumbents as fewer units move through expensive factories and distribution systems — a cost burden not borne by unscaled companies.

P&G fights back

How can a corporation built to take advantage of scale pivot to take advantage of unscale? It won’t be easy, but some companies recognise what’s happening and are experimenting with responses. One of them happens to be P&G.

For about a decade it’s run a programme called Connect + Develop. After 175 years of inventing most of its new products in house, the company came to understand that there were more smart inventors outside of P&G than could possibly be contained inside.

Connect + Develop invites proposals from anyone who has developed a suitable product, essentially allowing the company to become a platform for niche products, which can 'rent' P&G’s distribution, marketing and knowledge. P&G, meanwhile, captures some of the value of new unscaled products instead of competing against them.

Connect + Develop hasn’t completely transformed P&G, but it has moved it down the right path. According to one 2015 study, about 45% of initiatives in its product development portfolio had key elements discovered through Connect + Develop. A future unscaled version of P&G might look more like a giant consumer products platform that a constantly evolving swarm of small, focused entities rent—an Amazon Web Services for tangible consumer goods.

This article was extracted from Unscaled: How AI and a New Generation of Upstarts are creating the Economy of the Future by Hemant Taneja (Piatkus).

Image credit: blackboard1965/Shutterstock


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