Colgate Palmolive in Mexico Harvard Case Solution & Analysis

Introduction

This case is about the past deteriorating economic and financial circumstances for Colgate Palmolive (CP) subsidiary in Mexico. Colgate Palmolive is the world’s giant in consumer goods products category. This subsidiary is one of the major business concerns of the parent company, which is located in the USA.Colgate Palmolive had introduced many new products into its product line in the period of 1970s, which greatly helped it to cope with external environment challenges in the latter years of its business in Mexico.

The external environment circumstances became very harsh in the form of hyperinflation, currency devaluations, rising interest rates and introduction of liberalization under GATT (General Agreement on Tariffs and Trade). The company is able to cope up with some circumstances such oil price drops twice, but some situations are very challenging. The company currently faces the same situations as described above.

 Price controls by government of Mexico add further to the woes. The price controlled products are mainly common domestic usable like detergents, hand dish washing products, etc. The company in Mexico is the market leader in many of the product categories and in some product categories; it is facing competition from many international and local firms.

Problem Analysis

The company is facing extreme external environment challenges, which are affecting the company’s upper line and bottom line.The challenges, as described above, have a deteriorating effect on the company as a whole. These challenges pose serious problems to the company and in some instances; it has to stop production and marketing of some items like in the case of price control items in hyper inflationary situations. These macroeconomic challenges do not allow the company to achieve its goals of return on capital of 15%.

In an event of economic recession, customers move away from such products of the company to cheaper alternatives, which hamper the growth of the company. The Mexican branch has to do reporting of financials based on the US, Mexico and international standards, which have increased the work for the finance and accounts department.

Case Analysis

A comprehensive case analysis has been done with respect to the subject matter in the case. Following challenges have been identified as well as mitigating strategies have been made in order to address the following challenges efficiently and effectively.

Mitigating Strategies for Challenges the company faces

As explained above, there are several challenges for Colgate Palmolive subsidiary in Mexico. These challenges are not in small scale; rather they are on macroeconomic front of the economy. Every challenge has reached a highest point whose example cannot be found in the history of Mexico. The example includes that inflation has become hyperinflation in which the rate of growth is seen unprecedented in the history of the Mexico.

1.     Unanticipated Hyper Inflation

Hyperinflation is a period of severely high inflation in a country with inflation rates of over 100%. Mexico faces this situation when it has been passing through the 1980 s. The companies suffer due to the fact that the value of currency erodes with the passage of time in hyper inflationary moments.

Colgate Palmolive Mexico subsidiary uses the product cost in terms of expenses incurred to replace the current inventory with new ones. In hyper inflationary situation, the company will get new inventory at higher costs;therefore it needs to increase prices to keep contribution margins intact. Colgate Palmolive Mexico is facing a challenging situation in terms of price controls, which does not allow price to increase easily and in hyper inflationary situation, due to this the government is slowing down the increase in prices of price-controlled items.

Mitigating Strategies

The mitigating strategies for dealing with hyperinflation are:

  1. The company needs to implement a focus strategy in which it will focus on advantages in terms of cost or differentiation of products. This strategy is needed to be applied on niche markets, which are growing despite the major economy is feeling heat of hyperinflation.
  2. If the company is not able to pursue niche markets strategy, then it can go for differentiation of products. This can be useful as Colgate Palmolive’s innovations in products in 1970s helped it to deal effectively with challenging situations in later years.
  3. The company can focus itself on cost leadership strategy by bringing down costs in all phases of value chain.
  4. Out-sourcing can also prove to be useful strategy in hyper inflationary situations if the company is able to make contracts at cheaper costs.
  5. Business process re-engineering can also be useful in mitigating effects of hyperinflation for Colgate Palmolive Mexico as it will help to remove steps, which are of low value, from the supply chain activities.

The company can close lower sales volume distribution centers which are operating at higher costs.......................

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