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Procter & Gamble Company 2011

Alen Badal

A.

Case Abstract
Procter & Gamble (P&G) is a comprehensive strategic management case that includes the companys yearend 2010 financial statements, organizational chart, competitor information and more. The case time setting is the year 2011. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Cincinnati, Ohio, P&Gss common stock is publicly traded under the ticker symbol PG. Headquartered in Cincinnati, Ohio, P&G is the world's largest household products company. The firm is divided into two global units: Beauty & Grooming and Household Care but P&G also makes pet food and water filters. Many P&G's products are billion-dollar sellers, including Febreze, Fusion, Always, Braun, Bounty, Charmin, Crest, Downy, Gillette, Mach3, Iams, Olay, Pampers, Pantene, Tide, Gain, and Wella, among others. P&Gs fiscal year ends June 30 every year.

B.

Vision Statement (proposed)


To maintain our status as the number one household nondurables company in the world.

C.

Mission Statement (proposed)


We will create and promote household nondurable (2) products that are not only known for quality and innovation (4) but for value (7) and environmentally (8) conscious. Our consumers (1) around the world (3) use our products on a daily basis (5) and trust the Procter & Gamble name and our brands. At Procter and Gamble we believe good ethics is good business (6) and stirve to conduct business in accordance to the laws of the nations in which we operate and treat our employees (9) with the respect they deserve. 1. 2. 3. 4. 5. 6. 7. 8. 9. Customers Products or services Markets Technology Concern for survival, growth, and profitability Philosophy Self-concept Concern for public image Concern for employees

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

D.

External Audit
Opportunities 1. 2. 3. 4. 5. 6. 7. 8. 9. Higher demand for higher-priced products such as prestige cosmetics and fragrances. Younger customers are attracted by social media advertising. Social media advertising is more cost effective than traditional advertising. The beauty and cosmetics industry is expected to increase globally by 8.5 per cent in 2014 according to recent research from Euro Monitor International. There is an endless possibility to `celebrities endorsing fragrances, these products are successful because many are persuaded by fame of the celebrity. Men are increasingly concerned with their appearance, this provides a opening to grab a new branch of consumers. Increase in online purchasing, average monthly visits in the U.S. to beauty-related websites topped 60 million and grew 94 percent over past three years. Consumers are interested in products that are made with all natural products. Research shows that by 2015, global womens purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.

Threats 1. 2. 3. 4. 5. 6. 7. 8. 9. Volatile foreign exchange rates. Subject to anti-trust investigation in Europe. Increase in competitor expansion globally from Colgate-Palmolive, Unilever, and Clorox. Regulations are increasing due to the voicing of different groups about harmful chemical ingredients in cosmetic products. Diamond foods struggling financially, may not be able to purchase Pringles. Premium cosmetics are a prime target for counterfeiters. 9%, according to the Global Congress on combating counterfeiting, of all the world trade comprises counterfeit goods. Discounting premium cosmetics can damage its prestige image for the consumers who purchase these products. The Este Lauder companies ranks number one in prestige skin care and number two in makeup in the channel. Considerable investment is necessary to bring new products to the market and to maintain their high profile.

Competitive Profile Matrix


P&G Critical Success Factors Advertising Market Penetration Current Ratio Inventory Turnover R&D Income/Employee Financial Profit Customer Loyalty Market Share Product Quality Top Management Price Competitiveness Totals Weight 0.10 0.10 0.05 0.08 0.06 0.05 0.12 0.08 0.10 0.10 0.06 0.10 1.00 Rating 4 4 1 4 4 4 4 4 4 2 4 4 Score 0.40 0.40 0.05 0.32 0.24 0.20 0.48 0.32 0.40 0.20 0.24 0.40 3.65 Estee Lauder Rating 2 3 4 1 3 1 3 3 3 4 3 2 Score 0.20 0.30 0.20 0.08 0.18 0.05 0.36 0.24 0.30 0.40 0.18 0.20 2.69 Revlon Rating 1 1 3 2 2 3 2 2 2 3 2 3 Score 0.10 0.10 0.15 0.16 0.12 0.15 0.24 0.16 0.20 0.30 0.12 0.30 2.10

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

EFE Matrix
Weight Rating Weighted Score Opportunities 1. Higher demand for higher-priced products such as prestige 0.08 3 0.24 cosmetics and fragrances. 2. Younger customers are attracted by social media advertising. 0.06 2 0.12 3. Social media advertising is more cost effective than traditional 0.06 2 0.12 advertising. 4. The beauty and cosmetics industry is expected to increase 0.06 3 0.18 globally by 8.5 per cent in 2014 according to recent research from Euro Monitor International. 5. There is an endless possibility to `celebrities endorsing 0.04 2 0.08 fragrances, these products are successful because many are persuaded by fame of the celebrity. 6. Men are increasingly concerned with their appearance, this 0.08 3 0.24 provides a opening to grab a new branch of consumers. 7. Increase in online purchasing, average monthly visits in the U.S. 0.06 3 0.18 to beauty-related websites topped 60 million and grew 94 percent over past three years. 8. Consumers are interested in products that are made with all 0.03 2 0.06 natural products. 9. Research shows that by 2015, global womens purchasing power 0.05 3 0.15 is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.
Weight Rating Weighted Score Threats Volatile foreign exchange rates. 0.02 4 0.08 Subject to anti-trust investigation in Europe. 0.03 3 0.09 Increase in competitor expansion globally from Colgate0.08 4 0.32 Palmolive, Unilever, and Clorox. Regulations are increasing due to the voicing of different groups 0.07 3 0.21 about harmful chemical ingredients in cosmetic products. Diamond foods struggling financially, may not be able to 0.08 2 0.16 purchase Pringles. 0.04 2 0.08

1. 2. 3. 4. 5.

6. Premium cosmetics are a prime target for counterfeiters. 9%, according to the Global Congress on combating counterfeiting, of all the world trade comprises counterfeit goods. 7. Discounting premium cosmetics can damage its prestige image for the consumers who purchase these products. 8. The Este Lauder companies ranks number one in prestige skin care and number two in makeup in the channel. 9. Considerable investment is necessary to bring new products to the market and to maintain their high profile. TOTALS

0.04 0.07 0.05 1.00

3 3 4

0.12 0.21 0.20 2.84

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

E.

Internal Audit
Strengths 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion. P&G is focused solely on the beauty and personal-care products business. In 2011, Fortune ranked P&G the number one soap and cosmetic in the world. New CEO, Mr. McDonald focuses on lower end products aimed at price sensitive customers. P&G operates under a SBU structure. 23 P&G brands routinely earn over $1 billion in revenue per year. Braun, bounty, Charmin, Crest, Downy, Gillette, Pampers are all top brands owned by P&G. Invested over $2 billion in R&D in 2010. Market share grew in 14 of top 17 countries in 2010. EPS is 3.94.

Weaknesses 1. 2. 3. 4. 5. 6. 7. No published vision statement. $57 billion in goodwill on balance sheet. Profits declined 5% in 2011 yet revenues increased 2.9%. Weak profitability ratios. Not operating as efficiently as Johnson & Johnson. Spent $772 million in advertising to Johnson & Johnsons $366 million. Consumers may not associate all of our brands with P&G rather view them as their own distinct companies.

Financial Ratio Analysis Growth Rate Percent Sales (Qtr vs year ago qtr) Net Income (YTD vs YTD) Net Income (Qtr vs year ago qtr) Sales (5-Year Annual Avg.) Net Income (5-Year Annual Avg.) Dividends (5-Year Annual Avg.) Profit Margin Percent Gross Margin Pre-Tax Margin Net Profit Margin 5Yr Gross Margin (5-Year Avg.) Liquidity Ratios Debt/Equity Ratio Current Ratio Quick Ratio Profitability Ratios Return On Equity Return On Assets Return On Capital Return On Equity (5-Year Avg.) Return On Assets (5-Year Avg.) Return On Capital (5-Year Avg.) P&G 8.90 NA -1.90 5.09 7.54 11.37 Industry 10.40 NA 4.00 5.47 7.90 10.67 S&P 500 14.50 NA 47.20 8.31 8.76 5.70

50.0 17.8 13.9 50.8

53.3 16.3 12.4 53.7

39.8 18.2 13.2 39.8

0.52 0.8 0.5

0.80 1.0 0.7

1.00 1.3 0.9

18.3 8.7 11.0 16.7 8.0 10.1

32.6 11.1 15.4 32.2 10.0 13.9

26.0 8.9 11.8 23.8 8.0 10.8

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

Efficiency Ratios Income/Employee Revenue/Employee Receivable Turnover Inventory Turnover Net Worth Analysis (in millions)

91,008 653,907 13.3 5.5

70,194 537,057 12.5 4.9

126,905 1 Mil 15.4 12.5

Stockholders Equity Net Income x 5 (Share Price/EPS) x Net Income Number of Shares Outstanding x Share Price Method Average

$67,640 $58,985 $189,471 $174,020 $122,529

IFE Matrix
Weight Rating Weighted Score Strengths 1. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion. 0.12 4 0.48 2. P&G is focused solely on the beauty and personal-care products 0.08 4 0.32 business. 3. In 2011, Fortune ranked P&G the number one soap and cosmetic 0.04 4 0.16 in the world. 4. New CEO, Mr. McDonald focuses on lower end products aimed 0.07 4 0.28 at price sensitive customers. 5. P&G operates under a SBU structure. 0.05 4 0.20 6. 23 P&G brands routinely earn over $1 billion in revenue per year. 0.10 4 0.40 7. Braun, bounty, Charmin, Crest, Downy, Gillette, Pampers are all top brands owned by P&G. 8. Invested over $2 billion in R&D in 2010. 9. Market share grew in 14 of top 17 countries in 2010. 10. EPS is 3.94. 0.10 0.05 0.07 0.05 4 4 4 4 0.40 0.20 0.28 0.20

1. 2. 3. 4. 5. 6. 7.

Weaknesses No published vision statement. $57 billion in goodwill on balance sheet. Profits declined 5% in 2011 yet revenues increased 2.9%. Weak profitability ratios. Not operating as efficiently as Johnson & Johnson. Spent $772 million in advertising to Johnson & Johnsons $366 million. Consumers may not associate all of our brands with P&G rather view them as their own distinct companies. TOTALS

Weight Rating Weighted Score 0.02 1 0.02 0.04 1 0.04 0.03 2 0.06 0.03 2 0.06 0.05 1 0.05 0.07 0.03 1.00 1 1 0.07 0.03 3.25

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

F.

SWOT
SO Strategies 1. Spend $400 million in R&D to produce 3 new lines of higher end fragrances (S8, S9, S10, O1). 2. Allocate $100 million for advertising and promoting male skin care products using celebrities as spokesmen (S6, O5, O6). WO Strategies 1. Increase social medial advertising targeting teenagers by $100M (W3, O2). ST Strategies 1. Engage in talks with Pepsi to purchase Pringles if the deal with Diamond Foods is not completed (S2, S3, T5). 2. Continue to market low end cosmetics and fragrances (S4, T7). WT Strategies 1. Reduced advertising by $300M on well established products letting their brand name sell for itself (W5, W6, T9).

G.

SPACE Matrix
FP 7 6 5 4 3 2 1

Conservative

Aggressive

CP

-7

-6

-5

-4

-3

-2

-1 -1 -2 -3 -4 -5 -6 -7

IP

Defensive

SP

Competitive

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Internal Analysis: Financial Position (FP) Return on Equity (ROE) Return on Assets (ROA) Debt/Equity Ratio Gross Margin Current Ratio Financial Position (FP) Average

4 4 6 6 5 5.0

External Analysis: Stability Position (SP) Rate of Inflation Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Stability Position (SP) Average

-2 -2 -2 -4 -3 -2.6

Internal Analysis: Competitive Position (CP) Market Share Product Quality Customer Loyalty Technological know-how Control over Suppliers and Distributors Competitive Position (CP) Average

-1 -3 -2 -2 -2 -2.0

External Analysis: Industry Position (IP) Growth Potential Financial Stability Ease of Entry into Market Resource Utilization Profit Potential Industry Position (IP) Average

7 7 3 5 6 5.6

H.

Grand Strategy Matrix


Rapid Market Growth Quadrant II Quadrant I

P&G

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

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I.

The Internal-External (IE) Matrix


The Total IFE Weighted Scores
Strong 4.0 to 3.0 4.0 I Average 2.99 to 2.0 II Weak 1.99 to 1.0 III

Household High

3.0

IV

VI

The EFE Total Medium Weighted Scores


Health & Well-Being 2.0 VII

Beauty & Grooming

VIII

IX

Low

1.0

Segment Beauty & Grooming Health & Well-Being Household

2010 Revenues 34% 18% 48%

2010 Profits 36% 19% 45%

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

J.

QSPM
Increase R&D Increase advertising
AS 2 4 4 4 TAS 0.16 0.24 0.24 0.24

Opportunities 1. Higher demand for higher-priced products such as prestige cosmetics and fragrances. 2. Younger customers are attracted by social media advertising. 3. Social media advertising is more cost effective than traditional advertising. 4. The beauty and cosmetics industry is expected to increase globally by 8.5 per cent in 2014 according to recent research from Euro Monitor International. 5. There is an endless possibility to `celebrities endorsing fragrances, these products are successful because many are persuaded by fame of the celebrity. 6. Men are increasingly concerned with their appearance, this provides a opening to grab a new branch of consumers. 7. Increase in online purchasing, average monthly visits in the U.S. to beauty-related websites topped 60 million and grew 94 percent over past three years. 8. Consumers are interested in products that are made with all natural products. 9. Research shows that by 2015, global womens purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.

Weight 0.08 0.06 0.06 0.06

AS 4 1 1 3

TAS 0.32 0.06 0.06 0.18

0.04 0.08 0.06 0.03 0.05

1 4 0 4 1

0.04 0.32 0.00 0.12 0.05

4 2 0 2 3

0.16 0.16 0.00 0.06 0.15

Weight Threats 1. Volatile foreign exchange rates. 0.02 2. Subject to anti-trust investigation in Europe. 0.03 3. Increase in competitor expansion globally from Colgate0.08 Palmolive, Unilever, and Clorox. 4. Regulations are increasing due to the voicing of different groups 0.07 about harmful chemical ingredients in cosmetic products. 5. Diamond foods struggling financially, may not be able to 0.08 purchase Pringles. 6. Premium cosmetics are a prime target for counterfeiters. 9%, according to the Global Congress on combating counterfeiting, 0.04 of all the world trade comprises counterfeit goods. 7. Discounting premium cosmetics can damage its prestige image 0.04 for the consumers who purchase these products. 8. The Este Lauder companies ranks number one in prestige skin 0.07 care and number two in makeup in the channel. 9. Considerable investment is necessary to bring new products to 0.05 the market and to maintain their high profile.

AS 0 0 3 3 0 0 0 2 4

TAS 0.00 0.00 0.24 0.21 0.00 0.00 0.00 0.14 0.20

AS 0 0 2 1 0 0 0 3 3

TAS 0.00 0.00 0.16 0.07 0.00 0.00 0.00 0.21 0.15

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

Increase R&D
Weight Strengths 1. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion. 0.12 2. P&G is focused solely on the beauty and personal-care products 0.08 business. 3. In 2011, Fortune ranked P&G the number one soap and cosmetic 0.04 in the world. 4. New CEO, Mr. McDonald focuses on lower end products aimed 0.07 at price sensitive customers. 5. P&G operates under a SBU structure. 0.05 6. 23 P&G brands routinely earn over $1 billion in revenue per year. 0.10 7. Braun, bounty, Charmin, Crest, Downy, Gillette, Pampers are all 0.10 top brands owned by P&G. 8. Invested over $2 billion in R&D in 2010. 0.05 9. Market share grew in 14 of top 17 countries in 2010. 0.07 10. EPS is 3.94. 0.05
Weaknesses No published vision statement. $57 billion in goodwill on balance sheet. Profits declined 5% in 2011 yet revenues increased 2.9%. Weak profitability ratios. Not operating as efficiently as Johnson & Johnson. Spent $772 million in advertising to Johnson & Johnsons $366 million. Consumers may not associate all of our brands with P&G rather view them as their own distinct companies. Weight 0.02 0.04 0.03 0.03 0.05 0.07 0.03

Increase advertising
AS 0 0 0 2 0 2 2 1 4 3
AS 0 0 2 0 0 3 3

AS 0 0 0 3 0 3 1 3 2 4
AS 0 0 3 0 0 2 1

TAS 0.00 0.00 0.00 0.21 0.00 0.30 0.10 0.15 0.14 0.20
TAS 0.00 0.00 0.09 0.00 0.00 0.14 0.03

TAS 0.00 0.00 0.00 0.14 0.00 0.20 0.20 0.05 0.28 0.15
TAS 0.00 0.00 0.06 0.00 0.00 0.21 0.09

1. 2. 3. 4. 5. 6. 7.

TOTALS

3.30

3.38

K.

Recommendations
1. 2. 3. 4. Spend $400 million in R&D to produce 3 new lines of higher end fragrances. Allocate $100 million for advertising and promoting male skin care products using celebrities as spokesmen. Increase social medial advertising targeting teenagers by $100M. Engage in talks with Pepsi to purchase Pringles if the deal with Diamond Foods is not completed.

L.

EPS/EBIT Analysis (in millions)


Amount Needed: $600M Stock Price: $64 Shares Outstanding: 2,750 Interest Rate: 5% Tax Rate: 22%

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EBIT Interest EBT Taxes EAT # Shares EPS

Common Stock Financing Recession Normal Boom $15,000 $17,000 $20,000 0 0 0 15,000 17,000 20,000 3,300 3,740 4,400 11,700 13,260 15,600 2,759 2,759 2,759 4.24 4.81 5.65

Recession $15,000 30 14,970 3,293 11,677 2,750 4.25

Debt Financing Normal $17,000 30 16,970 3,733 13,237 2,750 4.81

Boom $20,000 30 19,970 4,393 15,577 2,750 5.66

EBIT Interest EBT Taxes EAT # Shares EPS

Recession $15,000 24 14,976 3,295 11,681 2,752 4.24

20 Percent Stock Normal $17,000 24 16,976 3,735 13,241 2,752 4.81

Boom $20,000 24 19,976 4,395 15,581 2,752 5.66

Recession $15,000 6 14,994 3,299 11,695 2,758 4.24

80 Percent Stock Normal $17,000 6 16,994 3,739 13,255 2,758 4.81

Boom $20,000 6 19,994 4,399 15,595 2,758 5.66

M.

Epilogue
P&Gs fiscal year ends June 30 of every year. Therefore, P&Gs Q1 2012 ended September 30, 2011. For Q1 of 2012, the companys overall earnings fell to $3.02 billion from $3.08 billion a year earlier. During that quarter, P&G raised prices across all divisions and regions to help make up for higher costs for commodities. P&Gs overall Q1 2012 net income fell 1.9 percent, but sales increased 8.9 percent to $21.92 billion, from $20.12 billion earlier. For that Q1 2012, P&Gs Beauty division sales increased nine percent to $5.4 billion on unit volume growth of four percent. However, this division reported that net earnings declined 12 percent to $731 million. Also for Q1 2012, P&Gs Grooming division reported a 10 percent sales decrease to $2.1 billion, but that divisions earnings increased 10 percent to $438 million. For Q1 2012, P&Gs Health Care sales increased 10 percent to $3.3 billion on unit volume growth of three percent. Sales of Oral Care, including toothpaste and mouthwash, increased about 5 percent as Oral-B toothpaste was marketed in Western Europe and Latin America. P&Gs Personal Health Care volume increased about 3 percent behind higher shipments of Vicks due to initiative activity primarily in North America and Asia, partially offset by lower shipments of Prilosec OTC in North America. P&Gs Feminine Care segment revenues grew about 3 percent in Q1 2012 primarily due to new products in China and strong growth in India. Net earnings increased 9 percent to $542 million as sales growth was partially offset by a lower operating margin. Operating margin declined due to higher commodity costs, partially offset by manufacturing cost savings and a reduction in overhead and marketing spending as a percentage of sales. P&Gs Snacks and Pet Care division for Q1 2012 reported that sales increased nine percent to $776 million. Volume in Snacks increased about 9 percent due to increased distribution and market growth in developing regions, as well as share growth and market growth in North America. Volume in Pet Care decreased about 5 percent mainly due to customer inventory adjustments in North America following a June price increase.

Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall.

P&Gs Fabric Care and Home Care sales for Q1 2012 increased 6 percent to $6.7 billion. Volume in Fabric Care decreased about 3 percent as growth in Asia was more than offset by the impact of the forward buy in the previous quarter ahead of the price increases in North America and initiative activity in the base period. Volume in Home Care also decreased low single digits driven by the impact of the forward buy in the previous quarter ahead of the price increases in North America, partially offset by initiative activity and distribution expansion in developing regions. Volume in Batteries grew low single digits due to market growth in developing regions and increased demand following the hurricane in North America. Net earnings in this division of P&G declined 14 percent to $805 million. P&Gs Baby Care and Family Care for Q1 2012 reported a 12 percent increase in sales to $4.1 billion. Net earnings increased 5 percent to $494 million.

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