Procter and Gamble

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PROCTER AND GAMBLE

2007
Procter and Gamble
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1.

Introduction The intense competition in particular market drives businesses to evaluate their policies and effectiveness regularly. Each company has its own business characteristic, which certain policy is suitable fit for a company while others could be unacceptable. Several conditions that prompt the differentiation treatment among different company are nature of the business, workers learning and development mentality, top level manager vision, dynamics market condition, and competitor business strategy, to name a few. From investors or outsiders point of view, financial performance of a company is noteworthy since they aim at investing their money to the company by buying a number of shares from stock market. Under such circumstances, the investors would assess in much details regarding the corporate current performance and possible future states. In other terms, investors need to examine the business risks of the company in order to save their investment. The assessment of business risks is also challenging since different business types imply a significant different treatment of strategic business control and evaluation. For example, a firm that produces sheets of paper has relatively stable, functional skills are specialized to gain operating efficiencies. There are relatively no strict challenge from the same competitor, because the market share are divided equally, as long as they keep the productions quality and maintain the cheapest cost of production. In contrast, firms in electronic industry like Nokia and Apple Inc, which produce mobilephones and other portable electronic products; they face a fiercer challenge since the business environment changes rapidly, which in turn, forces the firm to find an effective business strategy that can improve their cost-efficiencies with the same quality product. The situation also occurs in

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the fast moving consumer goods where a number of brands continue appear in order to offer attractive products to consumers. Regardless of whether the environment is stable or dynamic, an organization needs to exercise control over its operations so that its objectives are achieved as preliminary business planning and as part of managing business risks (Shaw, 2004). Concerning the fast moving consumer goods and the business risks as the result of acquisition, this paper will analyze the case study on Procter & Gambles Acquisition of Gillette. The discussion will compose of four parts: strategic management, SWOT analysis, ratio analysis of financial performance, and recommendation.

2.

Aims and Objectives Regarding the discussion on Procter & Gambles performance after committing an acquisition on Gillette, this paper has three aims and objectives as following:
a.

This paper intends to discuss Procter & gambles business statement such as mission and objectives statements in relation to the companys strategic and financial issues.

b.

Using the non-participant observation method, collecting data and analyzing qualitative information from journal, books, magazine and online materials, this paper intends to elaborate SWOT analysis regarding the companys decision to acquire Gillette

c.

In addition, the paper aims at conducting ratio analysis in terms of the companys liquidity, profitability, leverage, and activity

d.

At the end, this paper will provide recommendation for company by taking into account the SWOT analysis.

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2.

Research Questions The intention to expand a companys point of presence, increase revenue, and enhance

competitive advantage drives the company to undergo strategic initiative such as managing products or performing mergers and acquisitions (M&A). Interestingly, the case of mergers of acquisitions does not simply combine the strengths, competitive advantages, and benefits that individual company has into greater ones. In fact, many mergers and acquisitions end in the raising weaknesses and business slow down. This is because M&A involves the cultural combination that may lead to cultural clashes and further slow the companys operation. Since mergers and acquisition performance must be examined through a series of analysis, therefore, the research question for this paper is

As Procter & Gamble has conducted an acquisition on Gillette, is the acquisition is beneficial one by examining the companys performance by using strategic statements, SWOT Analysis, and ratio analysis?

I choose this research statement or question since it could be different from others who only focus on strategic managements of the acquisition such as the brand image, competitive advantage etcetera. Instead of discussing the partial discussion on management aspects of the acquisitions, I decide to discuss the financial analysis as well through the elaboration of ratio analysis that will inform about the financial performance of Procter & Gamble after carrying out the Gillette acquisition.

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3. 3.1

Analysis Corporate Mission/Vision Statement In practice, corporations need to define their strategic objectives clearly in order to guide

the company in achieving their stated strategic and financial targets. Strategic planning is the way to identify and go towards desired future condition. This kind of planning is important for companies since it becomes a step to develop, implement, and achieve goals and objectives (Strategic Planning). The strategic planning has three forms: goals and objectives, mission, and vision statements. In order to provide the suitable business statement, goal setting should fulfill the SMART method. SMART is a method of analyzing a companys goals setting. It composes of five different but interrelated words: S-Specific, M-Measurable, A-Achievable, R-Reasonable, and TTimeline. According to official website of Procter Gamble, the company has following mission statement/purposes: We will provide branded products and services of superior quality and value that improve the lives of the worlds consumers

The above statement fulfills the criteria of being mission statements since it describes what will be done, by whom, for whom, and why (Procter & Gamble, 2007). According to the case study, there are four main reasons underlying the acquisition of Gillette by Procter & Gamble; they are improved product innovation, stronger lineup of brands, creation of economies of scale, and better bargaining power to customers. In terms of strategic management, these reasons refer to four distinctive concepts; they are innovation and competitive advantage, diversification, Porters Three Generic Strategies, and marketing mix.

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3.2 3.2.1

Corporate Objectives Strategic Objectives The acquisition of Gillette by Procter & Gamble becomes the cornerstone for the company

in expanding their products; therefore, the combine company will have following objectives:

Increase global market share of P&Gs Five business units from 30 percent in 2005 into 40 percent in 2007

Develop bundling strategy between P&G and Gillette products in order to increase brand awareness of the new company

Increase compounded annual growth rates for Oral Care and Blades & razors by 10% in 2007

Develop winning corporate strategy to increase stock price of Procter & Gamble (P&G) by 50-percent growth

3.2.2

Financial Objectives In addition to strategic objectives, Procter & Gamble (P&G) will have following

objectives:

Strong revenue growth in 2007, representing 20% growth compared to revenue in 2006 ($81,866 in 2007 compared to $68,222 in 2006)

Maintain net profit margin of 12% (at minimum) Increase the dividend per common share into $1.5 in 2007

3.3

Four Strategic Management Concepts

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3.3.1

Product Innovation and Competitive Advantage

3.3.1.1 Chain Reactions of Innovations According to the case study, one of rationale for the merger is product innovation. Sometimes, the idea to develop a new product comes from observation of the previous products. There are several methods of evaluating and improving the value of our product. Traditional market research stated that methods of product innovation usually start with consumer complaints, product flaws, gap analysis, etc. Concerning the acquisition of Gillette, Procter & gamble may take benefits of concerted and more powerful products innovation as the result of combination of competitive advantage that individual companies (P&G and Gillette) have. The combination of two companies in turn will generate competitive advantage for the combined company. By definition, competitive advantage relates to the companys position in competitive landscape. In many details, Michael Porters reveals that competitive advantage occurs when the company has their earnings exceeding costs amidst the existence of normal competitive pressure. The case study reveals that Procter & Gamble has conducted several activities that trigger the chain reaction of innovation. Those activities are:

Opportunity Identification. Company can design an active system to support innovation. Despite depending on

researches to discover improvement possibilities, management must realize that most innovation opportunities are found by individuals who are closely tied to products and consumers (Hale, 1996)

Focus and Direction.

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Not every idea is a good one. Therefore, several effort of directing the creative minds is required. Some of those efforts are clearly communicating goals and objectives, defining what ideas that are not sought, presenting realistic limits or constraints (Hale, 1996).

Idea Generation. As innovation is closely related to creativity, management should be open to every part of

the company for feedback and suggestions. Creativity could come from anyone as individuals or group levels (Hale, 1996).

Analysis and Implementation. After receiving ideas, the next step is to analyze them objectively, rather than accept or

reject them on subjective basis. Innovative organizations use project-management techniques to analyze and guide ideas to implementation (Hale, 1996). Management Support Innovation support could be in tangible and intangible forms. Tangible forms are financial, personnel, space and equipment while intangible forms are philosophical supports. In order to constantly supportive, managers must be committed to the principle that the company must change and innovate (Markgraf, 2000).

3.3.1.2 Products Innovation at Procter & Gamble (P&G) Market research revealed that besides cheaper prices, consumers are also attracted to special brands that they trusted, because it has served them with preferable qualities than others. Thus, besides cost cuts, P&G have always put research and innovation ahead. Most of the companys innovation comes from extensive market researches, involving research groups and personnel. P&G was the first consumer product company in the world to conduct a formal market research. The companys method of conducting research was one of the

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most advanced and sensitive research in the world. One of those methods was the in-situ research method, where P&Gs research personnel came to customers homes and observed them within their daily activities. P&G also encourages and directs individuals to be sensitive toward possibilities of improvements. Ideas which result valuable innovations often came from the closest employees to the customers. Individual customer relation personnel are trained to be sensitive toward customers needs and report to higher management as possibilities of product improvements were founded. P&G designed their environment to be supportive of the innovation process. In the 1990, the company conducted a system reform that creates a communication system with less bureaucracy. For example, the use of talk sheet as an informal communication tool for managers, horizontally or vertically along the hierarchy lines. The changes made communication flows faster to produce timely ideas. Goals and directions of creative efforts are clearly stated. Managers are clear about what research information worthy of further investigations and what information should be considered biased and to be left behind. They believed that no research would be better than a false research. Focus groups are formed in order to design hypotheses, which would then be further investigated to find the relevance of the idea. Furthermore, being highly innovative is the value that responsible to some of the greatest success of the company. P& always sought new ways to offer distinct benefit to their consumers. P&G personnel are trained to be observant of consumers preferences. Product innovations are guided by consumers input as well as employees ideas for improvements. For example, the easy to open detergent box was the result of creative ideas from several employees, while the development of new soap fragrances are the result of customers inputs. Within the process of developing existing products, P&G also conducted field researches to retrieve information of consumers habits and behaviors. For example, soap and detergent are

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tested using various models of washing machines to understand what kinds of detergent families would prefer. The information gained would then be used as a basis for the improving product designs. P&G are in the business of creating and building brands, so they kept the brand management system intact. Basically, P&G is a collection of brands. They are known more by our brands than they are as a company. A major change over the years is that their brand teams are way more cross-disciplinary. They have strong functional disciplines, but they are highly integrated into brand teams and design does have an important place at the table. Another significant change is that they are now a worldwide business. They have global business units that have categories and brand groups within them. There's a huge challenge because the creation of brands and products makes it difficult for the retailers to perform. Consumers must clearly see who can do something good for them. To do that, P&G try to create a category language and architecture so the shopping experience is ordered, patterned and intuitive. They work with their retail partners to make sure that their understanding and research are consistent with theirs.

3.3.2

Extensive lineup of Brands and Diversification By definition, diversification refers to any business portfolio strategy where a company

combines variety of business or products in order to reduce exposure business risks. By conducting diversification, the company may take benefits as it will generate value for stockholders by performing business integration, which in turn generates sustainable competitive advantage. There are three forms of diversification as following: Vertical integration. This is integration with other company that is along the companys value chain

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Horizontal diversification. A company that performs this diversification tends to move into new industry

Geographical diversification. This type of diversification will drive a company to expand their existence in new markets/countries/locations (Kotelnikov, 2007)

The case of Procter & Gamble shows that the acquisitions of Gillette by Procter & Gamble provides the company with additional product lines including blades and razors, Oral Care, Duracell, Braun, and Personal Care.

3.3.3

Economies of Scale and Porters Three Generic Strategies In addition to Porters five forces, Michael Porter previously coins the term Porters Three

Generic Strategies. The strategy is named after the three factors that Michael Porter think to be the basis issue any corporations should deal with. In addition, the economies of scale also relate to intention to reach economies of scale in the production. The three factors are costs leadership, differentiation, and focus strategies.

3.3.3.1 Cost Leadership Strategies This generic strategy refers to any initiatives that a corporate performs to produce the leastcost product for a given level of quality. By adopting this kind of strategy, the firm can sell its product at regular industry price to generate more profit that its rival does or below the average industry prices in order to sell it at large volume while gaining higher market share.

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Figure 3

Porters Generic Strategies

Source: Porter, Michael. (1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press

3.3.3.2 Differentiation Strategies By meaning, differentiation strategies refer to strategies, which are developed in order to generate competitive advantage by producing unique goods or services. These strategies are beneficial especially for companies that face consumers that have various preferences and/or requirements. The uniqueness of the product may help the corporation to undergo several initiatives as following: (Porter, 1998) Put a premium price on their products and/or Increase unit sales and/or Gain buyer loyalty to their brands.

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In addition, a company that is carrying a successful differentiation allows them to attain following internal strengths (Porter, 1998): Access to well-known scientific breakthroughs Skilful and creative product development team Powerful sales team that is able to convey the perceived strengths of a companys product to consumers

The most sustainable results of differentiation strategies are the expensive and difficult for rivals to follow. There are many kinds of differentiation factors that a company might put in their products; they include taste, engineering design and performance, quality manufacture, and image and reputation. To achieve these goals, organizations could incorporate features that enhance buyer satisfaction in non-economic or intangible ways or compete on the basis of capabilities (rather than the product itself).

3.3.3.3 Focus Strategies Focus strategies refer to the ways that a company pays attention to a narrow segment to obtain either cost advantage or differentiation (Porter, 1998). It means that the company who conduct this kind of strategy will be a marketing-oriented person. By definition, marketing oriented as condition where customers wants and needs drive all firms strategic decisions. In this manner, the firms are automatically fostering the commitment to create customer value (Marketing Orientation, 2005). The underlying reasons behind the development of marketing oriented concepts are the facts that the more a company understands their consumers needs, the more likely the company

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has happy customers who will come back to buy in the future or at least the customers will recommend their friends to buy the same product from the firms.

3.3.3.4 Better Offering and Marketing Mix Effective marketing takes more than just a logo, advertising and attractive brochures. An effective marketing strategy can only be created when we completely realize the needs and desires of the customers and/or target market and systematically examine our own aims, potency and weaknesses. A good marketing plan not only focuses on public relations, advertising and communications, but will also reach into customer service, product support, human resources and more. (Marketing Basics: 4Ps) Basically, it is the heart of the marketing plan. The marketing strategy or marketing mix (4Ps) section should include information about: Product A product can be a physical item, a service, or an idea. Product decisions include aspects such as function, appearance, packaging, service, warranty, etc. The product is the physical product or service offered to the consumer. Price It is about what will charge customers for products and services. Pricing decisions should take into account profit margins and the probable pricing response of competitors. Pricing includes not only the list price, but also discounts, financing, and other options such as leasing. Promotion Promotion deals with how to promote or create responsiveness of the product in the marketplace. A promotion plan describes the tools or tactics used to accomplish the marketing ob-

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jectives. Promotion decisions are those related to communicating and selling to potential consumers. Place (distribution) Place is about how to bring the products together with the customers. In this section, describe how the products and customers "meet" or come together through sales and distribution. Moreover, describe the sales philosophies, methods, and distribution system (Marketing Mix).

3.4

SWOT Analysis The first analysis that takes into account the internal and external environment is SWOT

analysis. As the name implies, SWOT analysis composes of strengths (S) and weaknesses (W) as internal factors while the external factors composes of opportunities (O) and Threats (T). Amidst new emerging business analyses, some companies still employ SWOT analysis since it provides information that is useful to match the companies resources and capabilities to existing business environment in which the company competes.

3.4.1

Strength Strength is one component of internal analysis. The component describes any resources and

capabilities that support a company to achieve its competitive advantage such as patents, excellent reputation, low cost structure and many more. The major strengths of the company are their wellknown brands with extensive products line that positions the company to obtain better brand image as home and personal care providers.

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3.4.2

Weakness The second internal factor is Weaknesses. This is simply in contrast to the strength in which

the absence of specific strength might be considered as the weaknesses of the company. The company has not already convinced the markets or investors about the benefits of acquisitions. This is true since the earnings per share was estimated to decline by $0.25 and $0.30 per share.

3.4.3

Opportunity The first external factor in SWOT analysis is Opportunities. These elements provide

specific opportunities that may help a company to gain more profit and achieve sustainable growth. They include unfulfilled customer need, new technologies, elimination of trade barriers and so on. The opportunities of Procter and Gamble (P&G) are the increased benefits that the company obtains after performing acquisition on Gillette. This condition also provides Procter and Gamble (P&G) with revenue opportunity due to the extensive products lines the company has.

3.4.4

Threats In addition, Threats describe any changes in the external factors that may put any company

in unsafe position in the market. They include a change in consumer tastes, new substitute products, new regulations and many more. The threats to Procter and Gamble is the fact that their competitors like Unilever also advances their products and strategies to win the market. In 2006, the company reached a US$ 49 billion worth of turnover and a US $ 6 billion of profit all over the globe. The mission of the company is to add vitality to life. The company intends to achieve this mission by providing everyday needs of nutrition, personal care and hygiene for the global community to help them feel good, look good get more out of life (Unilever, 2006).

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3.5 3.5.1

Ratio Analysis Profitability Ratios

3.5.1.1 Return on Asset (ROA) This ratio shows the companys ability to produce net income with the total assets it owned. In the Procter & Gamble annual report 2006, we can calculate the ROA by using following equation (amounts are in $million): Return on Assets (ROA) Therefore, ROA for 2006 is: ROA = (8,684 /135,695) = 6.40% 3.5.1.2 Return on Equity (ROE) The Return of Equity for Procter & Gamble can be calculated using following equation: Return on Equity (ROE) = (Net Income / Average Shareholders Equity) = (Net Income / Average Total Assets)

Therefore, ROE for 2006 is: ROE = (8,684 /62,908) = 13.80%

3.5.1.3 Profit Margin A profit margin indicates how much profit a company can obtain from a certain amount of sales. The profit margin for Procter & Gamble can be calculated using following equation: Profit Margin = (Net Income / Sales)

Therefore, Profit Margin for 2006 is:

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Net Profit Margin

= (8,684 /68,222) = 12.73%

40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2006 ROA ROE 2005 Gross Profit Margin 2004 Net Profir Margin

Figure 4

Profitability Ratio

3.5.2

Liquidity Ratios

3.5.2.1 Current Ratio The ratio shows companys short-term responsibility over its debts. A higher number indicates that the company is liquid / has a larger capability to pay its short-term debts. The current ratio for Procter & Gamble can be calculated using following equation: Current Ratio = (Current Assets/ Current Liabilities)

Therefore, Current Ratio for 2006 is: Current Ratio = (24,329/19,985) = 121.74%

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3.5.2.2 Net Working Capital Ratio The Net Working Capital Ratio for Procter & Gamble can be calculated using following equation: Net Working Capital Ratio = ((Current Assets Current Liabilities)/Total Assets)

Therefore, Net Working Capital Ratio for 2006 is: Net Working Capital Ratio = ((24,329 19,985)/ 135,695) = 3.20%

140.00% 120.00% 100.00% 80.00% 60.00% 40.00% 20.00% 0.00% -20.00% 2007 Current Ratio Quick Ratio 2006 Net Working Capital

Figure 5

Liquidity Ratio

3.5.3
3.5.3.1

Long-term Solvency Long-Term Debt/Equity Long-Term Debt/Equity = Long-Term Debt/Equity = (35,976/62,908)

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= 57.19%

3.5.3.2 Interest Coverage Ratio Interest Coverage ratio= EBIT/Interest Expense = 12,413/1,119 = 1109.29%

1200.00% 1000.00% 800.00% 600.00% 400.00% 200.00% 0.00% 2007 Long-Term Debt to Equity 2006 Interest Coverage Ratio

Figure 6

Long-Term Solvencies

3.5.4

Activity Ratios This ratio refers to the ability of a company to convert their vast account into cash or sales

immediately.

3.5.4.1

Inventory Turnover
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It describes how often a companys inventory is exchanged (sold and replaced) within a given period: Inventory Turnover = Sales/Inventory = 68,222/6,291 = 1084.44%

3.5.4.2

Sales/Total Assets Sales/Total Assets = Sales / Total Assets = 68,222/135,695 = 50.28%

In addition to the chart about profitability and liquidity, below is the 10-year company stock performance:

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Figure 6

10-year stock performances with comparison to S&P 500

3.6

Recommendations Since the company has the mission to provide branded products and services of superior

quality and value that improve the lives of the worlds consumers. Therefore, the company should develop branding strategies to position their products as ones have high perceived quality. In addition, since market values acquisitions that Procter & Gamble performs, in the future, the company may conduct other mergers and acquisition that will strengthen the corporate brand image as the provider of home and personal care products.

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Reference:

Gamble, John E. (2006). Procter & gambles Acquisition of Gillette Goldenberg, Jacob. Mazursky, David. (2002). Creativity and product Innovation. Retrieved October 16, 2007 from http://www.pdma.org/bookstore/books/creativity_product_innovation.html Hale, Guy A. (1996). Managing for Innovation. Retrieved October 16, 2007 from http://www.winstonbrill.com/bril001/html/article_index/articles/201250/article242_body.html Karlsberg, Robert & Adler, Jane. (2005). Seven Strategies of Sustained Innovation. Retrieved October 16, 2007 from http://www.refresher.com/!rkjainnovation.html Kotelnikov, Vadim. (2007). Diversification Strategies. Retrieved October 16, 2007 from http://www.1000ventures.com/business_guide/im_diversification_strategies.html Markgraf, Bert. (2000). Managing Innovation. Retrieved October 16, 2007 from http://www.suite101.com/article.cfm/346/48043 Marketing Mix. (2005). Retrieved October 16, 2007 from http://www.marketingteacher.com/Lessons/lesson_marketing_mix.htm Porter, Michael. (1998). Competitive Strategy: Techniques for Analyzing Industries and Competitors. Free Press Procter & Gamble. (2007). Purpose, Values, and Principles. Retrieved October 16, 2007 from http://www.pg.com/company/who_we_are/ppv.jhtml QuickMBA. (2007). SWOT Analysis. Retrieved October 16, 2007 from http://www.quickmba.com/strategy/swot/>

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Ratios for Financial Statements Analysis. (2004). Retrieved October 16, 2007 from http://cpaclass.com/fsa/ratio-01a.htm Shaw, Greg L and John R. Harrald. (2004). Identification of the Core Competencies Required of Executive Level Business Crisis and Continuity Managers. Retrieved October 16, 2007 from http://www.gwu.edu/~dhs/pubs/identifycore_2004.pdf#search='businesslevel %20strategic%20control' Strategic Planning. Gamble, John E. (2006). Procter & gambles Acquisition of Gillette http://www.answers.com/topic/strategic-planning Tushman Michael L. Anderson, Philip. (1996). Managing Strategic Innovation and Change. New York: Oxford University Press. Unilever. (2007). Unilever Annual Report 2006.

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