Case Study Example

Procter & Gamble Company – 2011

A.

Case Abstract

Procter & Gamble (P&G) is a comprehensive strategic management case that includes the company’s year-end 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&Gs’s 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&G’s 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. Customers

2. Products or services 3. Markets

4. Technology

5. Concern for survival, growth, and profitability 6. Philosophy

7. Self-concept

8. Concern for public image 9. Concern for employees

D.

External Audit

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 women’s purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.

Threats

1. Volatile foreign exchange rates.

2. Subject to anti-trust investigation in Europe.

3. Increase in competitor expansion globally from Colgate-Palmolive, Unilever, and Clorox.

4. Regulations are increasing due to the voicing of different groups about harmful chemical ingredients in cosmetic products.

5. Diamond foods struggling financially, may not be able to purchase Pringles.

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 Estée 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.

Competitive Profile Matrix

Weight Rating Score Rating Score Rating Score

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

P&G Estee Lauder Revlon

EFE Matrix

Opportunities Weight Rating Weighted Score

1. Higher demand for higher-priced products such as prestige cosmetics and fragrances.

0.08 3 0.24

2. Younger customers are attracted by social media advertising. 0.06 2 0.12 3. Social media advertising is more cost effective than traditional

advertising.

0.06 2 0.12

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.

0.06 3 0.18

5. There is an endless possibility to `celebrities’ endorsing fragrances, these products are successful because many are persuaded by fame of the celebrity.

0.04 2 0.08

6. Men are increasingly concerned with their appearance, this provides a opening to grab a new branch of consumers.

0.08 3 0.24

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.

0.06 3 0.18

8. Consumers are interested in products that are made with all natural products.

0.03 2 0.06

9. Research shows that by 2015, global women’s purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.

0.05 3 0.15

Threats Weight Rating Weighted Score

1. Volatile foreign exchange rates. 0.02 4 0.08

2. Subject to anti-trust investigation in Europe. 0.03 3 0.09

3. Increase in competitor expansion globally from

Colgate-Palmolive, Unilever, and Clorox. 0.08 4 0.32

4. Regulations are increasing due to the voicing of different groups

about harmful chemical ingredients in cosmetic products. 0.07 3 0.21 5. Diamond foods struggling financially, may not be able to

purchase Pringles. 0.08 2 0.16

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.

0.04 2 0.08

7. Discounting premium cosmetics can damage its prestige image

for the consumers who purchase these products. 0.04 3 0.12

8. The Estée Lauder companies ranks number one in prestige skin

care and number two in makeup in the channel. 0.07 3 0.21

9. Considerable investment is necessary to bring new products to

the market and to maintain their high profile. 0.05 4 0.20

E.

Internal Audit

Strengths

1. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion.

2. P&G is focused solely on the beauty and personal-care products business. 3. In 2011, Fortune ranked P&G the number one soap and cosmetic in the world.

4. New CEO, Mr. McDonald focuses on lower end products aimed at price sensitive customers. 5. P&G operates under a SBU structure.

6. 23 P&G brands routinely earn over $1 billion in revenue per year.

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.

Weaknesses

1. No published vision statement.

2. $57 billion in goodwill on balance sheet.

3. Profits declined 5% in 2011 yet revenues increased 2.9%. 4. Weak profitability ratios.

5. Not operating as efficiently as Johnson & Johnson.

6. Spent $772 million in advertising to Johnson & Johnson’s $366 million.

7. 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 P&G Industry S&P 500

Sales (Qtr vs year ago qtr) 8.90 10.40 14.50

Net Income (YTD vs YTD) NA NA NA

Net Income (Qtr vs year ago qtr) -1.90 4.00 47.20

Sales (5-Year Annual Avg.) 5.09 5.47 8.31

Net Income (5-Year Annual Avg.) 7.54 7.90 8.76

Dividends (5-Year Annual Avg.) 11.37 10.67 5.70

Profit Margin Percent

Gross Margin 50.0 53.3 39.8

Pre-Tax Margin 17.8 16.3 18.2

Net Profit Margin 13.9 12.4 13.2

5Yr Gross Margin (5-Year Avg.) 50.8 53.7 39.8

Liquidity Ratios Debt/Equity Ratio 0.52 0.80 1.00 Current Ratio 0.8 1.0 1.3 Quick Ratio 0.5 0.7 0.9 Profitability Ratios Return On Equity 18.3 32.6 26.0 Return On Assets 8.7 11.1 8.9 Return On Capital 11.0 15.4 11.8

Return On Equity (5-Year Avg.) 16.7 32.2 23.8

Return On Assets (5-Year Avg.) 8.0 10.0 8.0

Efficiency Ratios

Income/Employee 91,008 70,194 126,905

Revenue/Employee 653,907 537,057 1 Mil

Receivable Turnover 13.3 12.5 15.4

Inventory Turnover 5.5 4.9 12.5

Net Worth Analysis (in millions)

IFE Matrix

Stockholders Equity $67,640

Net Income x 5 $58,985

(Share Price/EPS) x Net Income $189,471

Number of Shares Outstanding x Share Price $174,020

Method Average $122,529

Strengths Weight Rating Weighted Score

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

business. 0.08 4 0.32

3. In 2011, Fortune ranked P&G the number one soap and cosmetic

in the world. 0.04 4 0.16

4. New CEO, Mr. McDonald focuses on lower end products aimed

at price sensitive customers. 0.07 4 0.28

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. 0.10 4 0.40

8. Invested over $2 billion in R&D in 2010. 0.05 4 0.20

9. Market share grew in 14 of top 17 countries in 2010. 0.07 4 0.28

10. EPS is 3.94. 0.05 4 0.20

Weaknesses Weight Rating Weighted Score

1. No published vision statement. 0.02 1 0.02

2. $57 billion in goodwill on balance sheet. 0.04 1 0.04

3. Profits declined 5% in 2011 yet revenues increased 2.9%. 0.03 2 0.06

4. Weak profitability ratios. 0.03 2 0.06

5. Not operating as efficiently as Johnson & Johnson. 0.05 1 0.05

6. Spent $772 million in advertising to Johnson & Johnson’s $366

million. 0.07 1 0.07

7. Consumers may not associate all of our brands with P&G rather

view them as their own distinct companies. 0.03 1 0.03

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

H.

Grand Strategy Matrix

Internal Analysis: External Analysis:

Financial Position (FP) Stability Position (SP)

4 -2

4 -2

6 -2

6 -4

5 -3

Financial Position (FP) Average 5.0 Stability Position (SP) Average -2.6 Rate of Inflation

Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry into Market Return on Equity (ROE)

Return on Assets (ROA) Debt/Equity Ratio Gross Margin Current Ratio

Internal Analysis: External Analysis:

Competitive Position (CP) Industry Position (IP)

-1 7

-3 7

-2 3

-2 5

-2 6

Competitive Position (CP) Average -2.0 Industry Position (IP) Average 5.6 Growth Potential

Financial Stability Ease of Entry into Market Resource Utilization Profit Potential Market Share Product Quality Customer Loyalty Technological know-how

Control over Suppliers and Distributors

Rapid Market Growth

Quadrant II Quadrant I

P&G

Strong Competitive

Position

Slow Market Growth Weak

Competitive Position

I.

The Internal-External (IE) Matrix

Segment 2010 Revenues 2010 Profits

Beauty & Grooming 34% 36%

Health & Well-Being 18% 19%

Household 48% 45%

4.0 I II III

Household High

3.0 IV V VI

The

EFE

Total

Weighted

Scores

Health & Well-Being

2.0 VII VIII IX

Low

1.0

The Total IFE Weighted Scores

Strong Average Weak

J.

QSPM

Opportunities Weight AS TAS AS TAS

1. Higher demand for higher-priced products such as prestige

cosmetics and fragrances. 0.08 4 0.32 2 0.16

2. Younger customers are attracted by social media advertising. 0.06 1 0.06 4 0.24 3. Social media advertising is more cost effective than traditional

advertising. 0.06 1 0.06 4 0.24

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.

0.06 3 0.18 4 0.24

5. There is an endless possibility to `celebrities’ endorsing fragrances, these products are successful because many are persuaded by fame of the celebrity.

0.04 1 0.04 4 0.16

6. Men are increasingly concerned with their appearance, this

provides a opening to grab a new branch of consumers. 0.08 4 0.32 2 0.16

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.

0.06 0 0.00 0 0.00

8. Consumers are interested in products that are made with all

natural products. 0.03 4 0.12 2 0.06

9. Research shows that by 2015, global women’s purchasing power is expected to increase by $5 trillion and beauty is the category these consumers are most likely to purchase.

0.05 1 0.05 3 0.15

Increase

advertising

Increase

R&D

Threats Weight AS TAS AS TAS

1. Volatile foreign exchange rates. 0.02 0 0.00 0 0.00

2. Subject to anti-trust investigation in Europe. 0.03 0 0.00 0 0.00

3. Increase in competitor expansion globally from

Colgate-Palmolive, Unilever, and Clorox. 0.08 3 0.24 2 0.16

4. Regulations are increasing due to the voicing of different groups

about harmful chemical ingredients in cosmetic products. 0.07 3 0.21 1 0.07

5. Diamond foods struggling financially, may not be able to

purchase Pringles. 0.08 0 0.00 0 0.00

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.

0.04 0 0.00 0 0.00

7. Discounting premium cosmetics can damage its prestige image

for the consumers who purchase these products. 0.04 0 0.00 0 0.00

8. The Estée Lauder companies ranks number one in prestige skin

care and number two in makeup in the channel. 0.07 2 0.14 3 0.21

9. Considerable investment is necessary to bring new products to

K.

Recommendations

1. Spend $400 million in R&D to produce 3 new lines of higher end fragrances.

2. Allocate $100 million for advertising and promoting male skin care products using celebrities as spokesmen.

3. Increase social medial advertising targeting teenagers by $100M.

4. Engage in talks with Pepsi to purchase Pringles if the deal with Diamond Foods is not completed.

L.

EPS/EBIT Analysis

Amount Needed: $600M Stock Price: $64

Shares Outstanding: 2,750 Interest Rate: 5%

Tax Rate: 22%

Strengths Weight AS TAS AS TAS

1. Proposed sale of Pringles line of snacks in 2011 for $1.5 billion. 0.12 0 0.00 0 0.00 2. P&G is focused solely on the beauty and personal-care products

business. 0.08 0 0.00 0 0.00

3. In 2011, Fortune ranked P&G the number one soap and cosmetic

in the world. 0.04 0 0.00 0 0.00

4. New CEO, Mr. McDonald focuses on lower end products aimed

at price sensitive customers. 0.07 3 0.21 2 0.14

5. P&G operates under a SBU structure. 0.05 0 0.00 0 0.00

6. 23 P&G brands routinely earn over $1 billion in revenue per year. 0.10 3 0.30 2 0.20 7. Braun, bounty, Charmin, Crest, Downy, Gillette, Pampers are all

top brands owned by P&G. 0.10 1 0.10 2 0.20

8. Invested over $2 billion in R&D in 2010. 0.05 3 0.15 1 0.05

9. Market share grew in 14 of top 17 countries in 2010. 0.07 2 0.14 4 0.28

10. EPS is 3.94. 0.05 4 0.20 3 0.15

Increase

R&D

Increase

advertising

Weaknesses Weight AS TAS AS TAS

1. No published vision statement. 0.02 0 0.00 0 0.00

2. $57 billion in goodwill on balance sheet. 0.04 0 0.00 0 0.00

3. Profits declined 5% in 2011 yet revenues increased 2.9%. 0.03 3 0.09 2 0.06

4. Weak profitability ratios. 0.03 0 0.00 0 0.00

5. Not operating as efficiently as Johnson & Johnson. 0.05 0 0.00 0 0.00

6. Spent $772 million in advertising to Johnson & Johnson’s $366

million. 0.07 2 0.14 3 0.21

7. Consumers may not associate all of our brands with P&G rather

view them as their own distinct companies. 0.03 1 0.03 3 0.09

M.

Epilogue

P&G’s fiscal year ends June 30 of every year. Therefore, P&G’s Q1 2012 ended September 30, 2011. For Q1 of 2012, the company’s 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&G’s 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&G’s 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&G’s Grooming division reported a 10 percent sales decrease to $2.1 billion, but that division’s earnings increased 10 percent to $438 million. For Q1 2012, P&G’s 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&G’s 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&G’s 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&G’s 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.

Recession Normal Boom Recession Normal Boom

EBIT $15,000 $17,000 $20,000 $15,000 $17,000 $20,000 Interest 0 0 0 30 30 30 EBT 15,000 17,000 20,000 14,970 16,970 19,970 Taxes 3,300 3,740 4,400 3,293 3,733 4,393 EAT 11,700 13,260 15,600 11,677 13,237 15,577 # Shares 2,759 2,759 2,759 2,750 2,750 2,750 EPS 4.24 4.81 5.65 4.25 4.81 5.66

Common Stock Financing Debt Financing

20 Percent Stock 80 Percent Stock

Recession Normal Boom Recession Normal Boom

EBIT $15,000 $17,000 $20,000 $15,000 $17,000 $20,000 Interest 24 24 24 6 6 6 EBT 14,976 16,976 19,976 14,994 16,994 19,994 Taxes 3,295 3,735 4,395 3,299 3,739 4,399 EAT 11,681 13,241 15,581 11,695 13,255 15,595 # Shares 2,752 2,752 2,752 2,758 2,758 2,758 EPS 4.24 4.81 5.66 4.24 4.81 5.66

P&G’s 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&G’s 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.