Entry Strategy of Procter and Gamble Company - Essay Example

Entry strategy and financial analysis of P&G of Porter’s five force model Procter & Gamble (P&G) is one of the renowned multinational FMCG (Fast Moving Consumer Goods) producers headquartered in the United States. P&G sells a variety of products in different segments such as personal care and household care. One of the celebrated products of the firm in personal care segment is Head & Shoulders. It is an anti dandruff shampoo that is offered by the company in different varieties for male and female consumers (P&G, 2014). In this section, porter’s five forces with respect to the company and its product have been discussed. Threat of new entrants The FMCG industry is requires intensive capital investment and is driven by strong supply chain management. An FMCG company requires heavy capital investment because from product development to marketing and advertising, capital is necessary in every sector. Moreover, FMCG companies are no more limited to a particular geographic location; instead they are pursuing overseas ventures. Therefore, threat of new entrant at international market is relatively limited. P&G is one of the reputed FMCG companies and its brand, Head & Shoulders is well-recognized in the hair care industry. Consequently, it can be suggested that threat of new entrant is limited for the company and the product (Reuters, 2013). Threat of substitute FMCG industry is one of those industries that are heavily vulnerable to substitution, as local as well as a number of international brands are taking entry in the industry on a regular basis. However, studies suggest that P&G is a global leader in the hair care segment and have more than 20 percent of market share thereof from Pantene and Head &Shoulders (Reuters, 2013). The company has invested significantly in marketing and brand building of Head & Shoulders. The outcome is that the brand image is spreading from that of a medicated shampoo to a mass consumer product. Head & Shoulders is often marketed using celebrity endorsement which has significant positive impact on consumer buying behavior. Therefore, it can be suggested that threat of substitute is relatively less for the product (Reuters, 2013). Bargaining power of buyers Purchasing behavior of consumers has significant impact on revenue of FMCG companies. However, consumer buying pattern is strongly influenced by number of competitors or substitute products and their prices within the industry. It was ascertained that consumers have relatively strong bargaining power as the choices in hair care products in large and are mostly from well-known brands such as Unilever, L’Oreal, Colgate-Palmolive and Johnson & Johnson. These companies are strong competitors of P&G in consumer packaged goods sector. However, bargaining power of buyers is reduced by the fact that almost all these companies price their product in such a manner that there is little price difference. Overall, bargaining power of consumers is moderate (Statista, 2013). Figure 1 (International Business Times, 2014) Bargaining power of suppliers It was observed that P&G and its competitors are all renowned international market leaders in the FMCG sector and they seek long term supply chain relationship with suppliers. From the perspective of suppliers, supplying such big brands is a very responsible and reputable task and consequently, strong competition among suppliers exists as well. Therefore, suppliers’ bargaining power is relatively less in this regard (P&G, 2014). Rivalry among competitors The primary competitors of Head & Shoulders are shampoos by companies such as L’Oreal, Unilever and other brands by P&G. The competition in the hair care industry is very strong and so far this segment is being dominated by P&G in terms of revenue (Statista, 2013). Entry strategy of P&G (Head & Shoulders) in Kazakhstan Buckley & Casson (1998) and Root (1998) identified a number of market entry modes which have been further classified in five main categories such as export, licensing and franchising, strategic alliance, joint venture and wholly owned subsidiary (Johnson & Tellis, 2008). One of the promising business areas of Kazakhstan is consumer goods as the country faces chronic shortage of basic consumer commodities such as personal care products, clothing and others. The country has strong potential from the perspective of P&G product sale as the country does not have its own consumer goods manufacturing sector and heavily depends on importing (Tugut & Lee, 2007). Considering the current condition of Kazakhstan’s FMCG market, P&G can adopt the most basic entry strategy of exporting. The company can choose various local distributors, retailers and wholesalers for marketing and selling its products in the country’s local market. The distributors will be responsible for managing custom clearance, dealing with other retailers and marketing the same to various government and non-government corporations. More precisely, there are four approaches to the process of exporting, these are- passive exporting, direct export, exporting through intermediaries and representing product through domestic buyers (US commercial Service, 2010). In context of selling Head & Shoulder to Kazakhstan market, it was determined that selling through domestic buyers (retailers and wholesalers) is appropriate. In this process, P&G will be personally looking into the entire process of exporting, starting from market research to distribution in Kazakhstan. The retailer or wholesaler will be only responsible for representing the firm. This method is being considered appropriate because it will maintain a balance between cultural difference between the home country and host country. The buyer (retailer) being a local will be able to appeal better to the sentiments of consumers besides creating demand of products thereof. Direct exporting in Kazakhstan through local retailer will provide P&G greater control over the exporting process and will increase its share in the total profit (UNZCO, 1998). Another market entry strategy that can be suggested for P&G is franchising and licensing. This measure involves agreement between foreign partner and a local partner where the local company will be selling products of the company using their (foreign firm) technical know-how in exchange of royalty paid to the foreign firm (Meyer & Thu Tran, 2006). Although Kazakhstan is devoid of issues related to Islamic fundamentalism, the culture of the country is very different from that of P&G and hence franchising can be determined as the most apposite choice. Another reason of selecting licensing and franchising as market entry strategy for P&G in Kazakhstan is that the country does not have stringent licensing arrangement and regulations related to foreign investment is relatively flexible (US commercial Service, 2010). Franchising has increased significantly in Kazakhstan since entry of Coca-Cola in the 90s. In 2007, the country recorded turnover from franchising as high as $500 million in a year with around 150 franchising systems. Franchising has received positive response from businesses in the country due to foreign exposure and scope of local employment. Presently, a number of foreign brands are operating in the country through franchising, such as Baskin Robbins. Kazakhstan has special law regarding franchising, which contributes towards greater growth and presence of foreign firms in the country along with local development (Business Kazakhstan, 2014). Financial analysis of P&G The financial analysis of P&G stresses extensively on various components of income statement and balance sheet. The result of various operations can be represented in a consolidated manner in terms of net sales revenue, gross profit margin, selling and administrative expenses, income tax and other non-operative items. It was ascertained that factors that affect net sales of the company are geographic changes, change in foreign exchange, product initiatives, initiatives by competitors and pricing factors. The cost of goods sold and selling and administrative expenses were determined to be variable in nature as they are affected by input cost in various product segments, varying cost of raw materials and other resources and so on (P&G, 2014). The data from financial statements of P&G suggest that net sales of the company have increased by 1% from 2013 to $83.1 billion in 2014. Additionally, the unit sales volume has increased by about 3%. It was also gathered from the financial statements of P&G that the net sales of the company was affected by adverse changes in foreign exchange and sales fluctuation in different geographic locations. It was observed that the gross margin of P&G have declined from 49.9% in 2013 to 48.9% in 2014 and the reason was accredited to unfavorable product mix and geographic condition along with high manufacturing cost (P&G, 2014). Figure 2: Profit margin (Bloomberg, 2014) Figure 3: Financial data (Bloomberg, 2014) Figure 4: Stock analysis for 5 years (Bloomberg, 2014) The company has been successful in minimizing its overall selling and administrative expenses by around 5% as a result of less marketing expenses, restructuring cost and overhead expenses. The interest expenses of the company have increased by around 6% in 2014 as the outstanding debt thereof increased in 2014. Among other non-operating matters, the company gained significantly from divestiture but the income declined as a result of certain acquisitions. In 2014, the net earnings of P&G have increased by 4% from 2013 in 2014. The reasons range from low taxation rate to decrease in various kinds of general expenses. The diluted net earnings per share from aggregate continuing operations have increased by 4% in 2014 to $3.98 as a result of increase in net earnings of the company. It was further determined that shareholders earned $0.03 per share from discontinued operations of the company as well. The increase in net revenue had a positive impact on core EPS of the company which increased by 5percent to $4.22 (P&G, 2014; Bloomberg, 2014). Conclusion The paper analyses impact of market forces on profitability and market position of P&G using Porter’s five forces. It was observed that even in a steadily rising competitive environment, the firm has been able to stabilize its market position. This paper is chiefly focused on discussing market entry strategy of P&G in Kazakhstan and it was proposed that either franchising or direct exporting will be appropriate. The paper discussed elaborately the rationale for the selected strategies. Additionally, financial analysis was undertaken in the paper so that firm’s profitability and operational capability is established. References Bloomberg. (2014). PG: US. Retrieved from http://www.bloomberg.com/quote/PG:US. Buckley, P. J. & Casson, M. C. (1998). Analyzing foreign market entry strategies: Extending the internalization approach. Journal of international business studies, 3, 539-561. Business Kazakhstan, 2014. Franchising in Kazakhstan. Retrieved from http://www.business-kazakhstan.com/en/franchising.htm. International Business Times. (2014). Profit pool of beauty categories of various company in the US. Retrieved from http://s1.ibtimes.com/sites/www.ibtimes.com/files/styles/v2_article_large/public/2014/01/23/us-beauty-pool.PNG?itok=EVdQi4FF. Johnson, J. & Tellis, G. J. (2008). Drivers of success for market entry into China and India. Journal of Marketing, 72(3), 1-13. Meyer, K. E. & Thu Tran, Y. T. (2006). Market penetration and acquisition strategies for emerging economies. Long Range Planning, 39(2), 177-197. P&G. (2014). Annual report 2013-2014. Retrieved from http://www.pginvestor.com/interactive/lookandfeel/4004124/PG_Annual_Report_2014.pdf. Reuters. (2013). Research and Markets: Head & Shoulders: Establishing a mass consumer brand. Retrieved from http://www.reuters.com/article/2013/03/08/research-and-markets-idUSnBwbD79yla+120+BSW20130308. Root, F. R. (1998). Entry strategies for international markets. San Francisco, CA: Jossey-Bass. Statista. (2013). Revenue of the 15 largest consumer packaged goods (CPG) manufacturers worldwide in 2013 (in billion U.S. dollars). Retrieved form http://www.statista.com/statistics/255242/revenue-of-the-15-largest-consumer-goods-manufacturers-worldwide/. Tugut, M. & Lee, C. Y. (2007). Doing Business in Kazakhstan: Opportunities, Challenges, and Suggestions. The Journal of Global Business Management, 3(1), 109-119. UNZCO. (1998). Developing an Export Strategy. Retrieved from http://www.unzco.com/basicguide/c4.html. US commercial Service. (2010). Doing Business in Kazakhstan: 2010 Country Commercial Guide for U.S. Companies. Retrieved from http://www.franchise.org/uploadedFiles/Franchise_Industry/International_Development/Country_Profiles/Kazakhstan_2010%20CCG.pdf. Read More