Finance and Accounting at Procter & Gamble - Example

Finance and Accounting Essay: Procter & Gamble (P&G) Table of Contents Introduction 3 Product Portfolio of P&G 3 Product Life Cycle (PLC) 6 Boston Consulting Group (BCG) Matrix 7 Business Model of P&G 8 Organisational Structure 9 Financial Analysis 11 References 14 Introduction This study focuses on the strategic and financial analysis of P&G. The evaluation of the business model and the organizational structure of the company would also be done in order to support the analysis and estimate the performance of the company as a whole. Procter & Gamble is one of the largest packaged product selling companies in the world. This fact has always motivated the company to maintain a purpose-inspired growth. The companys mission is to improve the lives of customers around the world. The company wants to design products which will achieve maximum customer delight and conserve natural resources (P&G, 2012). It wants to win the confidence of the customers and help its leading brands to reach out different countries. It mainly wanted to focus on the core business and become strong global market leaders. The company also has the objective to maintain its growth and sustainability in different parts of the world (Corporate Watch, n. d.). Product Portfolio of P&G P&G offers more than 250 brands to its customers. The net sales of the company were recorded to be more than $1 billion in 2011. The product portfolio of P&G can be segregated into divisions based on the usage of the products. It offers washing or laundry products, hair care and grooming products, health care products and personal care products. In the hair care product category, P&G holds the maximum market share of 34.6 percent, as can be seen in Figure 1. The competitors such as L’Oreal, Unilever, Alberto Culvert, and John Frieda are some of the popular market players in the hair care segment holding lesser market share than P&G (Corporate Watch, n. d.). Figure 1: Hair Care Product Market Share Source: (P&G, 2010) The top hair care brands of P&G are Pantene, Head & Shoulders, Aussie and Silvikrin, as can be seen in Figure 2. Figure 2: Famous Hair Care Brands in Market Source: (P&G, 2010) In the washing and laundry category too, P&G is the market leader. As can be seen in Figure 3, P&G rules on 46 percent of the detergent market. Figure 3: Market Share of P&G in Laundry Segment Source: (P&G, 2010) The most famous laundry brands of P&G are Ariel, Tide, Bold, Fairy, Lenor, etc., as can be seen in Figure 4. Figure 4: Best Brands of P&G in Laundry Segment Source: (P&G, 2010) In the household cleaning category P&G has 11.6 percent market share, as can be seen in Figure 5. The best brands of P&G in this segment is Flash. Source: (P&G, 2010) Lastly, in the personal care, skin care or grooming segment, P&G has around 1.4 percent market share among the other companies,which is shown in Figure 6 . Figure 5: P&Gs Market Share in Personal Grooming Segment Source: (P&G, 2010) Product Life Cycle (PLC) The Product Life Cycle determines the position of the products or brands of a company in the market. In case of P&G, most of the brands sold under its product portfolio are in their maturity and growth stage, as P&G’s products are generating huge profits for the company in most of the segments and are among the market leaders (P&G, 2012d). In order to validate the position of most of the P&G’s products in the PLC, the revenue and profit figures for the last 5 years have been considered, as can be seen in Figure 6. Figure 6: Sales and Profit Source: (Morning Star, 2013) It has been found that sales are increasing but the profits are decreasing, which means that majority of the products of P&G are in their maturity stage and moving towards the decline stage. However, the company has an excellent research and development department, which is helping them to introduce extension of the existing products or introduce new product, so that P&G can retain the market leader position. Boston Consulting Group (BCG) Matrix The BCG Matrix is a tool for analysing the product portfolio of a company. It segregates the products into four divisions namely, question market, star, cash cow and dog. The BCG matrix is closely related to the product life cycle because the products at different levels in a PLC can be compared with one of the divisions of a BCG matrix, as can be seen in Figure 7. Figure 7: BCG Matrix combined with PLC Source: (Author’s Creation) The question mark products are usually at their introduction stage, as the performance of the new products in their initial stage cannot be accessed. Products at the growth stage of a PLC would be the cash cow products, which generate good revenue for the company (Kotler, Bowen, and Markens, 2008). Products at the maturity level are the star products, while products at decline stage are dogs. Most of the products of P&G are at their growth stage and maturity stage. This reveals that they are either cash cows or stars. However, a few products are also moving towards the decline stage because of increasing competition in the market. Business Model of P&G P&G believes in continuous growth and achievement of its existing brands and the innovation new products. It operates in a highly competitive market and competes with the super-premium brands in every country where it operates. It functions to win both the “first moment of truth” (when the customers are buying the products) and the “second moment of truth” (when the consumers are using the products). While discussing the business model of P&G, it is significant to discuss their products and packaging, environmental sustainability, suppliers and operations (Kotler, P., Bowen, J. T., and Markens, J. C., 2008). It has been found that 69 percent of the customers of P&G are from sustainable mainstream segment, and 17 percent are from the basic segments who are the lower income groups. Even 14 percent are from the niche segments who consider the products from P&G to be good. This signifies that about 70 percent of the consumers regularly use P&G products and brands. P&G has integrated life cycle thinking in case implementing technological framework (Procter & Gamble, 2012c). This life cycle assessment includes manufacturing materials, disposal, usage, distribution and packaging. For all these critical functions, the company utilises latest technologies which are eco-friendly and cost saving. In case of materials, wastage is avoided and smart eco-design has been adopted by the company through the adaptation of innovative construction method. Sustainable designs have been adopted by the company to optimise the transportation efficiency (Gilbert, 2003). Close collaboration with the suppliers and maintenance of scorecard method to assess the environmental footprint of the suppliers have a positive impact on the supply chain of the company (Procter & Gamble, 2012c). Organisational Structure The organizational structure of P&G is critical for the company’s growth. The management considers it to be a combination of the global scale profit of $83 billion with their local focus to win over their customers in every country. The structure of P&G has been able to overcome various traditional overlaps over the years, which also assisted the company to avoid existing inefficiencies that are present in large companies. P&G has implemented various structures to make management and control more effective. The Global Business Units (GBUs) of the company mainly focuses on the consumers, competitors and brands around the world. It is also responsible for the products in pipeline, shareholders and profitability of the business (Ferrell, and Hartline, 2010). Figure 8: Organisational Structure Source: (Procter & Gamble, 2012a) The Marketing Development Organisation (MDO) segments of the company have the responsibility to understand customers and retails in every market and integrate the flow of innovation from the GBUs to the business plans. The Global Business Services (GBS) employ the achievements P&G and proficient partners for providing best business support at lowest possible cost, as can be observed in Figure 8. Lean functions are utilised to ensure improvement in terms of capability and innovation. In order to maximise efficiency, P&G offers its services in a centralized manner through its 6 global hubs. The company manages over 170 different businesses and its employees with the help of its global business hubs, strategic partners, as presented in Figure 9. Figure 9: Global Business Service Source: (Procter & Gamble, 2012a) Financial Analysis P&G claims that the growth business model of the company has led its sales to $84 billion in 2012 and the net earnings of the company are more than $10 billion 2012. It has also been indicated that 40 percent of the business has resulted in 50 percent sales and about 70 percent of the operating profit of the company. The company is trying to win over rest of the customers through their innovations. The long term target of P&G is to increase their growth rate of organic product 1-2 percent above the growth rate of the global market and augment their net earnings to 90 percent of their current net earnings. In the fiscal year of 2012, P&G has shown an overall 3 percent growth in the organic segment. The company has revealed that growth has been less in the developed countries, while in the Brazil, Russia, India, and China (BRIC) countries the return was higher. This was probably due to financial slowdown. The company has reduced $6 billion on the cost of goods, $1 billion on marketing and $3 billion in overhead cost in 2012. These $10 billion would be utilised by P&G to finance the growth plans and develop newer and better products. 25 top brands of P&G generate billions of dollars for the company and each of them generate more than $1 billion sales annually. The net sales in the year 2012 were $83,680 million which was more than the previous year’s net sales i.e. $81,104 million. The operating income of 2012 has reduced considerably to $13,292 million, after earning $15,495 million in 2011. If the sales figures are analysed in terms of business segments, then the fabric care and home care segment generated the maximum business of 32 percent in 2012 (Ahwere-Bafo, 2012). Next is the beauty and baby care segment which generated 24 percent and 19 percent respectively, as can be estimated from Figure 10. Figure 10: Sales of P&G Based on Segment Source: (Procter & Gamble, 2012b) The fiscal cash flow of the company in 2012 was around $9.3 percent. They also paid dividend to their shareholders for 122nd consecutive years and a 7 percent hike in dividend was also seen in 2012. It is one of the 56th companies of the world which would have raised their dividend percent in such financial situation. It can be concluded that P&G is already a market leader but in order to retain its position as a leader it needs to follow a continuous state of innovation and production of new products to add value in customer’s daily lives. References Ahwere-Bafo, J., 2012. Custom Text: Strategic Management Accounting. 2nd ed. London: McGraw-Hill. Corporate Watch, no date. Procter & Gamble. [online] Available at: < http://www.corporatewatch.org.uk/?lid=698> [Accessed 7 February 2013]. Ferrell, O. C., and Hartline, M. D., 2010. Marketing Strategy. 5th ed. Connecticut: Cengage. Gilbert, D., 2003. Retail Marketing Management. 2nd ed. New Delhi: Pearson Education India. Kotler, P., Bowen, J. T., and Markens, J. C., 2008. Marketing for Hospitality and Tourism. 4th ed. New Delhi: Pearson Education India. Morning Star, 2013. Procter & Gamble Co. [online] Available at: < http://financials.morningstar.com/income-statement/is.html?t=PG®ion=USA&culture=en-us> [Accessed 7 February 2013]. P&G, 2010. P&G Gillette Product Booklet. [online] Available at: < http://www.pgeveryday.com/pg-products.jsp> [Accessed 7 February 2013]. P&G, 2012d. The Power of Purpose. [online] Available at: < http://www.pg.com/en_US/company/purpose_people/index.shtml> [Accessed 7 February 2013]. Procter & Gamble, 2012c. Products & Packaging. [online] Available at: < http://www.pg.com/en_US/sustainability/environmental_sustainability/products_packaging/index.shtml> [Accessed 7 February 2013]. Procter and Gamble, 2012a. Strength in Structure. [online] Available at: < http://www.pg.com/en_US/company/global_structure_operations/corporate_structure.shtml> [Accessed 7 February 2013]. Procter and Gamble, 2012b. Annual Report 2012. [online] Available at: < http://annualreport.pg.com/annualreport2012/files/PG_2012_AnnualReport.pdf> [Accessed 7 February 2013]. Read More